What is Forex and How to Start Trading

Forex (or FX) stands for “Foreign Exchange”, and what you trade is various currencies. You can trade different currencies for a number of reasons, from tourism through business to investment opportunities. Forex is one of the biggest, fastest and the most liquid market in the world; with an average daily turnover at nearly US$ 4 trillion.

Due to many factors such as trade, tourism, economic growth and decline, geopolitical situation and interest rates, currencies of all countries are in a constant state of flux. This allows an entrepreneurial person to bet against the currency value change by buying and/or selling various currencies against each other, expecting that currencies they buy will increase in value and that currencies they sell will drop.

What You Need to Know

Unlike other types of trading, such as stocks, futures or options, currency trading is not regulated by any central body. All trades are concluded by members based on credit agreements. It may seem frighteningly unsafe, however, because participants in FX must compete and cooperate amongst themselves, self-regulation has proven to be an effective safeguard in the Forex market.

While there are myriad of world currencies, and it is possible to exchange almost any currency for another, the vast majority of Forex trading is done among eight major currencies: USD, EUR, GBP, JPY, CHF, SEK, AUD, CAD. United States Dollar, as the world’s reserve currency, takes up a lion’s share of all currency pairs. Other currencies can be lucrative, but are, as a rule, more risky or offer wide, unfavorable bid/offer spreads.

Aside from bid/offer spreads (how much the broker is offering and asking for a specific currency), the most important thing you need to pay attention to, is trend. You can safely ignore gut feelings and overly complicated schemes, methods, even apps. If you dislike the Japanese YEN for whichever reason, and it’s trending upwards, you should be trading accordingly.

Other than trading for a profit or yield, you can use currency trading for hedging a stock portfolio. Hedging is basically making an investment with the goal to reduce the risk of substantial losses or gains. Leverage is another thing that makes Forex a very popular market. It makes trades potentially lucrative, but it also makes them potentially devastating. Leveraging essentially multiplies your gains and losses, Forex offers leverages reaching 200:1, allowing traders to control large investments with relatively little personal money. The flipside is that a bad call can leave you with a clean account and in serious debt.

Types of Forex Trading

There are two basic approaches to Forex trading. The most common one is day trading or swing trading. Traders focus on short term gains that require quick reactions and monitoring of the market status. This may require that you be glued to the screen for the whole day.

The second trading strategy is carry trade. This refers to borrowing one currency with low interest rate, in order to purchase a different currency with a higher one. The greater rate difference, the greater the profit, multiplied with the leverage factor. However, if you use levered investments, large exchange rate fluctuations can quickly turn the same profit into a huge loss.

To Sum Up

It may seem easy to jump into Forex trading using the “latest” information you’ve seen on TV or the Internet while eating your breakfast, but most of these information have usually been factored in or outright dismissed by the markets, so your quick information may cause you to lose money. Apps and robots are also a waste of money much more often than not; they can cause information overload and analysis-paralysis, making you a worse trader.

For most people in Forex trading, especially those with limited resources and new to Forex, day or swing trading for several days at a time is a good way to play the Forex markets. For those with long-term plans and more funds, carry trading can be a more lucrative opportunity.

In both of these cases, the trader must know how to use charts to time his or her trades. Good timing is essential for profitable trading. In both cases, as well as in all other trading activities, the trader must keep good trading habits and avoid impulsive behavior patterns. Keeping a cool head and sticking to logic and common sense are crucial to minimize risk and maximize long term viability of your trading career.

Or course, there’s always a shorter way to learn to trade. Join our trading community and learn directly from the trading professionals.