What is Forex trading and how can you start?
If you’re a newcomer to the world of forex trading, it might seem a bit intimidating. In this beginner’s guide, we run through the basics so you can start your FX trading journey.
What is forex?
Forex, also shortened to FX, stands for foreign exchange. In practice, it’s the exchanging and trading of different currencies.
FX is the most popular trading activity in the world. Every day, $6 trillion – more than the GDP of the UK and France put together – exchanges hands.
A number of different types of traders are involved in the FX trader, including banks, companies, individual retail investors, and even governments.
There is no centralised exchange when it comes to Forex. It’s typically done over-the-counter. Essentially, anyone can get involved – but please only commit any capital if you are comfortable taking any losses.
In our case at Markets.com, we offer FX trading via contracts for difference (CFDs). With CFDs, you do not own the underlying asset. These are leveraged products. That means you gain exposure for a fraction of the total trade’s value. However, profit and loss is gauged by the total size of your position, not your deposit, and can far outweigh your initial deposit. Your risk of loss is higher.
What makes FX trading appealing?
There are lots of reasons why foreign exchange is so popular, such as:
- Market size – roughly $6 trillion changes hands every day!
- Variety – We offer over 60 different currency pairs to trade at Markets.com
- Accessibility – Unlike stocks and other assets tied to exchanges, currency can be traded 24/7
- Leverage – As mentioned above, currency pairing CFDs allow you to open a trade at a fraction of the trade’s total value
There is also a degree of flexibility with forex.
CFDs allow speculation on price movements in both directions. If you think the currency pairing is going to lose value, you will take a short position. If you think it will gain value, you’ll take a long position.
What are currency pairs?
Currency pairs are the financial instrument used in foreign exchange.
It is a quotation for two different currencies. It’s basically the amount you would pay in one currency for another.
Let’s look at an example.
The currency pair is GBP/USD at 1.15.
That means you could exchange 1 GBP for 1.15 USD.
If one of the paired currency’s value changes, then the currency pair’s value will change too.
For example, GBP/USD has started the day at 1.15. By the end of the day, it has risen to 1.16. That is because the strength of pound sterling has risen in value against the US dollar.
If the currency pair starts the day at 1.15, then drops to 1.13, for instance, that means the value of pound sterling has weakened against the US dollar.
At Markets.com, our currency trading offer is split into three categories: Majors, minors, and exotic.
Majors are some of the most popularly traded pairs on the market, coming from the largest global economies. They’re essentially the engines of global commerce and economics. Major currency pairs include:
- GBP/USD – Pound sterling to US dollar
- EUR/USD – Euro to US dollar
- JPY/USD – Japanese yen to US dollar
- USD/CHF – US dollar to Swiss franc
- AUD/USD – Australian dollar to US dollar
- NZD/USD – New Zealand dollar to US dollar
- CAD/USD – Canadian dollar to US dollar
The minor pairings are still from important economies but do not include the US dollar. These are still popular trading assets. Take a look at some examples below:
- AUD/CAD – Australian dollar to Canadian dollar
- CAD/JPY – Canadian dollar to Japanese yen
- EUR/GBP – Euro to pound sterling
- USD/DKK – US dollar to Danish kroner
Exotic pairings are pairings featuring potentially more volatile currencies. In the past, such currencies may also have had unique or difficult conversion requirements. Many come from emerging economies.
- CHF/PLN – Swiss franc to Polish zloty
- EUR/RUB – Euro to Russian rouble
- GBP/TYR – Pound sterling to Turkish lira
- USD/ZAR – US dollar to South African rand
What factors affect the currency market?
Like any financial instrument, currency pairs are affected by numerous external factors. If you’re looking to enter the world of forex trading, be aware of the following:
- Central bank policy & interest rates – It’s the job of central banks to essentially watch over all aspects of a nation’s monetary policy. That will give it oversight over many things that can affect currency prices. Interest rates are a key part of this. If a central bank increases its overnight rate, then currency traders looking to enjoy higher yields may end up buying more. This can make currency prices rise.
- Economic releases – Big economic releases, such as monthly, quarterly, and annual GDP growth figures, manufacturing and services PMIs, employment figures, and inflation all have an influence on FX prices.
- Politics – It goes without saying that political tussles can affect a currency pairing’s valuation. Think how the pound slid dramatically after the Brexit vote, or how the USD wobbled in the wake of the US/China trade war under the Trump administration.
- Volatility – The above factors will have an impact on price volatility, which can then affect how traders trade. Some may prefer to trade on volatile currency pairs; others may wish to hold off until markets fall back to normal. Be aware that some currency pairings are more volatile than others.
Some currency trading tips for beginners
- Research – Don’t commit any of your money until you’ve done your research. Study the markets. Take time to head over to our news and analysis section. You’ll find plenty of pieces on what’s moving markets and how major currency pairs are currently fairing. The old adage fail to prepare; prepare to fail runs true here. Make sure you’re informed before placing a trade.
- Practice – A com demo account lets you practice trades with $10,000 in demo credit to play about with. That way you can get a feel for currency markets, familiarise yourself with our platform, and see how tools can help impact your trades, in a risk-free environment. You won’t be spending any money.
- Tools – We have a suite of powerful trading tools designed to help you. From various different charts to sentiment indicators, and much more besides, these are all designed to give you a potential trading edge. Click here to learn more about our tools.
- Know your limits – Only trade if you are comfortable taking losses. Don’t be afraid to cut your losses either if you feel you are losing too much. Do not overextend. At the same time, don’t be tempted to take all of your potential profit out the first time it appears. You can be confident – but only you will know your own limits.
Remember: trading is inherently risky. The value of your trades can down as well as going up. Bear this in mind if you decide to take the forex trading plunge.