“Why trade Forex”? That’s a question I get asked a lot, especially by those who are unaware of the foreign exchange market (also known as Forex, Spot, Spot FX, or FX). For those who already know how to trade Forex or are about to learn to trade Forex, the following information may already be known, but allow me to share it anyway for the benefit of those who are new to the foreign exchange market.
The Forex is a financial market which specializes in the trading of currencies from around the globe. During any transaction, one currency is bought while another is sold. This trading most often takes place with the help of a broker (or dealer). For the layman, think of trading on the Forex like buying stock in a particular country.
The entire market is run electronically, and there’s no central bank. The London market does the largest business, but a number of other markets are also available (New York, Tokyo, etc.). The Forex is open 24 hours a day, as one market is always opening when another one closes. It does shut down over the weekend, however.
In the early days, Forex trading was usually confined to bankers, governments and other large institutions. It cost millions to play the market, but the internet has allowed day traders and others to get involved in the exciting world of the foreign exchange market. These days, all you really need is a few extra dollars (or the currency of your choice) and a high-speed internet connection to get started.
Why Trade Forex?
Now that you know a little about what the Forex is, let’s address the nagging question of, “Why trade Forex?” This can often prove a major stumbling block for the uninitiated, as many wonder why this foreign exchange market would be preferable to the traditional stock market. The following items should provide a better understanding of the benefits of FX trading.
- It’s the largest financial market on the planet. Each day, a volume of over $4 trillion is traded, compared to the $25 billion of the New York Stock Exchange. That’s a difference of $3,975,000,000,000.
- The retail transaction costs are traditionally small, as low as 0.1 percent.
- With the exception of weekends, the Forex is open 24 hours a day.
- There are no commission fees, no government fees, no brokerage fees, no exchange fees and no clearing fees.
- You can trade directly with the market and cut out the middleman.
- Traders can determine their own lot sizes, which is a measure of how many units of currency you’re buying at one time.
- Traders can have millions of dollars in their accounts, or they can participate with as little as a few hundred bucks.
- Nobody can corner the market for long. The Forex is simply too huge.
- Due to the liquidity of the market, traders can also buy and sell at will.
- Combined together, the New York Stock Exchange and NASDAQ have 8,000 stocks which can be traded. In the Forex, there are only a few dozen to keep track of.
- Starting up is simple. All you really need is a computer with a high-speed internet connection.
- Many online Forex brokers offer demo accounts so that customers can learn their way around the FX before trading for real money. This is especially helpful for learning the basics.
- Micro accounts allow traders to participate in the Forex with a deposit of only a few hundred dollars. The Mini account is larger, and it usually requires a deposit of at least $10,000.
Now that we’ve answered the question, “Why trade Forex?”, let’s take a basic look at how Forex trading works. It’s easier than you might imagine.
How To Trade Forex
The Forex market is all about the buying and selling of currency from various nations. Ultimately, you’ll want to buy a currency you expect to increase in value, while selling a currency you expect to drop in value.
Currency is always sold in pairs. You might see JPY/USD or USD/GBP. You’ll also see a number beside each pair, such as GBP/USD = 1.7600. The first currency listed is called the “base currency,” while the second currency listed is known as the “counter” or “quote” currency. When learning how to trade Forex, it’s crucial that you understand this basic terminology.
The number beside the two types of currency is the exchange rate. This tells you how many units of the quote currency you must spend to buy a unit of the base currency. In the example GBP/USD = 1.7600, you’ll need to spend 1.7600 US Dollars to buy one British pound. That’s simple enough, isn’t it? If you’re selling instead of buying, each British pound sold would get you 1.7600 US dollars.
If you’re selling, you’re hoping that the base currency will fall in value. This is known as taking the “short position.” If you’re buying, you’re hoping for the base currency to rise in value. This is known as taking the “long position” or “going long.” So remember: short equals sell and long equals buy. That’s one of the key ingredients to learning how to trade Forex.
When you learn to trade Forex, you should also be aware of the bid price, the ask price, and the spread. The bid price is what the dealer is willing to give for the base currency in exchange for the quote currency. The bid price is therefore what you will sell your currency for. When the dealer is looking to sell instead of buy, the ask price is what he’s offering in exchange for the quote currency. The spread is the difference between the ask price and the bid price.
There’s a whole lot more to absorb if you’re going to learn to trade Forex, but this should at least give you an idea of the basics. Once you have a firm foundation, building up a solid Forex account will be much easier.
Learn to Trade Forex
In order to learn to trade Forex, there are a number of simple tips I can offer. If you follow this advice, you’ll be much better equipped when it comes time to learn to trade Forex.
- Forex is not about getting rich quickly, especially if you’re starting out with a small account. It’s all about slow and steady growth. Anyone who promises that you’ll get rich quick is trying to scam you.
- Learn the basics of Forex. Don’t throw caution (and your money) to the wind. Take your time and learn the basics of Forex trading. This will pay dividends in the long run.
- Learn for yourself. Don’t follow the strategy laid out by someone else, as this will stunt your growth as a trader. It’s important to develop your own system of analysis and trading. Don’t be a sheep: Be a wolf.
- Beware of the experts. Another important lesson when you learn to trade Forex. Most experts are trying to sell you something, so they’ll say anything to close the deal. Don’t fall for it. If they were really that successful on the Forex market, they wouldn’t bother pimping an eBook.
- Watch out for losing streaks. If you get on a bad run, there’s nothing wrong with stepping away from the computer for a few days.
- Don’t abandon your strategy. If your strategy hits a rough patch, stick with it. Remember that you’re in this for the long haul.
- Don’t make trading too complicated. Figure out what works, and then forget about all the rest. When you learn to Forex trade, you’ll want to keep things as simple as possible.
- Trade only a single currency pair at a time. After time, you can then advance to trading two different pairs and so on.
- Learn one time frame. Concentrate on only one time frame at first, and learn about all its charts. Once you feel you’ve nailed it, then you can branch out to other time frames.
- Don’t place too many indicators on your chart. This can create both clutter and confusion. A good rule of thumb is to have no more than two indicators on your chart at any given time. When you learn to trade Forex, this tip will make your life a lot more simple.