Forex is the largest financial market in the world, with over $7 trillion traded daily. That’s more than 25 times the daily volume of the US stock market.
Forex trading, or foreign exchange trading, is the process of buying and selling currencies on the global market. Unlike stock trading, which involves shares of companies, forex trading focuses on exchanging one currency for another
This happens in pairs, such as EUR/USD, where euros are traded against US dollars. The value of these currencies fluctuates based on factors like interest rates, economic data, and geopolitical events.
Forex trading occurs over the counter (OTC), meaning there’s no central exchange. Transactions are conducted electronically between parties worldwide
The forex market operates 24 hours a day, five days a week, beginning with the Asian markets on Monday and closing after the New York session on Friday
The most traded currencies include the US dollar (USD), Euro (EUR), Japanese yen (JPY), and British pound (GBP), which are part of the major currency pairs
Forex trading serves two primary purposes: profit generation through speculating on price movements, and hedging against unfavorable currency shifts to stabilize costs and reduce financial uncertainty
Forex is traded in pairs, such as EUR/USD or GBP/USD. The first currency is the base currency, and the second is the quote currency
A pip is usually a one-digit movement in the fourth decimal place of a currency pair. For JPY pairs, a pip is a change at the second decimal place
Currencies are traded in lots, which are batches of currency used to standardize forex trades. A standard lot is 100,000 units of the base currency
Leverage allows traders to control larger positions with less capital. For example, with 50:1 leverage, a $1,000 investment could control $50,000 in currency
The spread is the difference between the buy and sell prices of a currency pair. This is how most brokers make their money
The Forex market allows a trader to invest in virtually any currency pair in the world. There are more than 150 widely traded currencies in the world, and each currency can be pegged against another currency, which is then floated freely in the market. The buying and selling of currency pairs ensures there is sufficient volatility in the market, which is taken advantage of by short-term traders and investors. Along with the wide range of currency pairs, Forex trading also provides access to commodities, CFDs, and metals, which are all part of a broker’s overall product portfolio. While most Forex trading brokers try to incorporate as many instruments as they can into their trading accounts, some FX companies may limit the number of available instruments to a minimum. In order to offer a less complicated trading account. In other cases, brokers may offer a comprehensive range of financial assets, including stocks, bonds, and indices, to take the total count to more than 10,000 instruments through a single trading account. Therefore, always consider your investment strategies and risk-appetite, before choosing a Forex brokerage firm and investing in the different financial assets.
Only choose a regulated broker because there will be several mandatory measures that must be followed to ensure the safety and security of clients. These measures are not set out by the broker, but are laid down by specialist agencies in charge of regulating such companies. These agencies are created by the Government of a particular country or by other specific state authorities, and may act as either independent authorities or as a Government linked agency. For example, Forex brokers located in Cyprus are regulated by CySEC, while FX companies located in other countries such as the UK, the US, and Australia, are regulated by the Financial Conduct Authority (FCA), the National Futures Association (NFA), and the Australian Securities and Investment Commission (ASIC). Additionally, countries such as the US also have specific FX trading regulatory organizations such as the Commodities and Futures Trading Commission (CFTC), which dictates the rules and guidelines for investing in the markets. These agencies take care of all the licensing aspects of a broker, which is an essential requirement for brokers to be officially listed in their primary market. If a broker or any financial company operates without a license, they may well be a scam broker, or might not be as reliable as the other licensed entities in the market. Make sure your broker has a valid license and suitable regulation from a reliable regulatory organization.
The Forex market caters to the needs of a global community of traders, with access to varying amounts of trading capital. Not all traders are endowed with a large amount of trading capital. Which is one of the reasons why Forex brokers now offer different types of trading account to suit the varying levels of investment by clients. Some brokers offer a trading account for as little as $1 initial deposit. Most mainstream Forex brokers, on the other hand, mandate a minimum capital requirement that ranges between $100 and $500. ECN/STP Forex brokers may increase the minimum capital requirements further, requiring traders to invest at least $1000, but there are brokers that offer DMA accounts for $100 or less. The accounts can also be classified according to the tradable lots, which may include Micro accounts and Standard accounts. Micro accounts give the freedom to start trading from 0.01 lots with high leverage. Standard accounts typically involve trading contracts that start from 0.1 lots and considerably lower leverage than Micro accounts.