Forex basics

The off-exchange retail foreign currency market, also referred to as the "Forex" or "FX" market, is the largest financial and investment market in the world. Forex is the simultaneous buying of one currency and selling of another.

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.

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.

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 as high as 400:1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $20,000 worth of currencies. Similarly, with $500 dollars, one could trade with $200,000 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.

Unmatched Liquidity

There is no shortage of buyers and sellers in the Forex market. With the vast number of traders involved in the Forex market, the trading volume offers price stability and a consistency in fair market pricing. Equity traders on the other hand are more susceptive to liquidity risk and are subject to potentially wider dealing spreads and larger price movements. Liquidity in the equities market is no match for the liquidity that the Forex market offers. 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.

Profit Potential in both Rising and Falling Markets

Bear in mind when you are trading the Forex markets, you are always buying one currency and selling another. Unless there is virtually no change in value between the two currencies, one will always be appreciating while the other is depreciating. Now the question is, which side are you investing in?

Forex provides the ability to make money under any market condition if you are positioned on the right side of the market. For example, the EUR/USD pair, if the Euro is gaining strength against the dollar then you would want to buy (or "go long") the EUR/USD. If the US Dollar is gaining strength you would want to sell (or "short") the EUR/USD.

Because of the liquidity of the market you can take long or short positions against any currency pair. This market benefit could be potentially dangerous too because as it is easy to get into a trade whether it is going against you or not. Equities traders may have a much more difficult time liquidating stocks when the market is moving against them.

Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.