What is Forex Trading?

April 15, 2019

Written by Finance Advisor

Many people and currencies are involved in this market, the largest and most active in the world.

You want to make an investment but you don’t have enough experience, or is your first time and you have a lot of questions. What would you do to make your first steps?  Have you ever heard of Forex Trading? 

To answer all these questions, let’s think about a hypothetical situation: You are planning a trip overseas and you have to exchange money.  You have USD100 to buy EUROS. You receive 90 EUR but at the end of your trip, you have spent nothing. So, you want to convert to USD again and now when you make the transaction you receive USD110 instead of your original USD100. 

What has happened?  The immediate answer is quite obvious: you earned USD 10.  This is because the exchange rate changed, and that profit is a result of trading currencies. Even if you don’t know, you just engaged in Forex Trading.

 

In other words, Forex Trading is the act of buying and selling currencies, and the place where these currencies are traded is the Forex Market. This is a decentralized global market and is the largest in the world with an average daily trading volume of $4 trillion. It is usually denoted by the abbreviation FX Market.

Many people around the world and a lot of currencies too, are involved in this market. It means that you have the possibility to choose from over 170 currencies to  invest in Forex Trading. These currencies are grouped by pairs, where each one represents the exchange of one currency into another one. For example, the pair EUR/USD – one of the most traded currency pair in the world- represents an exchange of EUR into USD.

What do I need to know to trade in the Forex Market?

The Basics 

The FX Market attracts traders from all over the world, both experienced and beginners alike because it offers great opportunities to make profits with little amounts of money. However, there are some advice and recommendations to follow in order to have good experiences in forex trading, especially if it’s your first time. It is also convenient to know some basic notions to help you understand the best way of trading in Forex.

 

  • Ask: what is the price you’ll need to pay? What is the buying price? // Bid: Is the price of the demand, the price you sell at? 
  • Broker: Companies that serve as the middlemen between retail traders and larger commercial institutions. They allow clients to access the markets by organizing trading financial instruments.
  • LeverageBrokers lend money, a kind of credit, to traders which allows them to make large volume deals with a relatively small amount of capital. The capital the trader provides is called the leverage. Through this financial instrument, traders are able to make profits for a small cost. Here’s an example to make it easy to understand: with a Leverage of 1:100 if you invest $1000 you´ll have $100, 000 to trade. The $1000, is your capital or leverage.
  • Margin: An amount of money required by a client to maintain opened positions.
  • Margin trading: Difference between the buying and selling rates, also used to indicate the discount or premium between spot or forward.
  • Pair: The foreign exchange market is grouped into pairs of currencies. This financial instrument shows the value of one currency by comparing with another.
  • Profit: A positive amount of money that results from trading operations. The Profit Target is the level where a trader chooses to close a trade once a certain amount of profit has been accrued.
  • Spread: The difference between the price at which you can buy a currency and the price at which you can sell it.

Choosing the best broker. The way to start

Forex Trading includes several brokers and financial companies which offer products and services to start trading. As explained above, the brokers will give any client the opportunity to earn money by investing a small amount of capital.

How do you choose the best platform? Who are the most reliable brokers in the market? What are the different aspects to consider when choosing a broker?

Although there are regulations, it is  Forex companies that are regulated and not the market.  They are regulated by institutions like the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC).

There are some basic features to keep in mind when you start trading. First of all, consider the platform provided by each broker,  it has to be user-friendly and convenient. There are some respectable manual trading platforms, and some brokers even offer its own proprietary platform, which is an advantage. The most important thing is that it is easy to understand.

One of the most important things to analyze and compare when choosing a broker is the trading instruments. These vary from each company to another, and the most popular are currencies, stocks, CFDs on equities, indices, and commodities.

Another feature to consider is the velocity of the money transactions, as well as the funding and withdrawals methods.

We mentioned the importance of leverage, and this is given by the different account types offered by the brokers. When looking for a broker, choose the one with the most convenient type of account and good leverage.

Last but not least, take note of the reputation of the broker. What are people saying about them? Read their reviews carefully and evaluate then as best as possible to make a decision.

Forex trading in numbers

  • 4 trillion per day is the average of the trading volume. That’s why FX is the most liquid market in the world.
  • 250 billion per day in the US market alone.
  • The FX Market operates 24 hours per day, 5 days a week .
  • About 9.6 million people around the world are online traders.
  • There are 8 major currency pairs, and 4 are the best Forex currency pairs to trade: USD/EUR, USD/GBP, USD/JPY, AUD/USD.
  • 37% of all traders are in the city of London, the world’s largest trading center.
  • 87% of trading operations are made in dollars.

FX is the most liquid market in the world

Are you interested in Forex Trading?

Read the full reviews of the Top Brokers of 2019 here, compare them and choose the more suitable to your investment profile.

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