Forex Trading Beginner's Guide: Understanding Currency Trading from Scratch

“Forex can make big money” and “Forex is a scam”—these two voices have always existed in the market. But in reality, the essence of forex trading is very simple—it’s about profiting from the price fluctuations between different currencies. For those with experience in stocks or other investments, this concept should be familiar.

So today, let’s delve into: How exactly do you play forex trading? How should beginners get started?

Basic Understanding of the Forex Market

What is forex trading?

Forex (Foreign Exchange or FX) literally means “exchanging one currency for another.” The simplest example is currency exchange when traveling abroad—exchanging TWD for JPY before going to Japan. This is the most basic form of forex trading.

In terms of investment, forex traders buy and sell based on expected currency fluctuations. For example, if they anticipate the US dollar will appreciate, they buy USD in advance; when the USD price rises, they sell to profit from the difference.

Key features of the forex market:

• The largest financial market in the world, with a daily trading volume exceeding 6 trillion USD
• A global decentralized market, with no unified trading venue
• Operates 24 hours a day (closed on weekends)
• High liquidity, quick entry and exit

Major currency pairs

The most traded currency pairs in the forex market include:

• EUR/USD (Euro / US Dollar)
• USD/JPY (US Dollar / Japanese Yen)
• GBP/USD (British Pound / US Dollar)
• AUD/USD (Australian Dollar / US Dollar)

Each currency pair has its own volatility characteristics. For example, the Yen tends to be relatively stable, but during geopolitical tensions or economic crises, it can appreciate sharply, hence called a “safe-haven currency.”

Interpreting forex quotes

Forex quotes always appear in pairs, such as USD/TWD (US Dollar / New Taiwan Dollar). This is because the essence of forex trading is “simultaneously buying one currency and selling another.”

A quote contains two elements:

• Base currency: The first currency in the quote, usually quoted per one unit
• Quote currency: The second currency, indicating how much of this currency is needed to buy one unit of the base currency

For example, USD/TWD at 29.15 means 1 USD can be exchanged for 29.15 TWD.

Since forex prices are closely related to international trade, political, and economic situations, traders must keep a close eye on various current events.

Core Concepts of Forex Trading

Common Trading Terms

Long and Short Positions

Going long (Buy) means buying the base currency and selling the quote currency, expecting the base currency to appreciate. Going short (Sell) means selling the base currency and buying the quote currency, expecting the base currency to depreciate.

Closing Positions

Existing positions need to be closed through opposite trades to realize profits or stop losses. For example, if you bought USD (long), and USD appreciates, selling USD to close the position will realize gains.

Spread Cost

The spread is the difference between the bid (buy) and ask (sell) prices, representing one of the costs traders bear. The spread varies significantly across platforms and currency pairs.

Bid and Ask Prices

Bid is the price at which the broker is willing to buy the base currency; Ask is the price at which they are willing to sell. Traders operate between these two prices.

Factors Influencing Currency Prices

The strength of a currency is mainly determined by three aspects:

1. Economic Performance

A country’s income, employment rate, inflation rate, and other economic indicators, if strong, tend to strengthen its currency. For example, declining unemployment and GDP growth can push the currency higher.

2. Central Bank Policies

Central bank monetary policies and government fiscal policies directly affect currency supply. When a central bank raises interest rates, the currency often strengthens. The Fed’s rate hikes, for instance, often lead to a significant rise in the US dollar.

3. International Trade

Trade involves currency exchange. Countries with trade surpluses (exports > imports) usually have stronger currencies because international buyers need to purchase large amounts of that country’s currency.

4. Political Stability

Stable governments attract foreign investment, making their financial environment more trustworthy. During geopolitical tensions, investors tend to shift to stable currencies to hedge risks.

Margin Trading Mechanism in Forex

Lot Units

The forex market’s trading volume cannot be too small; trades are conducted in “lots.” There are three types of lots:

Leverage: Function and Risks

When funds are insufficient to buy a full lot, traders can use leverage. Leverage is simply defined as: trading with a small amount of capital to control a multiple of that amount.

Example calculation:

Suppose you have only $500 margin, and with 200:1 leverage, you can control a position worth $100,000 in EUR/USD. If the exchange rate rises from 1.0000 to 1.0500, closing the position could yield a profit of $5,000, with a return on investment of 1000%.

But note: Leverage is a double-edged sword. While profits can multiply, so can losses. Small market movements can cause significant capital changes, even triggering margin calls. Beginners should operate cautiously, starting with small leverage to adapt gradually.

Comprehensive Understanding of Forex Risks

Main Risk Types

Exchange Rate Risk

Currency prices fluctuate constantly due to global supply and demand. Market sentiment, policy expectations, international events—all can influence exchange rates. This is the most fundamental risk in forex trading.

Interest Rate Risk

Adjustments in interest rates by central banks (raising or lowering) directly impact currency strength. When trading USD/TWD, for example, you must closely monitor the Federal Reserve and Taiwan Central Bank policies.

Margin Call Risk

Leverage trading can encounter black swan events (wars, pandemics, financial crises), causing market volatility that quickly breaches stop-loss levels, leading to forced liquidation. This is the most deadly risk in leveraged trading.

Core Principles of Risk Management

Statistics show that over 90% of retail traders lose money, not because of lack of skills, but due to “emotional loss of control” and “poor risk management.”

Therefore, effective risk management includes:

• Setting maximum acceptable loss per trade (e.g., 2% of capital)
• Using reasonable leverage; avoid blindly chasing high returns
• Strictly executing stop-loss orders to prevent emotional trading
• Regularly assessing risk tolerance

Forex Trading Analysis Methods

Technical Analysis vs. Fundamental Analysis

Technical Analysis uses candlestick charts, moving averages (like MA50/MA200), RSI indicators, and other tools to predict future directions based on historical price movements.

Fundamental Analysis focuses on GDP growth, unemployment data, central bank interest rate decisions, and other economic indicators to determine long-term currency trends.

Expert Advice: Beginners should combine both methods rather than rely solely on one indicator. This provides a more comprehensive market understanding.

Timing the Market

The early 2022 Russia-Ukraine war provides a classic example. When the war broke out on February 24, global financial markets reacted violently. Major currency pairs like EUR/USD and GBP/USD experienced huge volatility.

During this period:

• Investors worried about Europe’s economic outlook, leading to euro sell-offs
• Safe-haven funds flowed into USD, JPY, and other stable currencies
• Traders who could quickly interpret these shifts could choose to buy USD or sell EUR, capturing short-term profits

This illustrates: Closely monitoring geopolitical and economic data releases often allows traders to seize opportunities.

Psychological Building in Forex Trading

Four Insights from Successful Traders

1. Accept the inevitability of losses

No matter how skilled or experienced a trader is, they cannot guarantee profits on every trade. Losses happen naturally. Fear of failure makes it hard to adapt to trading rhythms.

2. Only invest with disposable funds

This is a fundamental principle. Although forex is often short-term speculation, it should be done with money that does not affect daily life. If unemployed, without income, or in debt, do not think of using all your savings to trade. The final outcome is often total loss.

3. Avoid impatience and impulsiveness

Forex trading is not a quick skill; it cannot be mastered overnight, nor is it a get-rich-quick scheme. It requires time to learn technical and fundamental analysis, and to stay updated on international political and economic developments. Steady progress beats rushing.

4. Recognize the nature of risks

Most forex products are derivatives that leverage trading volume. This means they share a common trait: high risk. The ultra-high leverage offered by online platforms may seem attractive but often serves as a learning fee for beginners. Using leverage within reasonable limits is fine, but blindly pursuing the highest multiples will cost dearly.

Final Advice

Only disciplined individuals can achieve long-term profits and become true winners in the market. This is not a technical issue but a mindset and discipline challenge.

Trade plans must be strictly followed; do not change strategies impulsively due to emotional swings; reflect on losses instead of rushing to recover; stay rational when taking profits, avoiding reckless position increases. These seemingly simple principles are the hardest for most traders to follow.

Preparing Before Starting Forex Trading

When choosing a trading platform, focus on the following aspects:

Security and Regulation — Whether the platform is regulated by legitimate financial authorities, which determines fund safety.

Ease of Use — Whether the interface is intuitive and the trading process is straightforward, affecting trading efficiency.

Trading Stability — Whether the platform can operate stably without delays or glitches.

Deposit and Withdrawal Convenience — Speed of transfers and simplicity of remittance procedures.

Transparency of Fees — Whether spreads, overnight fees, commissions, and other costs are clearly disclosed.

After selecting a suitable platform, beginners can open a demo account to practice. No real funds are needed; you can learn trading procedures, test strategies, and accumulate experience in a simulated environment. This is the safest way for newcomers to learn.

Forex trading is a long-term learning journey. Starting from basic knowledge, progressing through simulated practice, and continuously summarizing experience in real trading, only then can one become a mature trader. The key is not to make big money immediately but to establish correct trading concepts and habits.