Forex Trading Tutorial: What is Forex Anyway?

forextradingtutorialThe economy is in a very vulnerable state. Investments that were once considered lucrative opportunities have become responsible for millions of dollars in losses over the last few years. This isn’t to say that all investment opportunities are bad; rather, that as a savvy investor you should consider diversifying your current investment strategies to include new opportunities wherever possible.

One of these opportunities is known as the Foreign Exchange market or Forex for short. Forex is one of the most exciting, fast-paced markets currently traded. Trading foreign currencies is nothing new, but it has historically been an investment opportunity dominated by large financial institutions, corporations, and extremely wealthy individuals. The Complete Forex Trader is considered to be one of the most comprehensive forex tutorials available; whether you are a new or experienced trader.

In recent years, the Internet has allowed average investors to buy and sell currencies easily and profitably with just the click of a mouse.

Forex is considered one of the least volatile financial markets because currency fluctuations on a daily basis are usually very small. Combined with the extreme liquidity and the availability of leverage (sometimes as high as 250:1 in retail trading), Forex has become one of the most popular investment platforms of the 21st century.

What is Forex?

The Forex market is based on the idea that currencies need to be traded regularly for global commerce to be effective. For instance, if you are traveling in France, you will need to trade your US currency for the equivalent in Euros as this is the accepted currency in France. Likewise, businesses convert currency into various forms to buy and sell products every day.

Forex is the largest financial market in the world. On average, more than $4.9 trillion per day is traded on the open currency market. This is partly because there is no central marketplace for foreign exchange. Most major US stock markets (NASDAQ, Dow Jones, etc.) have a central trading floor where business is conducted. Forex has no such trading floor and all trading is conducted electronically. The market is open 24 hours a day and just about every major currency worldwide can be bought and sold through the Forex marketplace.

Forex is divided into three primary markets:

  • Spot Market

  • Forwards Market

  • Futures Market

The Spot market has always been the largest market because it is the underlying asset that both the Forwards and Futures markets are based on. In most cases, when people talk about trading Forex, they are referring to trading the Spot market. The other two markets are typically reserved for companies looking to mitigate foreign-exchange risks into the future.  You can learn more about all three markets in the Forex Foundation Course.

For this reason, your best bet is to learn the Spot market. Basically, the spot market is where currencies are bought and sold according to current pricing. Currency prices fluctuate based on many factors including interest rates, economic performance, political situations, and perception of future success.

Understanding the Basics

The first thing you need to understand if you are interested in becoming a Forex trader is how to read a quote. The most important concept in Forex trading is that the value of a specific currency is always done in relation to another currency. This is known as a currency pair. For example, if you are trying to determine the exchange rate between the US dollar and the Japanese yen, a typical Forex quote might look like this:

USD/JPY = 119.50

In this example, the currency on the left is known as the base currency (USD) and the currency on the right is known as the counter currency (JPY). The base currency is always equal to one unit and the counter currency is what that one base unit is equivalent to in the other currency. This means that $1 US is equal to 119.50 Japanese yen.

Although you can trade just about any currency pair, the US dollar remains one of the most common base currencies traded in the Forex market. The exception to this would be currencies such as the British pound; typically the base currency when compared against the US dollar.

Getting Started

Once you understand the basics of Forex trading, the next step is to create a Forex brokerage account. One thing you should definitely consider doing is creating a free demo account at a large online brokerage firm. These online demo accounts are free and allow you make Forex trades without risking any real money. You can use your demo account to practice various strategies such as Candle Pattern Trading. Once you have some experience, you are ready to convert your demo account to a live account and start trading on the Forex market.

As previously mentioned, one of the biggest draws to Forex trading is leverage. Although it can be as high as 250:1, a factor of 50:1 is usually about average. What this means is that for every dollar in your account, you can trade $50 (assuming a 50:1 leverage factor). If you have $1,000 in your trading account, you have control of $50,000.

You can learn more about the power of leverage in Forex: The Complete Trading System.

Leverage is great because it allows you to potentially profit much more quickly than you could using more conventional trading platforms. However, you can also lose much more money than you actually have available if a trade doesn’t go the way you think it will. Fortunately, most brokerage houses have protective stops in place that prevent your account from losing significant amounts of money because of leverage.

Another great thing about Forex is that there are no commissions to be paid on your trades. Most equity accounts require that you pay the broker a fee for each trade. In Forex, you do not owe any fees or commissions on your trades. Rest assured – brokers are still making money by it doesn’t actually affect your profit margin per trade.

If you have lost faith in traditional retirement and investment opportunities, Forex may be something worth considering. Although it is definitely not a “set it and forget it” investment opportunity, the potential to acquire massive profits is very real and done on a daily basis by individuals just like you.

If you take any advice about Forex trading to heart, it should be to create a demo account and practice trading without risking real capital. You will learn trends in the market and be better able to spot a good opportunity when you see one. Thanks to leverage, these good opportunities can often turn into massive profits.

Who knows – maybe you will become the next Forex success story!