Forex – short for foreign exchange – simply means exchanging one currency for another.
If you have ever been on vacation and exchanged your pounds for foreign currency or resold your remaining tickets on your return, you have exchanged currency.
Currencies are the lifeblood of the global economy and enable governments and businesses to purchase goods and services across borders and support foreign trade or international supply chains.
You will see a forex calculation on your bank statement every time you buy something from an overseas website. Your bank calculates the cost in pounds sterling, based on the current exchange rate.
This concept is the starting point of forex trading – making predictions about expected changes in currency values and what you can sell or buy the currency in the future.
This guide introduces the basics of forex trading for beginners.
Trading Currencies 101
Forex can become very complex and risky, with varying regulations applying to different aspects of the interbank market. This interbank market includes banks from all over the world, exchanging currencies with each other.
It all depends on the demand for particular currencies and what the participating banks are willing to pay, so forex operates on a supply versus demand basis.
However, forex is not just a simple process of buying currencies at optimal times and cashing in assets during times of high demand; there are several variables to consider.
Things to consider before investing include:
- What account protections are in place if your forex broker or dealer goes bankrupt?
- Are traders regulated in your home country?
- What happens in a market crash if your invested forex suddenly drops?
One of the crucial factors for a beginner forex trader is that there is no standardization between products and regulation is patchy at best, so you are on your own to some degree.
Benefits of Forex Trading
One of the big advantages is that you can trade forex without a large capital investment, and it is much easier to enter or exit a position with a major currency, such as the British pound or the US dollar.
Traders can quickly adapt to market conditions and buy and sell whenever they want, spreading investments across multiple currencies to ensure strong diversification.
- Forex is a highly liquid market and handles the largest daily trading volumes in the world, with trading around the clock, starting in Australia at the start of each day and ending in New York.
- The main foreign exchange markets are concentrated around several cities, from London to Hong Kong, from Singapore to Sydney and from Paris to Tokyo, so it is a truly international market in which everyone can invest.
- Automation means you can adopt a dynamic trading strategy without monitoring movements 24 hours a day.
The decentralized nature of forex means you don’t need to go through a centralized exchange that can manipulate prices or transaction costs.
However, the downside is that it is not as easy to seek insider information to inform your trading decisions without a level of oversight.
Market volatility is the biggest potential pitfall in forex trading. Currencies can change direction incredibly quickly and lose most of their value within minutes, so there is considerable downside potential.
You should be careful not to invest everything in one currency, because an unforeseen crash could render your entire forex portfolio worthless.
Other disadvantages of forex include:
- Lack of regulation – while this makes forex more dynamic, it also means there is little protection available when trades go wrong or the rules brokers have to follow.
- Payouts aren’t automatic, so you won’t receive a regular dividend like you would with many more conventional investment structures, like stocks and shares.
- Banks and brokers allow high leverage, even up to 100:1, which means they can maintain large positions without any risk – understanding the results of leverage is essential for new traders .
Essentially, forex is much more involved than it first appears.
Mastering the indicators that should influence your decisions and understanding the overall economic situation that drives currency performance is essential to have a chance of success.
Trading Forex as a Beginner
If you want to get into forex trading, you should familiarize yourself with stock trading and the calculation of risk versus reward.
The first step is to invest time in acquiring the specialized knowledge that will be very useful to you.
For example, it is important to grasp forex leverage ratios as they tend to be higher than stock markets. The factors that determine price movement are also different.
There are tons of online courses, some free, some paid, such as:
- Udemy – Forex trading from A to Z.
- FX Academywith different classes for traders and beginners.
- Forex Signalsincluding a live training room.
Once you are sure you have a basic understanding, you need a forex trading account with a broker. Brokers do not charge commission but are usually paid through spreads against buying and selling costs.
As a beginner, it is worth using a low capital investment to start with or using a micro trading account.
These accounts have trading limits, which the broker can set at 1,000 currency units versus 100,000 units on a standard forex brokerage account.
From there, you can work out your trading strategy, set guidelines for what you want to achieve, and figure out how much you’re willing to invest in trades and how much risk you’re willing to take.
All you need to know about Forex trading FAQ
What is forex and how does trading work?
Forex is an abbreviation of foreign exchange and means transactional currency trading, also abbreviated as FX.
Trading structures vary, but the most common are spot markets, where you buy a currency for its value at that particular moment.
Futures and futures markets are more complex and depend on expected movements and estimated changes in value.
When you trade forex, you will see the price quoted in pairs, where you see how many units you can buy in the quoted currency with your base currency.
Can you make money by trading currencies?
You can earn or lose huge amounts of money through forex trading. But, of course, the more risk you take, the more chance you have of winning.
However, it is also possible to lose everything due to the volatility of this liquid market.
Traders and businesses use forex to speculate – so they can make money when currencies go up or down.
Hedging is another application by which companies forecast currency movements to confirm manufacturing or commodity prices in international markets that trade in alternate denominations.
Why are currency markets so volatile?
Forex volatility is the biggest benefit and highest risk for investors.
That said, real estate can be just as turbulent, so it’s always a matter of assessing the risk inherent in a transaction and allocating the exposure.
Forex spins and spins so fast because there are countless influencing factors, such as political instability and economic uncertainty – so a political news story could have an immediate impact on the value of your forex asset.
If you’re getting into forex trading, you need to keep abreast of financial news and political events, as all of these help decide where you’re likely to find the greatest potential profit.
How do foreign exchange regulations work?
If you are in the UK, trading and brokerage is monitored and regulated by the Financial Conduct Authority (FCA), which dictates rules on things like responsible selling and product advertising.
However, if you are trading in China or India, you may find that the rules are much less stringent, although there are limits to the capital you can use in forex trading.
Is forex trading suitable for beginners?
It is possible, yes. For example, you can start trading forex with a relatively small financial investment and enter the market at any stage given the 24-hour, five-and-a-half-day-a-week trading window.
Forex markets can be very profitable, with the ability to increase investments multiple times in a day, which is attractive compared to stock markets where you may have to wait months or years to realize a return.
The problem is that there is little certainty and your forex trading can be both expensive and lucrative. A knowledge base is therefore essential to mitigate the risk of heavy losses.
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