Forex or Foreign Exchange trading is buying and selling of currencies. It is one of the most actively traded markets in the world. Unlike other trading markets, a Forex market works 24/7.
Several factors contribute to the demand and supply of foreign currencies. Hence, the Forex market continuously moves. Today, almost 90% of the Forex trade is based on speculative trading. It means most traders do it for profit-making rather actual conversion of currencies.
We have curated a list of top brokers for you to compare and learn before you can start trading in different markets.
Let us guide you through the basics of Forex trading.
What is Forex Trading?
Forex Trading is the conversion of currency into another one at an agreed price. The Foreign Exchange market comprises individuals, banks, corporations, and financial institutions. Because of the demand and supply rule, there is a continuous change in the Forex market, as in any other market.
The basic of forex is to convert one currency into another for foreign use. However, in today’s forex market, most of the forex trading is done for profit-making. Individual and corporate traders invest in foreign exchange to earn profits through speculation.
Forex traders can use several trading strategies to earn profits. As it is one of the largest markets in the world, it remains highly liquid. It means traders can convert assets into cash very quickly. Moreover, the foreign exchange market is the only one that operates round the clock.
There is no central regulatory authority for the foreign exchange market in the world. Rather it is controlled through regulatory authorities in each country.
Foreign exchange markets are not regulated centrally. Unlike stock trading, forex takes place at “over-the-counter" or OTC markets. International forex trading is controlled mainly through four different trading centers namely; New York, Tokyo, London, and Sydney.
There are three main types of forex markets. Each type of market comes with different purposes for traders.
Spot Forex Market
The spot market is the conventional form of trading. It is a place at which currency exchange happens at spot rates. The transaction takes place and is completed at the agreed price on the spot. The prices are determined on demand/supply, economic, and interest rate factors.
Future Forex Market
In a future market, two parties enter into a legal contract to buy or sell currency at a future date and a predetermined price. Future contracts are traded in standard sizes and over-the-counter markets.
Forward Forex Market
In a forward market, a contract is agreed upon by two parties to buy or sell currency at a future date and a set price. These contracts are usually between two parties directly. These contracts can be made in standard or non-standard form.
Forex Trading – Key Terminologies
Let us briefly understand the key forex terminologies.
Base and Quote Currencies
Forex trading is unique in the sense that it always involves two assets. You'll buy and sell at the same time. The trade takes place in pairs. The currency pair comprises a base and quote currency, for example, USD/EUR is a pair.
The base currency is always the first currency, and the quote currency is the second one. For example, if the pair is trading at 0.82104 then 1 dollar is equal to 0.82104 euros.
Seven currency pairs are traded most frequently in the forex world. These are called major pairs or simply majors.
These are EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD and AUD/USD.
These are less frequently traded pairs but involve one of the major currencies except the dollar. For example, GBP/EUR, CHF/CAD, etc.
These are a combination of one major and one minor currency. For example, USD/MXN, or GBP/PLN, USD/INR, etc.
A spread is the difference between the buy and sell price of a currency pair. Like any other asset in trading, you’ll deal with two prices in forex as well.
These are currency batches to form standardized trading. A standard lot is 100,000, a mini lot is 10,000, and a micro lot is 1,000 of a base currency.
Margin the requirement for cash deposit in your trading account. You'll need an initial margin to open an account and a maintenance margin for certain trades.
Leverage is the facility offered by brokers to trade forex without paying the full trade amount. Forex leverage is one of the highest offered leverages that ranges from 1:1000 to 1:100,000 in various cases.
How Does the Forex Market Move?
Forex is the largest global trading market. It involves currencies from the globe. Hence, several factors can affect the forex market.
Let us briefly overview key factors that affect foreign exchange trading.
Demand and Supply
As with any financial asset, the demand and supply of a particular currency affect the rates. The supply of currencies is regulated and controlled by central banks. Hence central bank policies in each country play a pivotal role in the forex market.
Economic performance is one of the key factors in currency valuation. It also directly links to the central bank decisions about currency valuation or devaluation.
Market sentiments move to market news in forex, just like other markets. A positive news about a particular economy will increase demand for its currency.
Ratings and Influencers
Credit ratings of a currency and its country will directly affect its pricing. Central bank decisions such as interest rate changes also directly influence currency pricing.
How to Start Forex Trading?
Getting started with forex trading has become easier with online brokers and trading platforms. However, bear in mind forex trading is highly risky. On the flip side, that’s what makes it more profitable than other markets.
Keep these key steps in mind when starting forex trading.
- Define your goals with forex trading clearly, for example, choosing between hedging or speculation.
- Choose a forex broker wisely by comparing multiple options.
- Learn the basics of forex trading and practice with demo accounts.
- Study forex trading methodologies through fundamental analysis such as CPI, or retail sales.
- Try learning about technical analysis and tools such as pivot points, Fibonacci study, etc.
- Choose the trading tools wisely such as trading signals, market orders, and entry/exit points of a trade.
- Be ready for small losses in the beginning and learning experience.
- Lastly, try to avoid emotions in forex trading and evaluate your trades objectively on regular basis.
Choosing a Broker for Forex Trading
Choosing the right broker and right trading platform is vital for your forex trading success. Bear in mind that all brokers charge commissions for their services. When it comes to forex trading, these commissions are often embedded in the form of spreads. It means you’ll likely see wider spreads with a broker than spot markets.
We have compiled comprehensive guides and resources for you to choose the right broker.
Here are some key tips for you before you decide on the forex broker.
- Ensure to choose a reputable broker that is regulated by top-tier regulatory authorities such as FCA.
- Choose a broker that offers a wide range of tools and a familiar trading platform for you.
- Keep an eye on SPREADs offered by the broker, lower spreads are pivotal for profit-making in forex.
- Forex trading heavily relies on LEVERAGE, choose the broker with higher leverage offers.
- Choose a broker with easy account deposits and withdrawal options.
- Compare commissions, overnight funding rates, and non-trading fees before choosing the broker.
- Test the services with a demo account before depositing funds into your trading account.
Pros and Cons of Forex Trading
There are several Pros and Cons of forex trading. You should analyze the benefits and risks before committing to forex trading.
Pros of Forex Trading:
- It is the world’s largest trading market and hence offers the highest liquidity.
- The market is available 24/7 with several central zones globally from New York to Tokyo.
- Traders can take a long and short position simultaneously since forex trading always involves buying and selling at the same time.
- Forex trading offers one of the highest leverage ratios in the trading markets.
- Traders can use speculations to make profits, hedging to reduce risks.
Cons of Forex Trading:
- Forex Market is highly volatile that can be risky for traders.
- High leverage also poses higher risks for traders.
- Forex trading is difficult to learn for many reasons such as economic trends, monetary policies, central bank influence, etc.