What is Forex Trading?

April 15, 2019

Written by FinanceAdvice

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 a USD100 to buy EUROS. You receive 90 EUR but at the end of your trip, you have spent nothing. So, you want to receive USD again and now when you make the transaction receive USD110 instead of 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 made an operation in Forex Trading.

 

In other words, Forex Trading is the act of buying and selling currencies, and the place where these currencies are traded in 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.

A lot of people around the world and a lot of currencies too are involved in these markets. It means that you have the possibility to choose from over 170 currencies to do your investments 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 Forex Market? The Basics

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

 

  • Ask: Is the price you buy for // Bid: Is the price of the demand, the price you sell for.
  • Broker: The company which serves as the middleman between retail traders and larger commercial institutions, and allows its clients to access to markets and organizing trading financial instruments.
  • Leverage:  by trading with a broker, this borrows to traders an amount of money, a kind of credit which allows making large volume deals with a relatively small amount of capital. This capital is leverage. Through this financial instrument, the traders are able to make a profit for a small cost. Here goes 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.
  • 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.
  • Spreads: 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 of starting

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

How to choose the best platform? Which are the most reliable brokers in the market? What aspects must be considered when choosing a broker?

Although there is a regulation, it is indirect because these regulate the Forex companies but not the market.  The regulation is provided 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 start trading. First of all, consider the platform provided by each broker,  it has to be user-friendly and convenient. There are some respected manual trading platforms, and some brokers even offer its own proprietary platform, and it’s an advantage. In any case, it has to be 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 to do 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, so when looking for one broker, choose the one with the most convenient type of account and good leverage.

And last but not least, take note of the reputation of each broker. What are the people saying about them? Read carefully the reviews and the evaluations 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 within the world.
  • 250 billion per day only in the US market.
  • 24 hours, 5 days a week is the time in which operates the Forex Trading Market.
  • 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 largest trading center.
  • 87% of trading operations are made in dollars.

FX is the most liquid market within the world

Are you interested in Forex Trading?

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

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