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What is Forex & How Does It Work?

Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world's currencies trade. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion.

All the world's combined stock markets don't even come close to this. But what does that mean to you? Take a closer look at forex trading and you may find some exciting trading opportunities unavailable with other investments.

What is the Forex Market?

If you've ever traveled overseas, you've made a forex transaction. Take a trip to France and you convert your pounds into euros. When you do this, the forex exchange rate between the two currencies—based on supply and demand—determines how many euros you get for your pounds. And the exchange rate fluctuates continuously.

A single pound on Monday could get you 1.19 euros. On Tuesday, 1.20 euros. This tiny change may not seem like a big deal. But think of it on a bigger scale. A large international company may need to pay overseas employees. Imagine what that could do to the bottom line if, like in the example above, simply exchanging one currency for another costs you more depending on when you do it? These few pennies add up quickly. In both cases, you—as a traveler or a business owner—may want to hold your money until the forex exchange rate is more favorable.

There are several key differences between swapping currencies abroad and buying or selling forex.

  • The first is convenience. The forex market is a decentralised, electronic exchange. Accordingly, participants are able to trade currencies from anywhere, anytime the market is open.
  • The second is efficiency. Forex traders enjoy the utmost in liquidy, which promotes tight spreads, regular volatilities and rock-bottom pricing.

Participating in the foreign exchange market is the easiest, most efficient way of exchanging currencies. You don't have to stand in line at a currency dealer and pay undue premiums to trade monies. Instead, you simply need computing power, internet connectivity and an FX broker to engage the world's currency markets.

Past Performance: Past Performance is not an indicator of future results.

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How Does Forex Trading Work?

On the foreign exchange market (forex), trade is conducted in an exclusively electronic format. Currency pairs are bought and sold 24 hours a day, 5 days a week by participants worldwide. Market participants engage the forex remotely, via internet connectivity.

Upon a trader sending a buy or sell order to the market, forex brokers facilitate the transaction by extending margin. Accordingly, the trader is able to open new positions far in excess of capital-on-hand, with the goal of realizing profits from beneficial movements in price. To complete each forex trade, the market's technological infrastructure matches contradictory orders from market makers, individual traders and other liquidity providers.

How to Start Forex Trading?

All forex trades involve two currencies because you're betting on the value of a currency against another. Think of EUR/USD, the most-traded currency pair in the world. EUR, the first currency in the pair, is the base, and USD, the second, is the counter. When you see a price quoted on your platform, that price is how much one euro is worth in US dollars. You always see two prices because one is the buy price and one is the sell. The difference between the two is the spread. When you click buy or sell, you are buying or selling the first currency in the pair.

Let's say you think the euro will increase in value against the US dollar. Your pair is EUR/USD. Since the euro is first, and you think it will go up, you buy EUR/USD. If you think the euro will drop in value against the US dollar, you sell EUR/USD.

If the EUR/USD buy price is 0.70644 and the sell price is 0.70640, then the spread is 0.4 pips. If the trade moves in your favor (or against you), then, once you cover the spread, you could make a profit (or loss) on your trade.

Trading FX pairs in the contemporary forex marketplace is straightforward and user-friendly. Vast functionalities are readily available on the software trading platform designed to aid in analysis and trade execution. Some of the most powerful features are advanced charting applications, technical indicators and multiple order types. Whether you are an intraday scalper or long-term investor, modern platforms make it routine to conduct business with forex.

Pros and Cons of Trading Forex?

Like all markets, forex features a unique collection of pros and cons. For any aspiring currency market participant, it's important to conduct adequate due diligence and decide if forex trading is a suitable endeavour.

Remote accessibility, limited capital requirements and low operational costs are a few benefits that attract traders of all types to the foreign exchange markets. In addition, forex is the world's largest marketplace, meaning that consistent depth and liquidity are all but assured. Factor in a diverse array of products, and retail traders enjoy a high degree of strategic freedom.

However, there are several pitfalls of which to be aware. First, the availability of enhanced leverage and abundance of trading options can seriously test one's discipline. Also, pricing volatility can be swift and dramatic, posing the risk of rapid, significant loss. Lastly, past performance is not indicative of future results― forex trading is always changing, emphasizing the need for sound strategy and strong risk management.

Flexibility and diversity are perhaps the two biggest advantages to trading forex. The ability to open either a long or short position in the world's leading major, minor or exotic currencies affords traders countless strategic options.

Forex Trading Platforms

The forex trading platform is the trader's window to the world's currency marketplace. To be effective, it's imperative that your trading platform is up to the many challenges of the live market.

At FXCM, we offer a collection of robust software suites, each with unique features and functionalities. Our flagship platform Trading Station furnishes traders with the utmost in trade execution, technical analysis and accessibility. We also support the industry-standard Metatrader 4 (MT4) software, NinjaTrader, social trading-oriented Zulutrade and assorted specialty platforms. No matter what your approach to forex trading may be, rest assured that FXCM has your trading needs covered. To check out our available platforms, please click here.

If prices are quoted to the hundredths of cents, how can you see any significant return on your investment when you trade forex? The answer is leverage.

What is Leverage in Forex?

When you trade forex, you're effectively borrowing the first currency in the pair to buy or sell the second currency. With a US$5-trillion-a-day market, the liquidity is so deep that liquidity providers—the big banks, basically—allow you to trade with leverage. To trade with leverage, you simply set aside the required margin for your trade size. If you're trading 200:1 leverage, for example, you can trade £2,000 in the market while only setting aside £10 in margin in your trading account. For 50:1 leverage, the same trade size would still only require about £40 in margin. This gives you much more exposure, while keeping your capital investment down.

While it's true that forex leverage is a great way to optimise your capital efficiency, it must be treated with respect. Ultra-low margin requirements give you the ability to assume large positions in the market with only a minimal capital outlay. This is a key element of posting extraordinary returns over the short, medium or long-run.

However, in FX trading, leverage is the quintessential double-edged sword; it simultaneously boosts profit potential and assumed liability. During volatile periods, an unfortunate turn in price can generate losses in excess of deposited funds. The result can be a premature position liquidation, margin call or account closure.

If you're new to forex trading, then it's best to start small. Trading lower leverage ensures that you have enough capital to become experienced in the market. There's plenty of time to implement higher degrees of leverage once you gain competency and security in the marketplace.

What is Margin in Forex?

Forex margin is a good-faith deposit made by the trader to the broker. It is the portion of the trading account allocated to servicing open positions in one or more currencies. Margin is a vital component to forex trading as it gives participants an ability to control positions much larger than their capital reserves.

It's important to remember that margin requirements vary according to currency pair and market conditions. During times of extreme exchange rate volatility, margins typically grow as market conditions become unhinged. This occurs to protect both the trader and broker from unexpected, catastrophic loss.

At FXCM, clients enjoy minimal margin requirements and countless position sizing options. For major currency pairs, a 30:1 leverage restriction applies; for non-major currency pairs, a 20:1 limit applies. To view up-to-date margin requirements, click here.

What are Pips in Forex Trading?

A point-in-percentage, or "pip," is the minimum price movement that a currency pair can make. Pips are standardised units, which let traders quickly monitor the fluctuations of a currency pair's exchange rate. A majority of forex pairs are quoted to the fourth decimal place, or 1/10,000, making a pip 0.0001.

To illustrate pip functionality, let's take a look at the EUR/USD. The EUR/USD is quoted in terms of a 0.0001 pip; thus, for every 0.0001 movement in price, the trading account is credited or debited the pip's value. Pip value is calculated by dividing one pip by the currency pair's market price then multiplying by position size (micro, mini, standard lots). For pairs that feature the USD as the base currency, pip values are typically US$0.10 (micro), US$1.00 (mini) and US$10.00 (standard). So, for one standard lot of EUR/USD, each 0.0001 pip movement results in a US$10.00 credit or debit to the trading account.

Calculating your target forex pair's pip value for a given trade can be complex. Key variables are evolving margin requirements, unique position sizes and base currency. Fortunately, FXCM provides access to a pip calculator to help you stay on top of any trade's liabilities.

How to Learn Forex

In an atmosphere as dynamic as the forex market, proper training is important. Whether you are a seasoned market veteran or brand-new to currency trading, being prepared is critical to producing consistent profits.

Of course, this is much easier said than done. To ensure that you have your best chance at forex success, it is imperative that your on-the-job training never stops. Developing solid trading habits, attending expert webinars and continuing your market education are a few ways to remain competitive in the fast-paced forex environment.

If your goal is to become a consistently profitable forex trader, then your education will never stop. As the old adage goes, practice makes perfect; while perfection is often elusive for active traders, being prepared for every session should be routine.

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Forex

Is The Forex Profitable?

As the world's largest financial market, the forex attracts millions of participants from around the globe on a daily basis. The result is a highly liquid, diverse trading venue that…

Forex Trading For Beginners

The forex market is the largest capital marketplace in the world. Featuring more than $5 trillion in daily turnover, forex is a digital trading venue where speculators, investors and liquidity providers from around the world interact.

For those new to the global currency trade, it is important to build an educational foundation before jumping in with both feet. Understanding the basic points of forex trading is a critical aspect of getting up-to-speed as quickly as possible. It's imperative that you're able to read a quote, quantify leverage and place orders upon the market.

If you are interested in boosting your forex IQ, completing a multi-faceted forex training course is one way to get the job done. To learn more, check out our currency market primer to get on the same page as the forex pros.

Best Practices for Forex Trading

Unless you are playing the lottery, success isn't an accident. Mastering any discipline takes desire, dedication and aptitude. Becoming a winning forex trader is no different. Without the want, will and know-how, your journey into the marketplace is very likely doomed before it begins.

By far, the most common attribute among successful traders is that they have a plan. The trading plan is a structured approach to trade selection, trade management and risk management. Without a plan, a trader is likely to flounder in live market conditions.
Through incorporating a viable strategy to sound money management principles, one is able to consistently engage in forex. In doing so, chance is removed and statistically verifiable, repeatable results are generated. So how does one build a successful trading plan? The answer lies in personal experience and input from market professionals.

Fortunately, some of the differences between successful traders and those who lose money are no longer a secret. Through conducting an intense study of client behaviour, the team at FXCM has identified three areas where winning traders excel. While there is no "holy grail" for profitable forex trading, establishing good habits in regards to risk vs reward, leverage and timing is a great way to enhance your performance.

To learn how successful traders approach the forex, it helps to study their best practices and personal traits. Trading doesn't have to be a mystery—much of the work has already been done for you.

Free Online Forex Trading Courses

One of the advantages of being a modern forex trader is the availability of expert guidance. Internet connectivity and systems technology have brought an abundance of useful information to our fingertips. The only thing needed to raise your trading IQ is a desire to learn. Trading courses, tutorials, blogs, guides and expert webinars are all readily accessible online, 24/7/365.

A webinar is one of the best ways to learn information online. They offer an unparalleled personal learning experience in an exclusive one-on-one format. Attending a webinar is the next best thing to sharing a desk with a forex professional. If you are interested in watching an FX market professional at work, then attending a webinar is a must.

FXCM offers a variety of webinar types, each designed to cater to your trading needs. Daily entries cover the fundamental market drivers of the German, London and New York sessions. Wednesdays bring The Crypto Minute, a weekly roundup of the pressing news facing cryptocurrencies. In addition, a library of past recordings and guest speakers are available to access at your leisure in FXCM's free, live online classroom.

Disclosure

Leverage: Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange/CFDs with any level of leverage may not be suitable for all investors.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.