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Forex is an abbreviation for the Foreign Exchange Market and can also be referred to as “FX.” It’s the largest financial market in the world, trading $5 Trillion a day. To put that into perspective, the New York Stock Exchange trades a little over $22 billion a day. Trading in the Forex market involves buying and selling currency. Currency is traded in pairs, so you’re buying one currency while selling another. For example, one of the most commonly traded currency pairs is the Euro and US Dollar, abbreviated as EURUSD. When you place a “buy” trade, you are buying the Euro and selling the US Dollar. When you sell the pair, you’re selling the Euro and buying the US Dollar.
No. Contrary to the multitude of YouTube videos and sales propaganda, trading Forex is not easy. If you notice at the bottom of any site that deals in the Forex market, there’s a disclaimer that warns people it’s easy to lose money. The flip side is, when you educate yourself and manage your risk by being fiscally responsible, it is possible to make large amounts of money. Luckily, the Forex market is only two dimensional. It only moves up and down, so buying and selling decisions are based on one of two movements.
Approximately 80% of traders are trading for speculation. They expect to profit from the change in value between currency pairs. The remaining 20% of the market is the corporate market simply exchanging its currency. For example, a large multinational company like McDonalds may be changing its Japanese Yen into US dollars. The forex market offers very low transaction costs, so you can start trading with as little as $100. Although the barrier to entry is low, it’s recommended to start with $400 to ensure you are liquid enough to weather a market spike or drop.
You’re not actually trading money. You’re buying and selling currency pair predictions. If you use the EUR/USD as an example, and you predict the Euro will rise in value against the US Dollar, you’re paid if your prediction is correct. If your prediction is wrong, you don’t make money on that trade at that time. Depending on your trading style, you can hold onto your trade until the market switches and the Euro gains against the US Dollar and your trade becomes profitable.
All currency trading is traded in amounts called LOTS. Each lot has a different amount of currency. For example; a Swiss Franc lot has 125,000 Swiss Francs in it. A trader does not buy lots in order to buy and sell it or trade it. A trader opens a margin account, enabling him the right to trade it.
A margin account is a bond account. It is like a savings account. Before you can trade, you need to place a certain amount of money in what is called a margin account. You are guaranteeing other traders that you can pay them if you lose. That account is overseen by your broker. He monitors your account when you trade. He usually will not allow you to risk more than what is in your margin account. The margin account exists so, as you win on a daily basis, they have a place to deposit your money. Conversely, when you lose, they have an account to withdraw the money.
Currencies are traded on a pip system. A pip is another word for a point in the currency trading arena. Traders are trying to capture points. Depending on the currency, each point is worth a different amount. For example; the British Pound is worth about $10 per point that is traded per lot. If you trade 1 lot and capture 40 points, you just made $400. If you trade 10 lots and capture 40 points, you just made $4,000.00, etc.
Currencies are the money that represent the monetary system from different countries. For example; the Japanese Yen, Canadian dollar, Brazilian Real, Swiss Franc, etc. Futures trading of currencies is done in trading pits, where you are trading those currencies today, but for future prices. FOREX trading is trading actual currencies at today’s exchange rate with banks. All trades are done through brokers or market makers.
All forms of trading and investment can be construed as a form of gambling, although neither are the same as playing the lottery, roulette or betting. Traders seek price fluctuations and investors seek return on investment. Both require a calculated risk that is minimized by knowledge. You are always gambling when you don’t know what you are uneducated, trading emotionally or with a “hot tip”. Calculated risks are taken in all investments. People risk huge sums of money and not everyone succeeds. Even when there is a track record of success as in many franchises there is still no guarantee. Their investment becomes a calculated risk. The FOREX market is no different. When you trade not knowing what you are doing, or off a tip, you are gambling. When you trade after you have been educated or mentored by a successful program, or by other successful traders, you are now taking a calculated risk.
There are a variety of currency pairs that differ from broker to broker. The most common pairs are
- EUR/USD – Euro / US Dollar
- GBP/USD – British Pound
- US Dollar
- USD/JPY – US Dollar
- Japanese Yen USD/CHF - US Dollar / Swiss Frank
Forex is traded through a Forex broker. Traders can sign up online and download one of the trading platforms, like MT4, onto their computer or mobile device and start trading instantly.
Pip stands for Percentage In Point. It’s the smallest increment that a currency pair can move. For example, if the EUR/USD moves up from 1.2000 to 1.2001, the increase is one pip.
Although the charts look similar, the forex market is so large, no one controls it. Due to the nature of the stock market, large corporations and banks control the market.
The markets are open 24 hours a day, five days a week, Monday to Friday. The market actually opens on Sunday night, but the main trading starts on Monday morning.
You make money buying and selling currency pairs. You choose whether to buy or sell a currency pair depending on what the market is doing. For example, if you are trading the EURUSD and you believe the Euro will gain against the US Dollar, you buy. If you believe the Euro will lose momentum, you sell.
You don’t. Even the most seasoned pros lose some trades. The Forex market is highly volatile and can move up and down very quickly. You can, however, make an educated guess at how the market is going to move using different analytical tools. The three types of analysis are technical, fundamental, and sentimental. Technical analysis is the study of price movements using the charts. Fundamental analysis uses social, economic, and political factors to estimate the effect of supply and demand. And Sentimental analysis is based on gut feel. It depends on what the trader feels the market is going to do base on past experience.
A standard lot is 100,000 units, a mini-lot is 10,000 units and a micro-lot is 1,000 units. On a one pip movement in the EURUSD market, your profit is $10 on a standard lot, $1 on a mini-lot and 10 cents on a micro-lot.
Unlike the stock market that has physical trading locations, the Forex market is traded all over the world by banks, corporations, small investors and governments.
Invest $400 and get started. You have the option to open a demo account and pretend trade, but since you don’t have any skin in the game, your results will be much different than when you’re trading your own money. Trading with a demo account is like playing a video game, there are no consequences to your actions, so there’s no real motivation to learn to trade profitably. If you’ve got a bit of your own money on the table, it’s real. You’ll become much more aware of how to trade successfully and ultimately become a much better trader. If you want to simply invest some money and let a professional trader trade for you, you can also do that. It’s called mirror trading. You simply sign up for a Forex account with a broker and then sign up with a mirror trader and you get to trade what he trades.
Depending on the broker, you can start trading for as little as $200. The difficulty with starting with such a small amount of money is, it doesn’t allow you the freedom to experiment in the market as you learn how to trade. You will most likely lose money in the beginning, so you need enough of a cushion to ensure you don’t lose it all before you start making some. If you start with $1,000, you give yourself a pretty good chance of learning how to trade and the style that suits you. At the very minimum, start with $400. If you start off by trading micro-lots, 0.01 of alot, you’ll learn how the market reacts and how you react to the market. You’ll only make a few cents or dollars on your trades, but as you get better at reading the market, you can increase your trading amount.
Trading can take as little as fifteen minutes a day, depending on how you trade. You can set your trades in the morning and evening and go to work during the day. When you place your trade, you also set a ‘take profit’ point. If the market hits your ‘take profit’ the money is deposited into your account. Alternatively, you can spend several hours a day watching the market and taking advantage of incremental moves.
At the very basic level, you need Forex software that you download from your broker. If you want to up your game a bit, you may also want to include additional analysis tools that help you determine which way the Forex market is likely to move. Two very helpful analysis tools are:
- Forex Trendy – Forex Trend
- Trading Oracle
You can do it in the background while you have another job. Set your trades in the morning and evening and let the market work its magic during the day. There is a very low entry point. You can start trading with as little as $100 with most brokers, although it’s recommended to start with a very minimum of $400. The more capital you invest, the more profit you can make. It’s also very easy to lose money in this market, so the key to success is proper risk management.
Currency trading doesn’t take place on a regulated exchange like stocks and futures. There is no central governing body; no clearing houses, no arbitration panel and no one controls major shares of the market. There are no limits to the size of your trades, as there are in the futures market. If you have a few billion dollars to invest, you are free to do so. If you get an “insider tip” that the Bank of Canada is going to raise interest rates next week, you can buy as many Canadian dollars as you want and you won’t be prosecuted for trading with inside information. The market trades twenty four hours a day, five days a week, so there are seldom any gaps in price. With an estimated $5 trillion traded daily, the forex market is the largest, most accessible market in the world.
There are no fees or commissions in the FX market. Instead of brokers, like in the stock market and futures market, the forex market operates with dealers. Instead of charging a fee or commission the forex dealer makes their money on the bid-ask spread. After the trader covers the spread every pip is pure profit.
Not really. The forex market is actually speculative. There is no physical currency exchange taking place. FX trades are similar to playing a video game, they look real, but they’re just a computer entry. The money that is won or lost on each trade, however, is real.