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Introduction

The Skinny on Forex Trading

Subtopic 1 – What is FOREX?

1. The Foreign Exchange market also referred to as the “FOREX” or “FX”.
2. It is the largest financial market in the world, with a volume of over $4 Trillion a day.
3. New York Stock Exchange trades do have only $25 billion of volume a day.

Subtopic 2 – What is traded on the Foreign Exchange market?
 

1. The simple answer is money.
2. Forex trading is the simultaneous buying of one currency and the selling of another.
3. Currencies are traded through a broker or a dealer, and are traded in pairs; for example the euro and the US dollar (EUR/USD) or the British pound and the Japanese Yen (GBP/JPY).

Because you're not buying anything physical, this kind of trading can be confusing.
Think of buying a currency as buying a share in a particular country.
When you buy, say, Japanese Yen, you are in effect buying a share in the Japanese economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the Japanese economy.

In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to the other countries' economies.

Subtopic 3 – Which Currencies Are Traded?
 

The most popular currencies along with their symbols are shown below:

Subtopic 4 – When Can Currencies Be Traded?
 

Forex market is open 24-hours a day with generally only rest on the weekend and public holidays.

Subtopic 5 – The Forex market (OTC)
 

The chart below shows global foreign exchange activity. The dollar is the most traded currency, being on one side of 86% of all transactions. The euro’s share is second at 37%, while that of the yen is third at 16.5%.

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Subtopic 6 –Why Trade Foreign Currencies?
 

1. No commissions.
- No clearing fees, no exchange fees, no government fees, no brokerage fees. Brokers are compensated for their services through spread.

2. No middlemen.
-Spot currency trading eliminates middlemen, and allows you to trade directly with the market responsible for the pricing on a particular currency pair.

3. 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.

4. 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. Of course this depends on your leverage and all will be explained later.

5. A 24-hour market.
-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.

6. No one can corner the market.
-Forex market is so huge and has so many participants that no single entity (not even a bank) can control the market price.

7. 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 200 to 1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $10,000 worth of currencies. Similarly, with $500 dollars, one could trade with $100,000 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.

8. High Liquidity.
-Under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will. You are never "stuck" in a trade. 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).

9. 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.

10. “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 youshould 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.