First, congratulations! You’ve just found something few forex (foreign exchange or currency) beginners ever ﬁnd — an ideal starting point. Going beyond simpliﬁcations and theory, here is a practical, well-detailed, step-by-step guide to actually understand WHAT is forex and HOW does it work.
Figuring out how to get started with forex and how to make money trading forex, can be frustrating. Still, you’ve got to start somewhere. Welcome to somewhere.
FOREX, also known as FX market, Foreign Exchange Market or Currency Market, is a global decentralized market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. The foreign exchange market assists international trade and investments by enabling currency conversion. It also supports speculations on the floating exchange rate and interest rate between two currencies.
Like everything else, currencies need to be priced in the currency, so currencies always quote and trade in pairs. Foreign exchange (forex) prices are the product of the movement of one currency relative to another. For example, when people talk about the price of the JPY (Japanese Yen), they’re referring to the Yen value relative to another currency, depending on which pair they’re considering (e.g. USD/JPY).
Forex market is the largest financial market in the world, with up to $5 trillion traded every day.
Forex Trading is the simultaneous buying of one currency and selling another for capital gains and/or steady income.
Forex Trading for Capital Gains includes all speculative trades, or proﬁting on floating exchange rate between two currencies (eg. EurUsd) by either:
In either case, the forex trader could earn an amount of money on the difference between the opening and closing price of the trade.
Forex Trading for Steady Income includes all carry trade or proﬁting on the interest rate differential between two currencies by either:
In either case, the forex trader could earn interest income on the difference between the two yields, also known as Overnight Interest or Swap in Forex.
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There are more reasons to have some forex exposure beyond currency diversiﬁcation - or as much of your assets (investments or savings) to be denominated into currencies that are more likely to hold their real value or appreciate in the long run and lift your portfolio along with them.
Once you do your homework, you’ll realize that the currency market is arguably among the most rewarding asset classes for traders and investors. Forex trading offers the potential for better risk-adjusted returns IF you know how to exploit it. The availability of leverage in forex magnify gains and losses, creates an unmatched proﬁt potential for those with limited trading capital IF (big IF here) they learn how to control the downside risk.
Just as it’s easier to row with the current than against it, it’s easier to proﬁt by trading in the direction of an established market trend. Unlike with stocks (and other ﬁnancial markets), in forex, it’s as easy to proﬁt from falling markets as from rising ones. This is a huge advantage of the forex market. During a downtrend, when prices are falling, it’s easier to proﬁt by trading with that downtrend, selling a currency, or more precisely, a currency pair (they always trade in pairs).
Forex market hours offer the best flexibility. Forex markets trade in a seamless 24-hour session, 5.5 days a week, from Sunday 5:15 P.M. EST until Friday 5:00 P.M. EST (Forex Hours). “Trading in foreign exchange” (FX) markets averaged $5.1 trillion per day in April 2016, according to the 2016 Triennial Central Bank Survey of FX and over-the-counter (OTC) derivatives markets (Forex Turnover). The more liquid the market, the easier it is to be proﬁtable. Prices are fairer and more stable, less subject to sudden unpredictable movements.
Forex trading has among the lowest entry or startup costs in money and time of any ﬁnancial market, in terms of trading capital and training/equipment costs. Unlike most markets, you do not need many thousands of dollars to get started. That’s because, in forex, we can trade on margin, typically 1% or less. This allows us to make substantial proﬁts on small price movements. In theory, the answer to ‘how much money you need to start forex trading’ is as little as 1.000 USD. However, you’ll learn that you’ll lower your risks and have more chances to proﬁt by starting with at least a few thousand euros (or the equivalent) if possible.
Forex trading has gotten a reputation for being excessively risky due to a combination of:
If you’ll do your homework, you will see the absurdity of that reasoning. Just because there are individuals who behave stupidly with cars or power tools doesn’t mean that these should be avoided altogether.
The same goes for forex, including the typical leveraged trading. If you’ve had the right preparation to learn about forex and have the discipline to actually trade forex with proper risk and money management, you can keep the risk to acceptable levels, just as with any other kind of investing.
In the beginning, don’t try to be a bad imitation of an experienced pro. Instead, focus on becoming a great forex beginner. That means ﬁnding and using some easy forex strategies and one of the best trading platform that even a forex beginner can, in measured stages, start to implement and use successfully.
As with driving, there are ways to simulate the experience until you’re ready for the real thing (Forex Demo Account), and ways to then start slowly under less challenging conditions (Forex Retail Account) until you’re ready for more challenging conditions (Forex Professional Account).
As with evaluating any vendor, do your homework before you decide to open an online forex account. To maintain maximum objectivity, we will neither recommend AM Broker nor speciﬁc forex forum or websites that provide forex broker reviews. To speed your research, however, we offer the following guidance on how to choose a forex broker using AM Broker for the seek of illustrating.
Currency rates don’t tend to move by big intraday margins, so there are basically two ways to make money in forex trading:
Forex market produces some of the most stable long-term price trends that are ideally suited for long-term investors, and also can provide simple, effective ways to proﬁt in bear markets. Currencies can be excellent long-term plays because the fundamentals of the underlying economies that drive currency prices change much more slowly than those of individual companies. It’s a longer, more complex process to change the relative growth rates of entire economies (or currency unions in the case of the Euro) than it is for an individual company. This is the long term trading strategy to make money in forex.
For example, with 100:1 leverage in forex trading, a daily average 1% exchange rate fluctuation means 100% proﬁt. It also means a 100% loss. Leverage in forex trading needs to be managed very carefully to limit the risk as losses can sum up quickly.
Being able to read and really understand a forex quote is, unsurprisingly, key to trading forex. Let’s start with an example of an exchange rate: EUR/USD 1.12540.
The currency on the left (EUR) is the base currency and is always equal to one unit — 1€, in this example.
The currency on the right (USD) is called the counter or quote currency.
The number is what the counter currency is worth relative to one unit of the base currency. When that number goes up, it means the base currency has risen in value, because one unit can buy more of the counter currency. When that number goes down, the base currency has fallen. In this example quote, 1€ is equal to $1.12540.
You’re always buying or selling the base currency. Within a pair, one currency will always be the base and one will always be the counter — so, when traded with the USD, the EUR is always the base currency. When you want to buy EUR and sell USD, you would buy the EUR/USD pair. When you want to buy USD and sell EUR, you would sell the EUR/USD pair.
As with stock trading, the BID and ASK prices are key to a currency quote. They, too, are tied to the base currency, and they get a bit confusing because they represent the dealer’s position, not yours. The bid price is the price at which you can sell the base currency — in other words, the price the dealer will “bid,” or pay, for it. The ask price is the price at which you can buy the base currency — the price at which the dealer will sell it, or “ask” for it.
The bid and ask are typically shown as EUR/USD bid/ask, and the ask is represented with only the last two digits. For example, EUR/USD 1.12540/46 means that the bid is 1.12540 and the ask is 1.12547. You could sell 1€ for $1.12540 (the bid) and buy 1€ for $1.12547 (the ask).
The bid price is always lower than the ask price, and the tighter the spread, the better for the investor. Many brokers mark up or widen, the spread by raising the ask price. They then pocket the extra rather than charging a set trade commission. With AM Broker you can trade with ECN spreads, starting from 0.0 pips.
Forex is traded by the “lot.” A micro lot is 1,000 units of currency, a mini lot is 10,000 units, and a standard lot or 1 forex lot is 100,000 units. The larger the lot size, the more risk and potential reward you’re taking on; If you’re a beginner, we recommend sticking to mini lots while you get your footing.
And hey, this seems like a good place to note that reliable forex brokers almost always give investors access to a demo trading account. It’s much more fun to lose play money than real money, especially while you’re learning the ropes.
Remember when we said forex trading was complex? We weren’t lying. In stock trading, you might hear or read that a stock’s share price went up a point, or $1.
A pip is the forex version of a point: the smallest price movement within a currency pair. A pip’s value depends on the trade lot and the currency pair. If you’re trading a pair that has the USD as the counter currency and you’re using a dollar-based account to buy and sell, the pip values are:
If the USD is the base currency, the forex pip value will be based on the counter currency, and you’ll need to divide these values for micro, mini and standard lots by the pair’s exchange rate.
To figure out how many pips are in the spread, subtract the bid price from the ask price: That gives you 0.0007 in our EUR/USD example. For most pairs, the smallest price movement happens in the fourth digit after the decimal, so the spread here is 0.7 pips or $0.70 on a mini lot. That’s the cost of the trade.
Understanding what is forex and how does it work is important, but if you want some help, sign-up and our trainers will provide step-by-step guidance to get started. Play around with a FREE $20 welcome bonus and notice how forex can make you serious money today.
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