What is FOREX?
The Forex (also referred to as FX) stands for FOReign EXchange (currency trading) and is Over the Counter (OTC) market. The Forex market is the largest and most liquid financial market in the world participated in by a huge volume of traders who buy and sell currencies. Daily currency trading transactions amount to more than US$5 trillion, a far cry from the combined volume of transactions in equity markets at only US$30 billion.
Previously, participation was only limited to banks, hedge funds and major currency dealers. But with the persistence of small financial institutions and the advent of the internet, the foreign exchange market has allowed the trading of currencies at the retail level. With the internet and the development of various proprietary software, numerous interested traders around the globe can now take part in the Forex market.
How Forex works
Forex trading takes place 24 hours a day, five times a week. Currencies that are commonly traded include the US Dollar, Euro, Japanese Yen, Swiss Franc, Canadian Dollar, British Pound and Australian Dollar. They are also called by trader as the majors and account for more than 85 percent of the daily Forex transactions.
It is a standard procedure that currencies are traded in pairs. For example, the Japanese Yen is paired with the US Dollar, the Euro with the English Pound. If an investor, for instance, feels that the US Dollar's value will increase against the Yen, he or she will likely sell Yen and buy US Dollars (will open a buy trade on USD/JPY currency pair).
With the movement of currencies, profit is always possible even if there's only a small change. This is so because in every transaction, huge amounts of money are involved.
Where Forex occurs
Forex does not involve any central exchange unlike other financial markets which trade in a specific location. Instead, several trading centers around the world exist notably in London, Frankfurt, Tokyo, Singapore, New York and Hong Kong. Some 5,000 trading institutions are involved in Forex such as international banks, commercial companies, government banks and brokers for the various types of foreign currency exchange.
Complete Forex trading is done electronically either via the telephone or the internet. Online trading over the internet is now the most popular form of Forex trading today. This technology is an advantage because apart from the convenience it provides, it has also lowered transaction costs and increased speed of transactions significantly. Another benefit is its transparency attributed to the development of online trading platform.
The foreign exchange market is dynamic and will remain so. It is also stable despite the sudden falls it experiences every now and then. This is because when the value of one currency falls, what happens is the value of the other currency normally rises.
High liquidity is another advantage of the Forex market. Compared to the New York Stock Exchange, the daily trading volume in the Forex market is estimated to be 50 times more. Additionally, there will always be traders taking part in the buying and selling of foreign currencies resulting in extreme liquidity and price stability.
Forex Trading For Beginners
For trading, you need to understand Forex very well and the basic question that you must know the answer to is how much you are willing to risk and if you can bear the losses too.
Though there are numerous myths about how Forex traders become billionaires, there is very little truth to it. The reality is completely different. There are many times, when you will be at a loss too. With a few basic rules under your belt, you can learn how to trade Forex.
Rule 1 - Learn how to read the charts
The charts show the trend of the market. They will show you the where to enter and when to exit. Many a good trader has made profits following these charts and not by investing according to his or her intuition. There is no place of intuition in currency trading simply because this is not a speculation but rather a well-planned strategy. While you are making profits while following the trends, these trends will also help you to reduce the losses.
Rule 2 – Focus on Profits and Losses
Rather than choosing the highs and lows of the market, concentrate on learning Trading. When you follow the highs and lows and try to increase your profits by choosing these points, chances are that you will over-exceed yourself and your profit will turn into a loss.
Rule 3 – Always adapt
When you begin trading, it is usually recommended to establish your profit and loss ratio. A 2:1 ratio of Profit and Loss is commonly followed among traders. However, the key to successful forex trading is to always place your entry orders as well as Stop-Loss and Profit-Target orders in accordance to forex market volatility and the latest market structure. Always take profits that the forex market is currently offering you and do not trade with fixed RRR as with fixed RRR it will be very hard to fully adapt to current forex market structure and moves.
Another rule is to make numerous smaller trades than one big trade. Currency market is very volatile and if you try to follow the highs and lows of the market, you may end up losing your investment, as this turns a logical calculation to speculation. Formulate a strategy and follow it strictly and you will have fewer losses. Remember that for a long-term profitable forex trading, you need more profitable trades than loosing ones or higher profits than losses.
After all these rules, the best rule to follow is to make small investments rather than a big one. A profit made from these small investments will still have a big total and will also be much safer than trying to shake the markets for any fixed RRR profits targeting.
If you want to try out forex, you have to choose a company - broker - who will provide you an access to the forex market through a trading platform. Choosing the right broker is another very important decision for a long-term profitable trading. Make sure to read our Forex Brokers Truth page and Real Brokers Reviews page when choosing a broker. If you are strating to forex, make sure to start with a risk free demo account and gain enough knowledge and experience before investing real money.