What is Forex Trading?

Back to: Introduction to Forex

Forex stands for foreign exchange, which is exchanging one currency for another. You sell a currency and buy another currency, and once you do so you have essentially involved yourself in the forex market. In forex trading terms, assuming you’re an American visiting Japan, you’ve sold dollars and bought yen.
The foreign exchange market, known as “Forex” or “FX,” is the largest financial market in the world. Compared to the measly $74 billion a day volume of the New York Stock Exchange, the foreign exchange market looks absolutely ginormous with its $4 TRILLION a day trade volume.

Because you’re not buying or trading anything physical, like Diamonds & Gold this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country, like buying stocks of a company. The price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.
For instance, when buying the Great Britain Pound, you are basically buying a “share” in the British economy. You are betting that the British economy is doing well, and will even get better as time goes through analyzing using basic methods. Once you sell those “shares” back to the market, hopefully, you will end up with a profit.

In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country’s economy, compared to other countries’ economies.

Who Trades on It?

Currency trading was very difficult for individual investors until it made its way onto the internet. Most currency traders were large multinational corporations, hedge funds, or high-net-worth individuals (HNWIs) because forex trading required a lot of capital.

Commercial and investment banks still conduct most of the trading in forex markets on behalf of their clients. But there are also opportunities for professional and individual investors to trade one currency against another.

Forex Key Points.

• The foreign exchange (forex or FX) market is a global marketplace for exchanging national currencies.
• Because of the worldwide reach of trade, commerce, and finance, forex markets tend to be the world’s largest and most liquid asset markets.
• Currencies trade against each other as exchange rate pairs. For example, EUR/USD is a currency pair for trading the euro against the U.S. dollar.
• Forex markets exist as spot (cash) and derivatives markets, offering forwards, futures, options, and currency swaps.
• Some market participants use forex to hedge against international currency and interest rate risk, speculate on geopolitical events, and diversify portfolios, among other reasons.

You’ll often see the terms FX, forex, foreign exchange market, and currency market. These terms are synonymous, and all refer to the forex market.

How to Start Trading Forex

Trading forex is similar to equity trading. Here are some steps to get yourself started on the forex trading journey.

1. Learn about forex: While it is not complicated, forex trading is an undertaking that requires specialized knowledge and a commitment to learning.
2. Set up a brokerage account: You will need a forex trading account at a brokerage to get started with forex trading.
3. Develop a trading strategy: While it is not always possible to predict and time market movement, having a trading strategy will help you set broad guidelines and a road map for trading.
4. Always be on top of your numbers: Once you begin trading, check your positions at the end of the day. Most trading software already provides a daily accounting of trades. Make sure that you do not have any pending positions to be filled and that you have sufficient cash in your account to make future trades.
5. Cultivate emotional equilibrium: Beginner forex trading is fraught with emotional roller coasters and unanswered questions. Discipline yourself to close out your positions when necessary.   

Forex Terminology

The best way to get started on the forex journey is to learn its language. Here are a few terms to get you started:

• Forex account: A forex account is used to make currency trades. Depending on the lot size, there can be three types of Forex accounts:
• Micro forex accounts: Accounts that allow you to trade up to $1,000 worth of currencies in one lot.
• Mini forex accounts are Accounts that allow you to trade up to $10,000 worth of currencies in one lot.
• Standard forex accounts: Accounts that allow you to trade up to $100,000 worth of currencies in one lot. 
• Ask: An ask (or offer) is the lowest price at which you are willing to buy a currency.
• Bid: A bid is the price at which you are willing to sell a currency.
• Contract for difference: A contract for difference (CFD) is a derivative that lets traders speculate on price movements for currencies without owning the underlying asset.
• Leverage: Leverage is using borrowed capital to multiply returns. The forex market is characterized by high leverages, and traders often use it to boost their positions.