What is Forex Trading?
Table Of Contents
Forex is a combination of the words foreign exchange, and this is exactly what takes place in forex trading (Also known as FX Trading). This is essentially the trading of one currency for another.
We are here to teach you the terminology used, and to guide you on getting started as a forex trader.
Terminology of Forex Trading
Before you can walk the walk, it is always good to be able to talk the talk. Within forex trading, you'll encounter a variety of terms that have significance in the market. Understanding this terminology will have a positive impact on your forex trading journey and help you to become a better trader.
Here is a basic rundown of a few terms that you are most likely to encounter along the way:
The Forex Market
The forex market is the market on which you are trading. It is completely decentralized and is where all currency exchange takes place. The exchange of one currency for another is exactly what forex trading is, and precisely what the forex market facilitates.
The volume traded daily on the forex market is more than any other trading market in the world and because of this globalized, decentralized nature, it operates 24 hours a day, 5 days a week around the world. When you get into forex trading, you will have access to the forex market through your forex broker.
A forex broker is your link to the forex market, due to licensing requirements different brokers can only accept clients from specific regions. We offer a list of trusted brokers below, and recommend the best for each region.
Not all brokers you that find online are well-regulated, many of them have a poor history of fraudulent behavior, which is why performing due diligence is important. Below we include a list of brokers which you should avoid.
Currencies within the forex market are always traded in pairs. This is just the same as when you frequent a bank or currency exchange. You may see the symbols EUR/USD, or USD/JPY, and more. These are known as currency pairs and signify how much it costs to trade one currency for another.
The layout is also important, the first currency is the base currency, and the second is the quote currency. So where you see EUR/USD is 1.15 for example, this means that 1 Euro is worth $1.15, or that it costs $1.15 to buy 1 Euro at the current rate. Hundreds of currency pairs are available with forex brokers offering them in three categories, major pairs, minor pairs, and exotic pairs.
When we talk about leverage in forex, in the most basic of terms it means the additional money that you can borrow from your broker based on the balance of your account. As forex is typically traded in $100,000 standard lots, a lot of trading on leverage takes place. Within Europe, most brokers will offer a 30:1 leverage (the maximum allowed under EU regulation). This means that if you have an account balance of $1,000, you could potentially enter trades to the value of $30,000.
The leverage available really depends on where you are trading from and in some areas, under different regulations, brokers can offer leverage of 500:1 or more.
Margin in forex trading is invariably linked to leverage also. The margin is how much of your own funds you must have in your account to open a trade, or to keep that trade open. So, if you are trading with a leverage of 50:1 and you want to enter a trade worth $100,000, then you will need a $2,000, or 2%.
Pip is something you will see a lot of in forex trading and is short for “percentage in point”. A pip is defined as the smallest movement that a foreign currency market can make based on how the rates are listed to four decimal places. The value of 1 pip then is always 1/100 of whatever market you are trading. It is an important measurement to be aware of and calculate, as things like your spread will also be calculated in pips.
When trading forex you will always see two prices, the buy, and the sell price. The spread is the difference between these prices. Given that many of the top brokers operate on a commission-free basis and with minimal fees, the marginal spread that they do apply is an area where they can make a slight amount from each trade.
The spread in forex differs from market to market and changes all the time based on a number of factors like market volatility and volume, though most of the top brokers start their spread from as low as possible.
How to Get Started in Forex Trading
Armed with all of the most common terms in the industry, you are now well placed to start your journey as a forex trader. Here we will go through a few of the most common steps to take in finding the best broker for you, and what you will need in order to set up a forex trading account.
Choosing a Regulated Broker
With forex trading being completely decentralized, that means there is no one authority overseeing the market and the operations of the many forex brokers within that market. This makes choosing the broker with the best regulations in place a very important task.
There are a number of key, very well-respected regulatory bodies around the world that forex brokers try to become regulated by. The best among these include CySEC in Europe, FCA in the UK, and ASIC in Australia. There are many more that can also point to trusted regulation, but these are some of the most sought after.
Regulatory oversight of your broker from one of these bodies is a very positive sign that you can trust them completely. These regulators also put in place a number of things to help protect you as a trader, including maximum leverage amounts, negative balance protections, and more. Therefore, if you are a new trader and entering the industry for the first time, we would highly recommend choosing a well-regulated forex broker.
Consider all of the Trading Conditions
Every forex broker will of course have their own trading conditions. Some of these will be bound by the regulatory body that your broker is under. Within CySEC regulation for example, trading leverage offered by the broker can’t be more than 30:1. Other conditions though are left very much to the discretion of the individual broker.
This means that you should take a close look at things like minimum deposits, spreads charged by the broker on the different account types, commission charged, and all other fees that can increase your cost of trading such as deposit/withdraw fees and any fee for inactive traders or holding your positions open for a period of time.
With that said, you can also keep in mind that some of the top forex brokers strive to offer the best deals and often have loyalty programs and rebates for more active traders. Some with have welcome bonuses and other kinds of incentives though this again will depend on the rules of the local regulator.
Try a Demo Forex Trading Account First
One of the best ways to get started and completely risk-free, is to select a forex broker who offers a good quality demo account. These demo accounts from the top brokers are often unlimited in the sense that you can keep them open for as long as you like, and allow you to trade with virtual currency, but in an environment that completely replicates that of a real trading account.
This is a really great way for you to get to know exactly what a broker has to offer, and also learn more about the trading platforms and how to trade forex in general. It is a crucial step that we highly recommend, particularly if you are trading forex for the first time.
Choose Your Account Type & Trading Platform
Almost all of the top forex brokers will have a number of account types that you can choose from when opening your account. The trading conditions may vary on these types of accounts, and the minimum deposit usually also changes.
Typically, the higher the minimum deposit is on an account type, the better the trading conditions tend to be in terms of spread, fees, and any bonuses available.
You may also have the chance to choose your trading platform with most major brokers offering the top trading platforms from Metatrader of MT4, and MT5, as well as cTrader. Some brokers will also have their own proprietary trading platforms that you can trade through which can be very user-friendly for new traders too.
The last step in opening an account with any forex broker is to make your deposit. Again, the top forex brokers usually make a range of deposit options available to traders. These can include bank wire transfers, credit and debit cards, or eWallet methods like PayPal and Neteller that are commonly found.
The majority of these funding methods the broker’s usually try to offer without any fee. This can make sure you receive the best possible value for your money when making a deposit. On this point though, you should also check with your own bank about their fee policy particularly if you are making a wire transfer.
Trusted Forex Brokers
Forex.com – United States & Canada
– Regulated by NFA, CFTC, FCA, FSA, IIROC & CIMA
– Member of the National Futures Association (NFA# 0339826)
– Forex trading involves significant risk of loss and is not suitable for all investors.
– Authorized & Regulated by the FCA (# 113942)
– City Index is a trading name of GAIN Capital UK Limited.
– Head and Registered Office: Park House, 16 Finsbury Circus, London, EC2M 7EB.
– GAIN Capital UK Ltd is a company registered in England and Wales, number: 1761813. Authorised and Regulated by the Financial Conduct Authority. VAT number: 524837435
– 74% of clients lose money. Capital at risk.
– ASIC Regulated.
– City Index is a trading name of GAIN Capital Australia Pty Ltd. GAIN Capital Australia Pty Ltd, 100 Harris street, Pyrmont, NSW 2009 (ACN 141 774 727, AFSL 345646) is the CFD issuer and products are traded off exchange.
– All trading involves risk and losses can exceed deposits.
Regulated by the Monetary Authority of Singapore (MAS)
– City Index is a trading name of GAIN Capital Singapore Pte Ltd.
– GAIN Capital Singapore Pte Ltd 168 Robinson Road, Capital Tower #20-01, Singapore 068912. Tel: 6826 9988. Fax: 6826 9968.
– Company Registration # 200400922K.
– All trading involves risk and losses can exceed deposits.
Opening your Forex Broker Account
The final step in the process of getting involved in forex trading is to open your forex broker account. This means you will have selected your broker, and perhaps even tried their demo account, and you are now ready to open your own live trading account and start trading for real.
If that is the case, then the process is quite simple, though there are a few steps you should follow.
Prepare Your Documents
The process of opening a forex trading account can be pretty fast, though there are a couple of documents that you should be sure to have prepared to make the process as easy as possible. All major forex brokers will ask for the following:
- Proof of identification ( Your passport or driver’s license would be best for this)
- Proof of residence (A utility bill or bank statement within 3 months should be fine here)
With these documents, you typically upload them online through one of the broker’s trusted, secure services and they are verified within a few hours. Once you have completed verification, you will be completely free to trade on your new account.
Brokers to Avoid
These brokers should be avoided at all cost
Cyber Market Group
Fixed Star Investments Inc
Forex trading from an outside perspective may appear to be a complex, even daunting sector to start trading in. The reality is that, with some of the basic knowledge provided, and the help and educational infrastructure of a top forex broker, you can easily become involved.
Once you have made the first steps in forex trading, you can also be open to much of the great potential that a market with trillions of dollars in daily trading volume can bring. We also have a number of other trading articles that can really help you learn and grow on the next steps of your journey as a forex trader.
Forex Risk Disclaimer
“There is a very high degree of risk involved in trading securities. With respect to margin-based foreign exchange trading, off-exchange derivatives, and cryptocurrencies, there is considerable exposure to risk, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or related instrument. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable, or that they will not result in losses.”
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Anthony is a financial journalist and business advisor with several years’ experience writing for some of the most well-known sites in the Forex world. A keen trader turned industry writer, he is currently based in Shanghai with a finger on the pulse of Asia’s biggest markets.