A journey of a thousand miles begins with a single step
Confucius
By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest
Confucius
Learning about the forex market takes a little time and some study.
Below is a brief explanation of the Foreign Exchange Market (Forex for short) but if you are seriously considering currency trading, be sure to visit our skill centre.
The Foreign Exchange Market is also referred to as the "FX" market and is the largest financial market in the world, with a daily average turnover of almost $2 trillion. Foreign Exchange currency trading is the simultaneous buying of one currency and selling of another. The world's currencies are on a floating exchange rate and are always traded in pairs, for example Euro/Dollar or Dollar/Yen.
Currency trading is not centralized on an exchange, as are the stock and futures markets. This market is considered an Over the Counter (OTC) or 'Inter-bank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network.
The Forex market is called an Inter-bank market because it used to be dominated by the banks. However, the percentage of other market participants is now rapidly growing, and includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators such as you and I, also refered to as Retail Investors.
The Forex is a true 24-hour market. Trading begins each day first in Sydney, and then moves around the globe as the business day begins in each financial centre, first to Tokyo, then London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and geo-political events as they occur – by day or night.
Traders speculate on movements in the exchange rates between various currency pairs, for example the Euro and the Dollar. The exchange rate is is divided into smaller parts than you may have been used to, so instead of seeing for example $1.20, in forex trading the exact same amount would be seen as $1.2000.This still represents one Dollar and twenty cents.
As the exchange price moves by one of these small pecentages known as pips so the trader would make or lose money. To amplify on this, if a trader had bought the Dollar at our imaginary price of $1.2000 and the exchange rate changed to $1.2010 then the trader would have made a profit of 10 pips.
Now we need to look at what a pip is worth to the trader.
To do this it is necessary to understand a couple of things,
Leverage* and lot size.
If a trader has a "standard" trading account, each time the trader makes a trade for one single lot, that trader is actually committing to trade one unit of $100,000, but it is very usual for traders to have a "leveraged* account" also refered to as a "margin account".
What this means in effect is that the trader will elect the amount of leverage* to be used for the account and will only need to commit a percentage of the $100,000.
For the purpose of illustration we will use a leverage of 100:1*
This means that for every pip the price changes in favour of the trade, the trader will make $10 profit and for every pip the price changes against the trade the trader will lose $10
So in our imaginary example above, if the exchange rate changed to $1.2010 the trader would profit by 10 pips X $10 = $100 profit.
Conversely, if the exchange rate changed to $1.1990, then the trader would make a loss of 10 pips X $10 = $100 loss
The greater the leverage*, the greater the risk.
Many novice traders begin trading with a "mini account".
This means that the amount of money that the trader commits to is reduced to $10,000 per single lot and at a leverage of 100:1* each movement of 1 pip is valued at $1.
You will need to use a broker if you wish to trade on the forex.
As stated above this market is considered an Over the Counter (OTC) or 'Inter-bank' market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network.
Generally, the broker will arrange or act as the counter party to your trade.
The selection of a broker is a very important, if not crucial part of your trading decision. Make sure that before lodging your trading funds with a broker, that you carry out your own, very thorough, due diligence.
Most, if not all brokers, will give you access to a demo trading account. This is a trading platform and a "virtual" money trading account.
By using this very important and yet free tool, you will be able to learn and practice your trading techniques in the real atmosphere of a trading enviroment, without putting any real money at risk.
When you buy or sell (known as a Long trade or Short trade respectively) the broker will either charge you a commision or will charge you a "spread", this being the difference between the ask and bid price (buy and sell price) or in some cases both. This is how the brokers make their profit
That men do not learn very much from the lessons of history is the most important of all the lessons of history
Aldous Huxley
I am always doing that which I can not do, in order that I may learn how to do it.
Pablo Picasso
*Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
IMPORTANT RISK DISCLOSURE
Off-exchange foreign currency trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and, therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with off-exchange foreign currency trading and seek advice from an independent financial advisor if you have any doubts.
