Basics, What is Forex Trading

What is Forex

Learn everything you need to know about Forex trading, from the basics to advanced strategies. Understand how to use different currencies to make a profit and manage risk. Find out how the foreign exchange market works and start trading today.

Forex trading is the buying and selling of currencies on the foreign exchange market. With leverage, traders can make a profit from small fluctuations in the price of currency pairs. Learn how to trade forex and get started today with our beginner's guide.

Forex or also known as the FX market is the place where foreign currencies are exchanged, mainly online. It’s the process of changing of currency into another which is known as foreign exchange. Such transactions typically occur for business, trade, travel, etc.

The foreign exchange market is considered one of the largest in the world.

The highest daily volume was recorded back in 2019 posting $6.6 trillion according to the Bank for International Settlements.

Think of it as if you are traveling from the US to Europe. You will head to an exchange office to exchange your dollars into euros, in order to purchase a product or a service while you are there. It is the same concept, but with the Fx market, you will be able to do this transaction through your phone, laptop, desktop, or even your tablet. The transaction can be done within seconds.

Top Currencies
66% of global forex trading falls into seven major currency pairs, including EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, CNY/USD, and USD/CHF.

Trading RiskTrading, in general, can be risky, complex, and challenging if you don’t follow proper risk management, in addition to a solid strategy, which you can develop on your own, or use other strategies that are available online. However, you have to test any strategy on a demo account before you start trading with real money. Always remember a golden rule when it comes to risk management, your risk must always be lower than your expected reward. Always keep your risk as low as possible, on the other hand, try to let the profit run.

How to Access Forex Market

Accessing the forex market is not hard in this day of age, especially since everything is online. All you need is the following:

1. Choose your device (Desktop, Laptop, Phone, or Tablet)
2. Internet Connection
3. Online Forex Broker
4. Fund Your Account
5. Download the trading platform
6.  Start trading

Market Hours

The foreign exchange market is unlike any other market when it comes to trading hours. This market is 24/5 market. It’s open 24 hours, five days a week.

It starts with the Asian session on Monday, and it ends by the closing bell of the US session on Friday. There are three main sessions across the day. The Asian session, European session and finally the US session.

Advantages of Forex Market

1. Flexibility: There are no restrictions on the amount of money that you can trade or invest in such a market. Although some brokers might have a minimum amount, usually this amount is not significant. You can start trading for as low as $100.
2. Transparency: since this market is a global and huge market, manipulation is not possible. No country or central bank has the ability to single-headedly corner the market or rig the prices since this market operates across several time zones.
3. Multiple Asset classes: Forex market has a lot of options, there are a variety of assets, mainly currencies, and there are hundreds of currency pairs that you can trade. In addition, you can also choose between trading the spot price or the future contract of any currency.
4. Low transaction cost: Forex has very low transaction costs compared to any other market across the board. For example, the cost to trade GBP/USD usually is the spread between the bid and ask price, which generally can go to as low as 0.0003 pips.
5. Leverage: This is one of the biggest advantages of such market, if you use it correctly to your favor. It provide the most leverage amongst all financial asset markets. It provides investors and traders with the ability to trade as many as 20 to 30 times or even more of their initial deposit, which of course comes with risk as well. It all depends on how your risk management strategy works.

Margin Trading

Margin: What is it?
The collateral that an investor must deposit with their broker or exchange in order to cover the credit risk the holder poses for the broker or exchange is known as a margin in the financial industry. If an investor borrows money from their broker to purchase financial assets, borrows money to sell those same instruments for a loss, or enters into a derivative transaction, credit risk is created.

An investor who purchases an asset on margin does so by taking out a broker loan for the remaining amount. When an investor purchases an asset on margin, they make a smaller initial payment to the broker and put up collateral in the form of marginable securities in their brokerage account.

How does it work?
Prior to placing a trade, an investor must make a deposit into the margin account. The amount that must be deposited is determined by the broker’s mandated margin percentage. For instance, margin percentages of either 1% or 2% are often applied to accounts that deal in 100,000 or more currency units.

Consider a trader who deposits $10,000 into a forex account and initiates two trades. The utilized margin is $2,500 because the broker needs that amount to hold these two trades open. The margin threshold in this case is ($10,000 / $2,500) x 100, or 400%. More money is available to use for further trades the larger the margin is. The trader cannot execute any further deals when the margin level reaches 100% because all available margin has been used.

Forex Market Participants

1. Traders
2. Central Banks
3. Private Banks
4. Investment / Hedge Funds
5. Companies / Corporations

Forex trading is the simultaneous buying of one currency and selling of another. It's one of the largest and most liquid markets in the world, with a global daily trading volume of over $6 trillion. Learn more about how to make money from forex