Beginner's Must-Read! Forex Investment Introduction and Pitfall Avoidance Guide: Understand the 5 Key Points Before Entering the Market

“Can forex investing make money?” This is the most common question asked by many newcomers to the market. The answer is: there is potential, but the risks are also enormous.

The forex market is the world’s largest financial trading venue, with a daily trading volume exceeding 6 trillion USD, far surpassing the futures and stock markets combined. In the past, the dominant players in forex trading were financial institutions and high-net-worth individuals, but with the advancement of internet technology, ordinary people can now participate. Today, over 30% of daily forex trading comes from retail traders, including retail traders operating through derivatives like Contracts for Difference (CFD), which is why in recent years, retail forex investors have experienced explosive growth.

But this is not good news. Statistics show that 70%-90% of individual investors experience losses in forex trading. Before you truly jump into this market, you must clearly understand what you are doing.

Forex Beginner Lesson 1: How to Choose Investment Channels?

Forex investment is not limited to just one method. Depending on risk tolerance and investment goals, investors can choose from three main channels:

The most basic methods: currency exchange and foreign currency fixed deposits

Currency exchange is the simplest—if you travel to Japan, exchanging TWD for JPY, this is the most primitive form of forex trading. Everyone does this in daily life.

Foreign currency fixed deposits are an upgraded version. If you want to hedge risks or preserve value, you can open a foreign currency fixed deposit account at a bank. This is the most basic form of forex investment, belonging to the “spot trading” category. The advantages are low risk and stable returns, suitable for beginners new to forex.

But be aware: each bank has minimum deposit requirements for different currencies, and early withdrawal may result in loss of some interest. It is recommended to invest idle funds that are not needed in the short term.

The highest risk method: Forex Margin Trading

This is the real “speculating on forex.” The threshold for forex margin trading is extremely low, usually starting at just $50, and you can begin trading. But it is also an investment method with both high risks and high rewards, suitable only for those with some trading experience.

Investors deposit margin with banks or brokers to start trading. Different brokers offer different leverage ratios—common ones include 1:30, 1:100, 1:200, etc.

Advantages of forex margin trading: low capital requirement, 24-hour trading, bidirectional operation, high flexibility. For example, if you believe the euro will appreciate, buy EUR/USD; if you think the euro will depreciate, sell EUR/USD. If the price moves as predicted, you make money; otherwise, you incur losses.

The biggest risk is “margin call”—a single price fluctuation can wipe out your principal. Therefore, risk control, setting stop-loss and take-profit points, and reasonable use of leverage are essential.

Warning: Forex scam platforms are rampant. When choosing a broker, ensure it holds a license issued by a financial regulatory authority. Legitimate platforms will not engage in fake trading, signal calling, or withdrawal difficulties.

Forex Beginner Lesson 2: Leverage and Margin—Recognize the Double-Edged Sword

The root cause of many retail traders’ losses is their lack of understanding of leverage and margin. “Leverage not only amplifies profits and losses but also magnifies traders’ fears and greed.”

What is leverage?

Leverage allows you to control larger positions with a small amount of capital—“fight big with small.” For example, if a broker offers 20:1 leverage, you only need €2,000 to establish a €40,000 EUR/USD position.

It sounds attractive, but it also magnifies losses.

Common leverage ratios and their effects

Using a $1,000 principal to trade EUR/USD, profits and losses under different leverage ratios:

No leverage:

• 5% profit = $50
• 5% loss = -$50

10:1 leverage:

• 5% profit = $500 (50%)
• 5% loss = -$500 (50%)

50:1 leverage:

• 5% profit = $2,500 (250%)
• 5% loss = -$2,500 (250%)

100:1 leverage:

• 5% profit = $5,000 (500%)
• 5% loss = -$5,000 (500%)

200:1 leverage:

• 5% profit = $10,000 (1000%)
• 5% loss = -$10,000 (1000%)

Can you see the power of leverage? A 5% price movement can wipe out your entire account under 200:1 leverage.

The golden rule of leverage use

Beginners should use low leverage. Experienced traders usually limit leverage to 10:1 or less. Never use 500:1 on your first account—that’s courting disaster.

Start with small lot sizes, gradually accumulate experience. Develop a clear trading plan, set stop-loss and take-profit points, and stick to discipline. When profits reach your target (e.g., 20%), take profits immediately and avoid greed.

Forex Beginner Lesson 3: Advantages and Traps

Advantages of forex trading

• Bidirectional trading: go long or short, even in bear markets
• 24-hour market: adjust strategies anytime
• High leverage: up to 200 times the principal
• Low trading costs: OTC structure reduces fees, no commissions
• Deep market and high liquidity: global market, difficult to manipulate, transparent information

Forex trading traps

• High risk: high leverage means full loss possible
• Impact of news: economic data, central bank policies, geopolitical events—often unpredictable
• Psychological pressure: decision-making relies entirely on oneself; market volatility is rapid, requiring professional knowledge and strong mental resilience

Key question: Are you suitable for forex trading?

Forex trading is not a part-time game. If you only want to spend a little time casually trading, you may end up losing everything. Successful forex traders must learn systematically, master capital management skills, have a solid trading plan, and possess risk awareness.

Forex Beginner Lesson 4: Which currencies to trade?

There are 180 currencies worldwide, but only a few are truly worth paying attention to in forex trading.

The four major currency types

• Policy currencies: influenced by national policies and economic changes (USD, EUR)
• Safe-haven currencies: used to hedge risks, safe assets (JPY)
• Commodity currencies: affected by major commodity exports (AUD, RUB)
• Emerging market currencies: tightly controlled by governments, relatively stable (CNY)

Beginners are advised to start with the first three categories.

Top ten most traded currency pairs globally

These ten pairs account for nearly 90% of forex market trading volume.

Advantages of high-liquidity currencies: lower spreads, lower transaction costs, faster order execution, more information, and more stable prices.

AUD, as a commodity currency, is influenced by raw materials, iron ore, beef prices, and tends to be more volatile. EUR/USD is known for high liquidity and low volatility.

Which should beginners trade?

Experienced traders may chase opportunities in high-volatility currencies. But inexperienced beginners should choose low-volatility, high-liquidity currencies, such as starting with EUR/USD. This allows for lower costs, better trading conditions, and faster access to information.

Forex Beginner Lesson 5: How to choose a trading platform?

Always follow the principle: only trade on regulated platforms.

Major global regulators include:

• UK Financial Conduct Authority (FCA)
• Australian Securities and Investments Commission (ASIC)
• US National Futures Association (NFA)
• EU Markets in Financial Instruments Directive (MiFID)
• Cyprus Securities and Exchange Commission (CySEC)

When selecting a platform, verify it holds licenses from these authorities. Legitimate platforms offer zero commissions, low spreads, multiple leverage options, and comprehensive trading tools (stop-loss, take-profit, trailing stops, etc.).

Advanced Tips: How to survive in the forex market?

Factors influencing currency prices are numerous and complex

Global political instability, interest rate changes, stock market fluctuations, economic data—market participants include commercial institutions, investment banks, hedge funds, governments, multinational organizations, and retail traders. This complex ecosystem provides liquidity but also introduces countless variables. Beginners must pay attention to news and study fundamentals.

Leverage is just a tool; risk management is the core

Leverage can amplify profits but also losses. True investors need long-term systematic learning, strict capital management, clear trading plans, and sufficient risk tolerance.

Start small

One advantage of forex is the ability to trade with small capital. Beginners should start with small lot sizes, accumulate experience under low-risk conditions, and gradually build trading confidence.

Develop a plan and stick to it

Avoid frequent changes to your trading strategy. But also recognize that when market trends change, timely adjustments are necessary. The key is to set clear entry and exit points before trading—such as taking profit at 20% gain or cutting losses at 10%.

Never ignore stop-loss and take-profit orders

This is the most important rule. Exit when targets are reached, wait for the next opportunity. Greed is the biggest killer in forex.

Practice with demo accounts

Before investing real funds, practice various strategies in a demo environment to deepen your understanding of forex trading. Avoid paying painful tuition fees.

Summary: Final advice before entering the forex market

This article covers the five key points of forex investing—choosing investment channels, understanding leverage and margin, evaluating pros and cons, selecting currency pairs, choosing platforms, and advanced trading insights.

The forex market indeed offers opportunities to make money, and the entry barrier is low. But because of this, many inexperienced retail traders are attracted, and most end up losing money. The high risk of leverage trading is a truth that must be thoroughly understood before entering.

If you are prepared for risks, have a solid plan, and are willing to start small to practice, forex investing might be suitable for you. Otherwise, it’s better to begin with traditional investments, and only consider entering this high-risk, high-reward market after accumulating sufficient knowledge and experience.