Forex trading basics

Forex trading basics that beginner traders should know. Forex brief: What is Forex? How to trade Forex? Foreign exchange trading risks. Learn more about Forex trading.

Lately, currencies have been on a rollercoaster ride with record breaking highs and lows. The world of foreign exchange is dominating news headlines; but what does it mean, and more importantly, what do you need to know before you get on board?

First of all, it's important that you understand that trading the Foreign Exchange market involves a high degree of risk, including the risk of losing money. Any investment in foreign exchange should involve only risk capital and you should never trade with money that you cannot afford to lose.

Important information: "Forex/CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 64% and 85% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money."

What is Forex?

You may have noticed that the value of currencies goes up and down every day. What most people don't realize is that there is a foreign exchange market or Fx for short - where you can potentially profit from the movement of these currencies. The best known example is George Soros who made a billion dollars in a day by trading currencies. Be aware, however, that currency trading involves significant risk and individuals can lose a substantial part of their investment. As technologies have improved, the Forex market has become more accessible resulting in an unprecedented growth in online trading. One of the great things about trading currencies now is that you no longer need to be a big manager to trade in this market; traders and investors like you and me can trade in this market with a small deposit.

A quick overview of Forex

The Forex market is the largest financial market on Earth. Its average daily trading volume is more than $5.0 trillion. Compare that with the New York Stock Exchange, which only has an average daily trading volume of $55 billion. In fact, if you were to put ALL of the world's equity and futures markets together, their combined trading volume would only equal a QUARTER of the Fx market.

Why is the size and liquidity of the foreign exchange market important? Because there are so many buyers and sellers that transaction prices are kept low. If you're wondering how trading the Forex market is different then trading stocks, here are a few major benefits.

Many brokers don't charge commissions – you pay only the bid/ask s
There's 24 hour trading – you dictate when to trade and how to trade.
You can trade on leverage, but this can magnify potential gains and losses.
You can focus on picking from a few currencies rather than from 5000 stocks.

Forex is accessible – you don't need a lot of money to get started.

How to trade Forex?

The mechanics of a trade are virtually identical to those in other markets. The only difference is that you're buying one currency and selling another at the same time. That's why currencies are quoted in pairs, like EUR/USD or USD/JPY. The exchange rate is the purchase price between two currencies on an online chart.

Read: Fx trading tutorial - an article on currency trading.

Example: The EUR/USD rate represents the number of USD one EUR can buy. If you think the Euro will increase in value against the USD, you buy Euros with Dollars. If the exchange rate rises, you sell the Euros back, and you cash in your profit. Please keep in mind that forex trading involves a high risk of loss.

Important: be aware of the risks.

Currency trading risks

Finally, it cannot be stressed enough that trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. Remember, you could sustain a loss of some or all of your initial investment, which means that you should not invest money that you cannot afford to lose. If you have any doubts, we recommend that you seek advice from an independent financial advisor.

See a review of the ranking of the Best Forex Brokers in 2024.

Additionally:

Free Forex trading course for beginners.

Forex trading tips. 20 things you need to know to be a successful trader.

Risk disclaimer: Trading (Wiki link) in derivative financial instruments brings a high level of investment income, but is also associated with the possibility of losing your investment. Before bidding, it is recommended that you familiarize yourself with the terms of trade.