What is Forex?
The Foreign Exchange is a financial market that allows the world to trades its currencies. It is estimated that over $3 trillion is accounted for in the worlds financial markets.
The Forex is unlike the stock exchange in that it does not have a specified trading area. Transactions can occur over the telephone or through a global network of banks, multinational corporations, importers and exporters, brokers and currency traders using the Internet. This implies that there is not just one exchange rate but a number of different rates dependent on what a bank or market maker is trading, and where it is in the world.
In comparison the Forex market is 100 times larger than the New York Stock Exchange.
The Forex is the buying of one currency and the selling of another concurrently and typically occurs in investing and international trade. It allows businesses to convert their currency into another in order to make trades.
The major currencies are the British Pound (£GBP), the Euro (€EUR), the Japanese Yen (¥JPY), and the Swiss Franc (CHF) which are most often traded against the US Dollar ($USD).
You will often see currency pairs expressed like this: USD/JPY. The first part of the pair, known as the "base currency" is followed by the "quote currency". (In our example, USD/JPY would be the US dollar as the base against the Japanese Yen as the quote.)
Then, next to the currency pair will be the quota, or bid/ask price. This is expressed in the following format: EUR/USD: 1.2836 1.2839. The first number in the series represents the bid price, (the cost of selling the Euro against the Dollar) and the second number is the ask price, (the cost of buying the Euro against the Dollar).
The difference between the bid/ask price is called the pip spread. A pip is the smallest unit of measure for any currency. In most currencies, this is the fourth digit after the decimal point; each pip is equivalent to one-hundredth of a penny. However, the Japanese Yen is an exception. Each pip is the second unit after the decimal point, meaning each pip equals one cent.
Learning how to Trade Forex
For the person that is new to Forex, learning how to trade currency can be a bit intimidating. But if you don’t let yourself get overwhelmed and take it one step at a time, learning the basics on how to trade currency can be mastered quite easily. The first thing to do is familiarize yourself with the different terms and how the market works.
Learning to Trade with Discipline
A very important lesson when you learn to trade Forex is learning to be disciplined. Forex trading without discipline leads to only one result and that is complete and utter failure. If you allow your emotions to rule you, you will lose all objectivity and rather than placing your trades according to the movements of the market, you will be trading according to where you hope the market will go.
You need to be disciplined enough to be able to close out losing trades before they clean out your account. One thing you will find when you learn to trade Forex is that it is impossible for all your trades to be winning trades. However, many traders can’t accept this fact and end up incurring even heavier losses.
As already mentioned, the Forex market can be incredibly volatile but also highly unpredictable. Due to its very nature it makes it practically impossible for anyone to accurately forecast its movements 100% percent of the time, no matter how good they are at analyzing the markets.
Learn to Trade Forex: Start with the Basics
Just like learning anything, when you learn to trade Forex you need to start with the basics. This means that you first need to have a good grasp of the Forex market and the mechanics of trading.
The Forex market is one of the largest financial markets in the world with over $4 trillion traded every day. It is also an extremely high risk market to trade in due to a number of factors including volatility and high leverage.
While the price movements in the Forex market aren’t extreme in terms of absolute movements, due to the high leverage brokers offer, even increases of fifty pips, which equate to only half a cent, can generate large profits for traders. It is this high level of leverage, though, that makes Forex trading so attractive to retail traders. If you find yourself uncertain of what terms like “pips”, "pairs" or “leverage” mean, you needn’t worry because when you start to learn to trade Forex these are the basic concepts you will first cover.
Forex trading also offers an extremely low entry barrier, another factor which makes it so popular to retail traders, with some brokers allowing a minimum deposit as low as $25. While you might think there isn’t much you can with $25, you are quite mistaken.
If you start off with a $25 deposit and make a 2% profit every day, which equals approximately 10 pips, in about a year, your account balance would be around $13,000. That’s not a bad return considering that 10 pips can be made with one or two trades.
Become a trader like a pro
People are attracted to Forex currency trading because they see it as a way to make a lot of money in a reasonably short period. Because of the rapid rise and fall of exchange rates, an astute person can stand to make a fast profit, providing they make the right selection. However, making the wrong decision can result in losing your money just as quickly. Obviously there is an element of risk involved but that is what holds a lot of the appeal for Forex traders.
You may have experienced changing your currency when you go on holiday, and you would have noticed that the rate could change from day to day. You may get more for your money one day than another. You may have even made a profit if you were wise enough to check the current rates before you changed your money back.
Most people automatically think of banks in connection with increasing the value of their money, but this is where Forex trading differs in that brokers are used instead. The majority of transactions are processed online, which means they are not restricted to 9-5 banking hours. If you have had any experience with stock trading, you may notice some slight similarities. For example the potential for trading in margins, when a relatively small balance held by the broker is able to control a much larger deal.
However, one of the major differences between trading on the stock exchange and Forex trading is that you are not restricted to trading only within your own country. Therefore, no matter where you live this will not affect your ability to trade in any two currencies.
Because the market is international and trading is primarily conducted online this opens up a whole vista of extra possibilities for managing the market. If you are in Australia for example, the UK is 10 hours behind you, and the US anything from 14-17 hours behind, and yet New Zealand is 3 hours in front. It sounds confusing but you will soon learn how to negotiate the different time zones to your advantage.
You may be a bit confused when first starting as to which currency belongs to which country, but it’s fairly simple if you remember every currency is represented by three letters, the first two represent the country and the third letter is the currency of that country for example: AUD = Australian dollar, USD = US dollar, GBP = UK pound. The rate of exchange between two different currencies is usually displayed like this USD/AUD 1.08 meaning you need 1.08 Australian dollars to buy one US dollar.
When you are learning how to trade currency with Forex, you will need to find an investment management company or a broker that you can trust and feel confident with. It’s sensible to shop round and visit forums to read what more experienced users have to say about preferred brokers. When you find someone that you think will be right for you, check how long they have been established, and make sure you read all the small print of any terms, conditions or contracts.
Remember, it’s important not to rush into anything until you understand what you are doing. Many online Forex sites have set up virtual (dummy) accounts where you can learn how to trade currency by practicing with “play money” until you are confident about venturing into the real world of Forex.