Forex Trading Beginner's Guide: Five Core Points and Practical Insights

Many friends new to investing often ask—“Can forex trading really make money?” For some investors, the answer is yes. The forex market is the largest and most liquid financial market in the world, with a daily trading volume exceeding $6 trillion, far surpassing the total trading volume of futures and stock markets.

In the past, forex trading was mainly participated in by financial institutions and high-net-worth individuals. But with technological advances, ordinary investors can now easily access the forex market. Currently, over 30% of daily forex transactions are conducted by retail traders, including derivatives such as futures and Contracts for Difference (CFDs), leading to an exponential growth in retail forex traders.

However, like stock investing, the forex market is full of profit opportunities but also carries significant risks. Multiple studies show that 70%-90% of individual investors have experienced losses in forex trading. Therefore, if you’re still unsure about “how to play forex,” this beginner’s forex tutorial guide is exactly what you need.

What are the ways to invest in forex?

Before starting forex investment, you should first understand the different investment channels.

Currency Exchange

The most basic form of forex trading is exchanging one currency for another. In daily life, for example, when traveling to Japan, you need to exchange New Taiwan Dollars (NTD) for Japanese Yen (JPY). This process involves the simplest form of forex trading.

Foreign Currency Fixed Deposit

If investors want to convert NTD into other currencies to hedge risks or preserve value, they can open foreign currency fixed deposit accounts at banks for buying and selling. This method of buying or selling foreign currencies is called “spot forex trading,” which is the most fundamental form of forex investment.

Foreign currency fixed deposits feature large transaction volumes and low risk and return, making them suitable for beginners new to forex. Note that different banks set different minimum deposit amounts for various currencies, and early withdrawals may result in some loss of interest. It is recommended to use idle funds that are not needed in the short term for fixed deposits.

Forex Margin Trading

The higher-risk and higher-reward method is “forex margin trading,” suitable for investors with some trading experience. Margin trading in forex has a relatively low entry barrier, often called “forex trading,” requiring analysis of the currency market and judgment of exchange rate trends to profit from the bid-ask spread.

Investors can open accounts with banks or forex brokers, deposit the required margin, and start trading. Different institutions have different minimum account opening requirements. Most brokers offer leverage options such as 1:30, 1:100, 1:200, 1:500.

The advantages of forex margin trading include low deposit thresholds, 24-hour trading, and flexible long and short positions. For example, if you believe the EUR/USD will appreciate, you can buy EUR/USD; if you think the euro will depreciate against the dollar, you can sell EUR/USD. Profits are made if the price movement aligns with your prediction; otherwise, you incur losses.

However, the biggest risk in forex margin trading is “margin call”—which refers to a situation where a single price fluctuation causes your principal to be wiped out. Therefore, risk control is crucial when trading forex on margin, including setting stop-loss and take-profit points and using leverage wisely.

When choosing a broker, beware of scams. Many illegal platforms impersonate legitimate institutions or lure investors via social media to deposit funds. When selecting a forex broker, ensure it holds proper licenses issued by financial regulatory authorities. Legitimate brokers do not engage in account manipulation, signal shouting, or withdrawal difficulties.

Key points in forex education: Proper use of leverage and margin

Many beginners lose money mainly because they do not use leverage and margin properly. “Leverage not only amplifies profits and losses but also magnifies investors’ fear and greed.” Professional forex traders need systematic learning and thorough training to master leverage and margin.

What is leverage?

Leverage allows investors to control larger positions with less capital, achieving “small capital, big position.” This method maximizes the use of trading funds to increase potential returns.

For example, if a broker offers 20:1 leverage, it means the investor can establish a position size 20 times the account balance. Buying 40,000 units of EUR/USD requires only 2,000 euros in margin.

What is forex margin?

Forex margin originated in the 1970s and is a type of financial derivative. Margin is usually expressed as a percentage of the total position size, such as 2%, 5%, or 25%. Leverage is expressed as ratios like 10:1, 50:1, 100:1, 200:1, 400:1, 500:1, etc.

▶ 50:1: For every $1 of initial capital, you can open a position up to $50. For example, depositing $500 allows trading up to $25,000.

▶ 100:1: Typical leverage for standard accounts. With $2,000, you can trade up to $200,000 in forex.

▶ 200:1: Typical leverage for mini accounts. Most brokers require a minimum margin of $500 for such accounts.

▶ 400:1: With this ratio, each dollar can control up to $400 in trading. Many brokers offer this leverage on mini accounts.

The actual effect of leverage

Taking an example of trading $1,000 in EUR/USD, the results with different leverage levels:

From the table, it’s clear that leverage can magnify currency fluctuations. When depositing $1,000 and trading with 200:1 leverage, a mere 5% price movement can lead to a profit or loss of $10,000.

Obviously, leverage can help investors amplify gains but also cause huge losses. It is recommended that beginners use lower leverage; most experienced traders limit leverage to 10:1 or less. Successful forex traders develop prudent strategies, adjust trading timeframes as needed, and exit positions once targets are reached.

Advantages and risks of forex trading

Compared to other financial markets, the forex market has unique features.

Advantages of forex trading

• Bidirectional trading: Can go long or short, profit opportunities regardless of market trend
• 24-hour trading: The forex market operates year-round, allowing flexible strategy adjustments
• High leverage: Leverage can reach 200 times the principal, with low minimum trading units, suitable for flexible operations
• Low trading costs: Over-the-counter structure significantly reduces trading fees, no commissions needed
• Strong market liquidity: Global market with transparent data, deep liquidity, difficult to manipulate

Risks of forex trading

• High risk: High leverage means investors can lose all their capital
• Market news impact: Highly dependent on economic data, political events, central bank policies, and unpredictable factors
• Psychological pressure: Fully reliant on personal decision-making, rapid and intense market fluctuations require professional knowledge and strong mental resilience

Beginners should carefully consider: “Am I suitable for forex trading?” Forex trading requires agility and active participation. Operating only as a part-time activity can lead to significant losses. Forex investors face high risks, high volatility, and high leverage. Successful traders must continuously learn, master effective capital management, develop robust trading plans, and have risk tolerance.

Forex education: Which currencies should beginners choose?

There are a total of 180 different currencies worldwide. Based on their characteristics, currencies in forex trading can be divided into four main types:

● Policy currencies: Trends determined by national policies and economic changes, e.g., USD, EUR

● Hedging currencies: Used to hedge against risks in international trade and financial markets, e.g., JPY

● Commodity currencies: Influenced by exports of commodities, e.g., AUD, Russian Ruble

● Emerging market currencies: Strictly regulated by governments and relatively stable, e.g., CNY

Beginners in forex can start with the first three categories. The following are the ten most traded (most liquid) currencies, accounting for nearly 90% of the forex market volume:

📌 It is worth noting: the higher the trading volume of a currency pair, the higher its liquidity, the smaller the spread fluctuations, and the narrower the bid-ask spread, such as EUR/USD. As a commodity currency, the Australian dollar is more affected by raw material prices, iron ore, beef, wool prices, so the AUD/USD price tends to be more volatile.

( Advantages of trading high-liquidity currency pairs

• Lower spreads
• Lower transaction costs
• Faster order execution
• Access to more information and news
• Smoother price movements

) Choosing currencies based on trading style

If you are an experienced trader, currencies with higher volatility offer more opportunities, but also greater gains or losses. Novice traders with little experience should be cautious when trading volatile currencies, as the risks are often greater than regular currency trading.

It is recommended for beginners to start with less volatile currencies, such as EUR/USD, which offers high liquidity, small fluctuations, lower costs, better trading conditions, and faster information access.