An introduction to forex trading

Trading on the foreign exchange market is not difficult and it can be a profitable form of financial speculation. You’re basically buying and selling currency on the global foreign exchange, or forex, which is a massive decentralized currency market. The forex market sees over $5 trillion change hands every day. It’s the most liquid market in the world, dwarfing the stock market in terms of size, value and opportunity.

You’re already doing it

Every time you convert dollars to euros or any other currency for a trip abroad, you’re making a forex transaction. You’ll notice that when you do that, sometimes you’re better off with the new currency and sometimes you’re worse off when it comes to spending it abroad. You’ll also doubtless be aware that exchange rates can vary quite dramatically, and that the value of one currency compared to another changes all the time. That is the basis of all forex trading.

When you swap dollars for euros, you’re essentially selling your dollars to the bank or travel agent and buying euros from them at a set rate. When you get back from your vacation, those euros could be worth more or less than you paid for them. It’s possible that you could get more dollars back than you paid for them. Of course, the difference will probably be only a few cents, but if you’re trading in large amounts of currency then those cents add up. And if you’re trading directly on the forex market then you’ll secure a better price than going through a bank or other high street exchange.

Technical terms

The difference between the buying and selling price of a currency is known as the spread, and on the forex market that is expressed in pips. For instance if one euro can be bought for $0.7060 and sold for $0.7058, then you’ve got a spread of 2 pips. Forex brokers usually make their money by charging a small commission on the spreads they offer, so when you’re trying to find a broker bear this in mind and be sure to compare their spreads.

Another aspect of forex trading to look out for is leverage. This is how you can trade large amounts of currency without actually having to buy it outright, instead borrowing the credit from a bank or broker. Different providers will set a maximum leverage level, but a modest example would be 50:1. That means that if you have a margin (investment) of $10 then you can trade $500. Obviously, this increases your exposure and your potential profit without your having to put up an equivalent amount of capital, but it also increases your risks. Trading with a large leverage means that you could lose money you don’t have, so beginners should proceed with caution.

As a forex trader you’ll learn to look out for trends, usually spurred by economic or political factors, that you can take advantage of. You’ll want to stay on top of global current affairs and develop sharp instincts. A good way to get started is through copy trading, where you follow and imitate the moves of successful traders. Eventually, with luck, diligence and skill, you may get to be one of those successful traders.