WHAT IS FOREX TRADING?
Forex or Foreign Exchange is the simultaneous buying of one currency and the selling of another. Currencies are traded in pairs.
The Forex Market, also referred to as the "Forex" or "FX " , has more buyers and sellers and daily volume ($2 trillion a day) than any other market in the world and takes place in major financial institutions across the globe. The forex market is open 24 hours a day, five days a week.
In the forex market, currencies are always priced in pairs and all trades result in the simultaneous buying of one currency and selling of another. The objective of currency trading is to buy the currency that increases in value relative to the one you sold. If you have bought a currency and the price appeciates in value, then you must sell the currency back in order to lock in the profit.
WHY TRADE FOREIGN CURRENCIES?
There are many benefits and advantages to trading Forex. Here are just a few reasons why so many people are choosing this market:
- No commissions: No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for their services through something called the bid-ask spread.
- No middlemen. Spot currency trading eliminates the middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
- No fixed lot size. In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5000 ounces. In spot Forex, you determine your own lot size. This allows traders to participate with accounts as small as $250 (although we explain later why a $250 account is a bad idea).
- Low transaction costs. The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as .07 percent. Of course this depends on your leverage and all will be explained later.
- A 24-hour market. There is no waiting for the opening bell - from Sunday evening to Friday afternoon EST, the Forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade--morning, noon or night.
- No one can corner the market. The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank) can control the market price for an extended period of time.
- Leverage. In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum. For example, Forex brokers offer 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 dollars and so on. But leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
- High Liquidity. Because the Forex Market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position at your desired profit level (a limit order), and/or close a trade if a trade is going against you (a stop loss order).
- Free Demo Accounts, News, Charts, and Analysis. Most online Forex brokers offer 'demo' accounts to practice trading, along with breaking Forex news and charting services. All free! These are very valuable resources for “poor” and SMART traders who would like to hone their trading skills with 'play' money before opening a live trading account and risking real money.
- “Mini” and “Micro” Trading: You would think that getting started as a currency trader would cost a ton of money. The fact is, compared to trading stocks, options or futures, it doesn't. Online Forex brokers offer "mini" and “micro” trading accounts, some with a minimum account deposit of $300 or less. Now we're not saying you should open an account with the bare minimum but it does makes Forex much more accessible to the average (poorer) individual who doesn't have a lot of start-up trading capital.
WHAT TOOLS DO I NEED TO START TRADING FOREX?
A computer with a high-speed Internet connection and all the information on this site is all that is needed to begin trading currencies.
WHAT DOES IT COST TO TRADE FOREX?
An online currency trading (a “micro account”) may be opened for with a couple hundred bucks. Micro accounts and its bigger cousin, the mini account, are both good ways to get your feet wet without drowning. For a micro account, we'd recommend at least $100 to start. For a mini account, we’d recommend at least $1000 to start. For a standar account we'd recommend at least $10000. Anyway, the recommended starting amount depends on your forex trading system.