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Forex 101

What is the Forex Market?

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So, you know about the stock market. You may have even traded on the stock market. Now, you want to get involved in forex trading, but first, you need to answer a couple of key questions. What exactly is forex? And what is the forex market?

These are questions that many people have. Whether you have trading experience or not, it is OK to ask questions about the forex market. Here, we will do our best to provide some answers.

The Forex Market Basics

Forex actually refers to foreign exchange. That is, the exchange of one currency for another. So, when we talk about forex trading, generally what we are talking about is the exchange of currencies.

The forex market is essentially the global marketplace upon which all the exchanges of these currencies happen. Anybody, a regular trader, professional trader, or institution, who wants to exchange one currency for another is active in the forex market.

As a simple example of this, when you want to take a vacation to a foreign country and you exchange your currency from one to another through an exchange location, you have completed a forex trade.

You will also often hear that the forex market is in fact, the largest trading market in the world. It is much larger than any of the global stock exchanges in terms of volume, with more than $5 trillion worth of trade taking place on a daily basis.

How does the Forex Market Work?

Beyond its tremendous size when considering volume of trades, one of the most unique aspects of being involved in the forex market is the location. Unlike stock exchanges in New York, Tokyo, London, and other cities around the world that have physical locations that trading takes place, the forex market is decentralized.

This means that forex trading does not take place in one specific place, or through one main authority. The entire market is also traded electronically with transactions moving through a variety of global networks facilitated by brokers and liquidity providers.

Essentially, what this allows is for the forex market to operate around the clock and all over the world with ease. When one market closes for trading, another is open. This means that the forex market can be traded on 24 hours a day, 5 days a week as there will always be a market open in some location during these times.

Safety and Regulation in the Forex Market

With the forex market being decentralized as we mentioned, you may have some questions as to whether it is still safe to trade forex, and who regulates a decentralized trading market like this. The answer is, first and foremost, trading in the forex market is typically very safe. This ultimately depends on your broker and who regulates that broker, but the overwhelming majority are well-regulated and very secure for trading. This is of course one of the key concerns if you are thinking about trading forex and something that you should dedicate time to thoroughly investigating and confirming.

Due to the decentralized nature of the forex market, there are many regulators all over the world who oversee the operations of forex brokers in particular. Depending on the country you are based in, it may be mandatory for your forex broker to be regulated by a particular authority.

Some of the most respected regulatory bodies in the world of forex include CySEC operating within Europe, FCA who are based in the UK and are a top-tier regulatory authority there, ASIC who are Australia based, and the CFTC and NFA in the U.S. where regulatory conditions are comparatively strict. There are a host of other regulators too who typically provide trusted protection to forex traders around the world.

Each regulatory body imposes its own rules and regulations and it up to the individual forex brokers if they wish to pursue regulation from that authority. Some regulators such as CySEC employ regulations to limit the amount of trading leverage that is available, while trading of CFDs in the US is banned completely by the NFA.

How to Get Involved in Forex Trading

The very last step, once you have gotten to know a little about the forex market and how it works, is to get involved and start trading for yourself. This requires that you choose a forex broker to sign up with.

As mentioned already, the vast majority of these brokers are recognized and well regulated around the world. This means that they all take your security as a trader very seriously. The best thing you can do as a new trader is to try out a demo account first. These often function just like the real thing, but with no risk attached. This can allow you to see if you enjoy trading with a particular broker.

Once you have checked out and verified that the broker is well-regulated by a respected authority, then getting involved in the forex market can be as simple as verifying your account and making your first deposit. Depending on how they operate, a broker may provide you access to the direct market forex rates, or they may act as a market maker themselves creating their own exchange rates. This is something that you will need to decide the benefits of based on your own trading style.

Final Thoughts

Overall, the forex market has the highest daily volume of trading in the world, far beyond that of any other trading market. That brings with it a variety of opportunities for those interested in getting involved in forex trading. Once you have stepped over the initial entry barriers and gotten to know more about the sector, it can be an excellent way to improve your trading skill and diversify any portfolio. The key is in choosing a top forex broker, but with many offering extensive forex educational sections to help you get started, the choice is all yours.

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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.