Learning to trade currencies can be a tough topic for beginners. This currency trading for beginner's guide covers real-life examples, basic principles, and step-by-step guidance to getting started.
How to Use this Currency Trading Guide
To get the most out of this guide, it’s recommended to practice currency trading. The best risk-free way to test the main type of orders is with a demo account, which gives you access to our trading platform and $50,000 in virtual funds for you to practice with.
Once you’ve found a currency trading strategy that consistently delivers positive results, it’s time to upgrade to a fully funded live account where you can apply your newfound edge.
What is currency trading?
Currency trading is the process of speculating on currency price movements, with the aim of making a profit. Many currency conversions on the foreign exchange market are for practical use, and not for creating profit. However, traders can speculate on currency price movements, with the aim of capitalizing on correctly forecasting these movements.
As a currency trading beginner, it’s important to understand the basics of the forex market. For a more detailed definition of forex, visit our page on 'what is forex'.
Currency trading for beginners – basic knowledge
Currency trading is a 24-hour market that is only closed from Friday evening to Sunday evening, but the 24-hour trading sessions are misleading. There are three sessions that include the European, Asian, and United States trading sessions.
Although there is some overlap in the sessions, the main currencies in each market are traded mostly during those market hours. This means that certain currency pairs will have more volume during certain sessions.
Most of the volume in currency trading is confined to only 18 currency pairs compared to the thousands of stocks that are available in the global equity markets.
The most liquid currencies
Though most currencies are convertible and tradable, most traders stick to the eight major currencies (known as majors) because they have the most liquidity or availability, meaning that lots of buyers and sellers are usually present at any given time. That means you’re likely to get the best price and avoid slippage. For example, if you want to buy or sell something, you’ll get a better price if thousands of counterparties are competing for what you have to offer, as opposed to just one or two.
Here are the eight major currencies, along with their symbols and nicknames, ranked in order of liquidity. In general, the ﬁrst two letters stand for the country, and the last letter signiﬁes the currency.
Currency Symbol Country Currency Name Nickname USD United States Dollar Buck, Greenback EUR Euro Zone Euro Fiber JPY Japan Yen Jippy GBP Great Britain Pound Cable CHF Switzerland Franc Swissy CAD Canada Dollar Loonie AUD Australia Dollar Aussie NZD New Zealand Dollar Kiwi
Why these currency symbols? In general, the first two letters stand for the country, and the last letter signifies the currency.
How currencies are classified
Depending on how they behave, these major currencies are classiﬁed as one of two kinds: risk and safety or safe haven currencies. In general:
- Risk currencies are those that appreciate in times of optimism and depreciate in times of pessimism like other risk assets such as stock indexes or industrial commodities.
- Safe haven or safety currencies depreciate in times of optimism and depreciate in times of pessimism like other safety assets that are in demand when markets are fearful, such as investment grade bonds.
Here’s a table showing how these currencies rank on the risk-to-safety spectrum.
In other words, the AUD is the currency that tends to rise the most when markets feel optimistic and want risk assets, and the JPY tends to fall the most. In times of fear, when risk assets are selling off, the opposite occurs.
- These labels refer solely to how these currencies behave relative to other assets. These categories do NOT refer to the safety of these currencies as a store of value. For example, the JPY generally behaves as the ultimate safety currency, however, few would dispute that the CAD is a better long-term store of value given Canada’s better ﬁscal health.
- While the above general ranking works over a given period of days or weeks, it rarely applies perfectly on a daily basis. For example, even if markets are feeling very optimistic, and classic risk barometers like the USA 500 are trending higher, currency speciﬁc news events can cause lower ranked risk currencies to outperform the AUD and NZD.
Currencies Trade in Pairs and Why That Matters
Like everything else, currencies need to be priced in a currency, so currencies always trade in pairs. This fact makes the currency market different from other markets in two critical ways.
1. Price Movements Are Always Relative to Another Currency
Here’s the ﬁrst big difference.
Thus, unlike how traditional asset markets price stocks or commodities in terms of a given currency, foreign exchange (forex) prices are the product of the movement of one currency relative to another.
For example, when traders talk about the price of the U.S. dollar (USD), they’re referring to the dollar value relative to another currency, depending on which pair they’re considering. This is a critical difference from other asset markets.
On a given stock exchange, traders need only consider how share prices change relative to the local currency, which is assumed to have an essentially ﬁxed value regardless of what’s happening in the currency market. However, currency traders must consider how a currency will move relative to multiple currencies, all of which are moving at the same time. For example, it’s common for a given currency to be up versus some currencies but down versus others.
- If traders want to beneﬁt from the USD’s appreciation the most over a given period, they must also choose the currency against which it will be strongest during the anticipated time span of the trade, be it an hour, year, or anything in between.
- Even when the Japanese Yen (JPY) is relatively weak (Yen depreciation), if the USD is doing even worse, you can still proﬁt from selling the USDJPY.
2. It’s Just as Easy to Trade in Bear Markets as in Bull Markets
This is such a huge advantage over other markets such as stocks that it alone justiﬁes learning to trade currencies because currency trading gives you an easier, more reliable way to play bear markets. In other markets, there are often technical rules that make it harder to trade the downtrends.
Speculation from bear markets is just a matter of buying safe haven currencies and selling risk currencies to pay for them. In bull markets, you do just the opposite.
Confused? Stay with our currency trading for beginners guide here—the details will be clarified further when we learn about the anatomy of a currency pair price quote and better understand what happens in a currency trade.
Reading a Currency Pair Price Quote
Here is a sample currency pair price quote that you’d see on your trading platform, with explanatory notes.
It’s important that you take the time to go through this carefully until all is clear. In other words:
- Read the pair as the Euro-U.S. Dollar or the Euro-Dollar.
- The currency on the left, the EUR, is called the base currency. That’s because price movements of the EURUSD are “based” on the base currency. The EURUSD price will rise on the charts if the EUR is rising versus the USD. In other words, when this pair is trending higher, it means the EUR is rising versus the USD (and vice versa, the USD is falling versus the EUR). When the EURUSD is falling, that means the EUR is falling versus the USD, and the USD is rising versus the EUR. Thus, when you think the base currency will rise versus the counter currency, you buy or “go long” the pair.
- The currency on the right, in this case the USD, is usually called the counter currency because the price of the pair moves “counter” to the value of the USD versus the EUR. That is, if the EURUSD is rising, the value of the USD relative to the EUR is falling. The currency on the right is also called the quote or terms currency, because price movements of the EURUSD are “quoted” in “terms” of the USD. Price is read as counter currency per base currency. In other words, do not read the pair like a fraction. Instead, were ad the EURUSD price as: U.S.Dollars per Euro and not Euros per Dollar. For example, if the EURUSD price is 1.4000, that means the price or exchange rate is 1.4000 USD per EUR, or, the EUR costs 1.4 USD.
The above price quote means you could do one of the following:
1. Buy the EURUSD pair at the (higher) ASK price
That Means: You buy Euros and pay for them by selling dollars, paying the higher ask price. For every 1 EUR you buy, you’re selling $1.3924 USD, regardless of whether your account is funded with JPY, GBP, EUR, and so on. Amounts are converted as needed.
2. Sell the EURUSD pair at the (lower) BID price
That Means: You sell Euros and get U.S. dollars in exchange for them at the lower sell or bid price. For every 1 EUR you sell, you’re being paid $1.3921 USD.
- When you buy or go long the EURUSD, you’re long the base currency EUR and you’re short the USD. When you sell the pair, you’re doing the opposite. Thus, you’re always long one currency and short the other, so it’s as easy to short one currency versus another and, thus, beneﬁt from its downtrend as it is to be long that same pair.
- When you enter or exit a position you buy at the higher ask price and sell at the lower bid price. Why? The difference or spread between the bid and ask prices is the proﬁt the market maker or broker earns for pairing buyers and sellers instead of charging a commission like stockbrokers.
How to trade currencies
You buy the EURUSD or any other currency pair at the higher ask price if the following occurs:
- If you want to open a new buy position for the pair (go long the pair), you’re betting that the price of the EURUSD pair (in Dollars per Euro) will rise. In other words, you think the EUR will rise in price versus the USD.
- If you want to close an existing short position in which you had bet the opposite, that the pair would drop, (the EUR would fall versus the USD), either take your proﬁts or cut your loss on your short position using a stop loss order or a market order.
You sell the EURUSD at the lower bid price if the following occurs:
- You want to open a new sell position for the pair (go short the pair), betting the price of the EURUSD pair (in Dollars per Euro) will fall. In other words, you think the EUR will fall versus the USD.
- You want to close an existing long position in which you had bet the opposite (that the pair would rise in value, meaning the EUR would rise versus the USD), to either take proﬁts or to cut losses on your long position.
Do you see now how beneﬁting from a downtrend in a currency is no different than riding an uptrend? Let’s review these critical currency trading basic knowledge for beginners.
Whenever you buy or sell a currency pair, you’re always buying (going long) one and selling (going short) the other. In times of optimism (bull markets), you want to be long pairs that have risk currencies as the base currency (one on the left) or short pairs that have safe haven currencies as the base currency. In times of pessimism (bear markets), you want to do the opposite, because:
- When you’re long a currency pair, you’re long (or buying) the base currency and paying for it by shorting (or selling) the counter currency.
- When you’re short a currency pair, you’re short (or selling) the base and buying (or going long) the counter currency.
- Pairs that have risk currencies as the base currency are called risk pairs. Those with safety or safe haven base currencies are called safety or safe haven pairs.
For example, if you think markets will favor risk currencies and that the EUR (a risk currency) will be strong relative to the USD (a safety currency), then you buy the EURUSD. When you do that, you will be buying the EUR and paying for it by selling (shorting) the USD. If you believe the opposite, sell the pair. That means you’re selling the EUR and using the proceeds to buy U.S. dollars.
Examples of Currency Trades
Here is a practical introduction to currency trading for beginners with two examples based on the most popular currency pair.
Currency trading example 1: buying EUR/USD
EUR/USD is trading at 1.12874 / 1.12892
You decide to buy €10,000 because you think the price of EUR/USD will go up. EUR/USD has a margin rate of 3.34% (or 1:30 leverage), which means that you only must deposit 3.34% of the total position value as position margin.
Therefore, in this example your position margin will be $378.83 (3.34% x [€10,000 x 1.12892]).
Remember that if the price moves against you, it is possible to lose more than your collateral of $378.83.
Outcome A: winning trade
Your EurUsd price prediction was correct, and the price rises over the next hours to 1.14592 / 1.14610. You decide to close your long trade by selling at 1.14592 (the current sell price).
The price has moved 1400 points or 140 pips (1.14592 – 1.12892) in your favor.
Your profit is ([€10,000 x 1.14592] – [€10,000 x 1.12892]) = $140.
Outcome B: losing trade
Unfortunately, your EurUsd forecast was wrong, and the price dropped over the next hour to 1.13672 / 1.13690. You feel the price is likely to continue dropping, so to limit the losses you decide to sell at 1.13672 (the current sell price) to close the trade.
The price has moved 780 points or 78 pips (1.13672 – 1.12892) against you.
Your loss is ([€10,000 x 1.12892] – [€10,000 x 1.13672]) = –$78.
Currency trading example 2: selling EUR/USD
EUR/USD is trading at 1.12836 / 1.12854.
You decide to sell €20,000 because you think the price of EUR/USD will go down.
EUR/USD has a margin rate of 3.34%, which means that you only must deposit 3.34% of the total position value as position margin. Therefore, in this example your position margin will be $757.4 (3.34% x [€20,000 x 1.12836]). The platform will automatically convert the position margin amount into your account currency at the prevailing CAPEX conversion rate (USD in our illustration).
Remember that if the price moves against you, it is possible to lose more than your position margin of $754.94.
Outcome A: winning trade
Your prediction was correct, and EUR/USD drops over the next hours to 1.11368 / 1.11386. You decide to close your short trade by buying at 1.11386 (the current buy price).
The price has moved 1,450 points or 145 pips (1.12836 – 1.11386) in your favor.
Your profit is ([€20,000 x 1.12836] – [€20,000 x 1.11386]) = $290.
Outcome B: losing trade
Unfortunately, your prediction was wrong, and the price of EUR/USD rises over the next hour to 1.13802 / 1.13820. You feel the price is likely to continue rising, so to limit your losses you decide to buy at 1.13820 (the current buy price) to close the trade.
The price has moved 984 points or 98.4 pips (1.13820 – 1.12836) against you.
Your loss is ([€20,000 x 1.12836] – [€20,000 x 1.13820]) = –$196.8.
Getting Started with Currency Trading
- Open a CFD trading account. You can open a live or demo account to trade on price movements of currency pairs.
- Start researching to find the currency pairs you want to trade. Use our news and analysis section to keep up-to-date with market news that may impact currency pairs, and our economic calendar to keep updated with market-moving events.
- Based on your research, decide if you want to buy or sell. Is the research you’ve conducted indicating the base currency (the first-named currency in the pair) is more likely to weaken or strengthen? Go long and ‘buy’ if you believe it will strengthen or go short and ‘sell’ if you think it will weaken.
- Follow your strategy. Before placing a currency trade, ensure you have followed your strategy which should include risk management. Also, see our tips on building a trading strategy.
- Place your currency trade. As per your strategy, place your currency trade with defined entry and exit points. Don’t forget to use risk management conditions, such as a take-profit or stop-loss order.
- Close your trade and reflect. By following your trading plan, exit the market at your forecasted limits. Think about how you performed, so that you can improve after each trade you make.
Currency trading for beginners: where to learn more?
Getting started with currency trading can be an intimidating experience, with so much to learn. That’s why we created CAPEX Academy, a self-learning hub on our platform full of interactive online courses covering key aspects of trading and investing, fundamental and technical analysis, economic and technical indicators, and much more.
CAPEX Academy’s content ranges from the most beginner concepts right up to the very advanced, professional trader level. It’s completely free and easy to use.
Once you’ve got the basics down, our website’s Analyses and News section also contains a host of resources that help you perfect your technique and Predictions and Trade Ideas to keep you up to date on current market events. There are even videos and online seminars.
But, as we all know, practice makes perfect. That’s why we recommend putting all the theory you’ve learned into real-life use with our free demo account. Here, you’ll be able to trade with $50,000 in virtual funds in a risk-free environment to hone your techniques and build your confidence before doing it for real.