Introduction to Trading Forex
What is Forex Trading?
Forex trading is a very common type of speculative, short term investing. The term Forex is derived from the phrase “Foreign Exchange”. I.e. the process of exchanging one currency for another. Trading Forex is not the same as physically exchanging one currency for another for practical purposes like spending money in another country.
Forex trading is an investment product offered by brokers to traders all around the world. As the objective of Forex trading is to make a profit rather than buying foreign currencies, many investors trade what’s known as CFD. CFD stands for Contract for Difference. This contract allows you to gain exposure to price fluctuations of different currency pairs without any complicated physical transfers or settlements of different currencies.
When you trade Forex you are buying or selling currency pairs. The quotes are based on exchange rates from the FX market. The Forex market is the largest global market, larger than all stock exchanges combined. The average daily turnover exceeds $6.5 trillion each day.
Retail Forex vs Institutional Forex
To start trading Forex, you need to sign up with a retail forex broker. Retail forex brokers offer trading conditions that are accessible to the average person. Such examples include a very simplified approach to trading, high leverage, low fees and low initial deposits to fund your account and start trading. It usually takes just a few minutes to open a trading account.
Institutional trading conditions are very different from what retail brokers offer. Institutions normally trade with banks or prime brokers. Companies need to deposit tens of millions of Dollars to open their account. Account opening can take days or weeks. The amount of leverage offered is very limited and it takes multiple days for trades to be settled. Corporate trading firms also don’t have the same consumer protection as retail traders do.
How to Trade Forex
When you trade forex, you buy or sell in currency pairs, e.g. “EUR / USD” (Euro versus the U.S. Dollar) or “GBP / AUD” (Great Britain Pound versus the Australian Dollar). When you go Long (which means to buy) on EUR / USD it means you are buying USD for EUR. You will make a profit if the price of the USD will increase. Your profit or loss will be in USD. The great thing is that you don’t need to already own Euros to place a trade for EUR / USD. If your trading account balance is in GBP then the margin used will be taken converted from EUR into GBP. The moment you close your position, everything is settled immediately.
Forex is traded in Lots. A Lot is a standardized amount of currency. 1-Lot is 100,000 units of the base currency. This means in a EUR / USD trade, 1-Lot means 100,000 Euro. A Mini-Lot is 0.1 of a Standard Lot which means it’s 10,000 units of the base currency. A Micro-Lot is 0.01 of a Standard Lot which means it’s 1,000 units of the base currency. A Micro-Lot is usually the smallest trade size that a broker would allow.
The forex market is open 24-hours a day, five days a week. The week starts on Monday morning in New Zealand and comes to end at the close of business in New York on a Friday.
Choosing a Trading Platform
To trade forex online, your broker will provide you with a trading platform. Most brokers offer the MetaTrader 4 platform. Some brokers may offer other trading platforms or may have developed their own trading platforms. The MT4 platform dominates the market and despite being fifteen years old, it’s still the most popular choice with traders and brokers. The choice of trading platform is not really a choice at all.
How to Choose a Forex Broker
Each broker will have their own features and selling points. We recommend Brantford Capitals. To start trading you need to open an account, deposit funds, then use the broker’s trading platform to buy and sell different currency pairs using margin. Most brokers don’t just offer Forex trading but also CFD trading on oil, metals, cryptocurrencies and more.