What is forex ?

Why choose trading forex ?

Nothing can beat education as a means of getting from an ignorant new trader to a profitable professional in Forex trading. Our approach to educating traders is to provide a starting point for beginners, a list of advanced topics for intermediate traders, and clues for further research for experienced FX scholars. Education never stops — even the best traders must constantly learn something new to be up-to-date with the latest market developments.

What is forex?

Forex simply refers to the foreign exchange market, a market in which you can trade one currency for another. The word forex itself, which is also sometimes abbreviated to FX, is a portmanteau of the phrase foreign exchange.

One of the most unique things about the Forex market is that it’s decentralized. This means that it does not have a fixed location or an owner, and investors deal directly with each other. The decentralized nature of the forex market gives it other distinct qualities too.

Forex trading takes place around the world on a 24-hour basis during weekdays. This is very different from stock markets, which close at the end of the day. As the forex market is global, trading activity simply shifts to a different location, depending on what time of day it is. For instance, when trading finishes in New York, it begins in Sydney. Moreover, whilst the forex market is technically closed on the weekends, you will find that these down periods are very short due to the way time zones work.

Forex is also by far the largest financial market in the world, with a total trading volume of over $5 trillion per day. Ultimately, the size and scope of the forex market present you with a huge number of opportunities to trade.

What is forex trading?

Forex trading is the trading of currency within the forex market. On the most basic level, this is done through the trading of currency pairs (one currency traded for another currency). In fact, every time you take a vacation and swap your USD for the currency of your destination country or vice versa, you are participating in the forex market and forming part of the $5 trillion daily volume mentioned above.

Operating in the market as a retail forex trader is not a whole lot different. You are buying one currency at a particular price and hoping that this price then moves in your favor so you can resell it at a later date. What makes forex trading so potentially lucrative, however, is the amounts traded.

The difference in currency values is often negligible unless you are trading with large amounts. Whilst you might not make a lot of profit trading in your cash at the end of your vacation, as a forex trader you will generally trade at least one micro-lot (worth $1,000) at a time. This is facilitated by major forex brokers, who give you leverage to hold large market positions.

This effectively means that for as little as $100 in some cases, you can place trades to the value of $50,000. The market has the potential for you to grow your investment at an extreme rate.

How do currency pairs work?

When you trade in the forex market, you will be trading currency pairs. A currency pair is, as its name suggests, made up of two currencies. One is the base currency and one is the quote currency.

The base currency is always listed first. This is the currency which you are wishing to buy. The quote currency, on the other hand, is the currency you already have. You sell the quote currency to buy the base currency.

For example, in the EUR/USD currency pair, the Euro is the base currency and the Dollar is the quote currency. When reading this particular example market, you may see 1EUR = $1.20. This means that in order to purchase 1 Euro, $1.20 is required.

When you are trading in the forex market, you will always be trading currency pairs. There are hundreds of currency pairs to choose from, depending on your broker, though these can typically be broken down into 3 distinct categories:

• Major Pairs – These always include the US dollar. Popular major pairs include EUR/USD, GBP/USD and USD/JPY.
• Minor Pairs – These are also sometimes referred to as cross-currency pairs. These pairs do not include the dollar but do include one of the three main non-USD currencies (the euro, the British pound or the Japanese yen). Minor pairs include EUR/GBP, EUR/JPY, GBP/AUD
• Exotic Pairs – Exotic, or emerging, pairs are those which involve only one major currency. For instance, USD/MXN (US dollar and Mexican peso).

Currency pairs gain and lose value due to a number of different factors, such as economic news and political announcements. This, combined with the wide range of pairs available for trading, makes the market both lucrative and accessible to traders from all over the world. 

The 3 different types of forex trades

There are three main ways in which you can trade on the forex market. These are through spot trades, forward trades, and future trades.

Spot Trades are instantly delivered orders. You are buying right now at the current price available in the market, and you will take ownership right away.

Forward Trades are trades in which you agree to pay a price for a currency at a set time in the future. This time and price are binding no matter what happens in the interim and no funds are usually required until the agreed date.

Futures Trades are trades in which you buy into the market now, with an agreed date on when to sell the current position. These are usually traded as CFDs in which case ownership of the underlying asset is not transferred.

Spot trades are by far the most popular type of trade. This is due to the fact they are instant and simple. These are both important qualities in a quickly changing market like forex. 

Why is FX Trading so popular?

Retail forex trading, which refers to trading which is carried out by individuals, is incredibly popular. Around 5-6% of the entire forex market is made up of retail traders. That counts for around $300 billion of the market’s daily trading value.

Whilst this may seem small in comparison to the value of the complete market ($5 trillion), compare it to the daily value of the New York Stock Exchange (between $2-6 billion). As you can see, the retail forex trading industry is huge.

Why is this case? Although learning to trade forex profitably requires a lot of time and effort, and without this it can be risky, the simple fact is that there’s plenty of appealing advantages to forex trading too.

Earn extra income
Forex trading offers you the opportunity to earn extra income, provided you are suitably prepared for trading, knowledgeable about the market and remain aware of the risks. As the forex market is open 24 hours a day, trading can be done in your spare time. FX trading can be fitted to your lifestyle, not the other way around.

Start trading with ease
One great thing about forex trading is that you typically do not need huge amounts to get started. Most major forex brokers require a first minimum deposit of under $100. Learning about forex trading is similarly accessible. The internet is filled with quality forex trading guides and advice (like this very page), and your broker may even provide you with educational materials to help you improve your skills.

Adapt your trading style to suit your needs
A huge benefit of forex trading is that, wherever you turn, you are presented with a wide range of options. From choosing to trade the currencies you know well, to employing different strategies or using robots, you can always adapt your trading style to make sure you get the best results for you.

Trade wherever you want
In the past few years, forex trading has become increasingly portable. Many of the best forex brokers now allow you trade from almost anywhere, as their trading platforms are available on desktop, laptop, and mobile. You can also use mobile app to keep up to date with trading analysis when you’re on the go.

Open all hours
In addition to being able to trade wherever you like, the non-stop nature of the forex market means that you can trade whenever you like too. No matter which time-zone you’re in or whether you’re a night owl or an early bird, you can always trade at a time that suits you.

Explore a highly liquid market
Liquidity essentially describes how easy it is to sell something for cash. In trading terms, this means whether or not you can invest in an asset quickly and sell it again quickly, without impacting the inherent value of the asset. The forex market, with its huge market volume, has high liquidity. As such, there are always trades to be made and prices remain relatively stable.

What do I need to start FX trading?

As we mentioned earlier, forex trading can seem intimidating. Luckily, help is at hand. Our range of forex educational guides and material will put you in good stead to start trading effectively.

Once you’ve done your research and studied hard, you’ll be pleased to know there’s only a handful of other things you need to get started:

Capital
Of course, to start trading you’ll need some capital. The amount of capital you need, however, is reducing all the time. Top forex brokers are becoming more flexible with their minimum deposit limits, to a point where you can now get started for under $100.

Hardware and Software
Next, you’ll need to make sure you have some way of trading. Traditionally this would mean having a PC or laptop yet, thanks to modern technology, you can now easily use top trading platforms on your mobile or tablet.

A Quality Broker
Once you’ve created a convenient trading set-up, you’ll then need to choose a broker to trade with. It is important to find a broker that suits your needs perfectly. This could mean choosing a broker that offers a strong educational infrastructure, a particular trading platform or a certain range of markets. You can use our broker comparison list to help narrow down your search.

Economic Insight
Last but not least, to trade forex successfully you will need to keep up with economic and current events. There are certain tools that can help you with this, such as economic calendars and market news notifications, and these are often provided by top brokers.

You can also use trading signals or try out copy trading, where you follow the activity of successful traders, to help you to whilst you get started. 

How to make money trading forex

To make money trading forex, you need to know one simple thing: when to buy and sell currencies.

Of course, this is easier said than done. To trade successfully, you must invest time in yourself and your learning before you invest your capital in the market. Profitable traders have a firm understanding of economic trades and use this to create tested forex trading strategies. A good trading strategy can help you to interpret, anticipate and make the most out of market movements. 

Practice trading forex now

Once you are feeling confident in your knowledge and trading ability, registering for a forex demo account is your next step.

Demo accounts are excellent as they allow you to trade and make mistakes with virtual currency. You can trade in a completely risk-free environment, yet the software and markets will still perform exactly as they would under live conditions. This gives you a comprehensive trading experience, helping to build your knowledge extensively, for free.

Many of the best forex demo accounts, like those in the table below, also offer unlimited use periods. So, even after you start live trading, you can use your demo account for testing strategies.

 

 Best Forex Broker List