What's FOREX?
The FOREX market is an international financial market where currencies are traded. The foreign exchange market started in the 1970s and is now the largest financial market in the world, with an average daily turnover of US$1.9 trillion. That's thirty times more than what all of the US stock exchanges do every day.
Every Forex trade involves buying one currency and selling another at the same time. For example, you would make a Euro/Dollar trade if you think the Euro will go up against the dollar. The forex system would then buy Euros and sell Dollars in the same amount. Then, when you want to close your position, you would make a Dollar/Euro trade. This would sell the Euro and buy the Dollar. If the Euro went up against the Dollar, you would have made money. If the Euro went down against the Dollar, you would have lost money.
What kinds of money are traded?
Most of the world's currencies can be traded, but the US Dollar, Euro, Yen, Swiss Franc, and Sterling are the ones that make up the majority of market activity.
Where can you find the Forex market?
Forex is different from most other financial markets around the world in that it is not based on an exchange. Instead, it works through something called the "interbank market" or "Over the Counter" (OTC). Since each Forex trade involves buying one currency and selling another, the trades are done electronically with any broker who is willing to take them.
Who can trade on the Forex market?
Historically, only banks, such as central banks, commercial banks, and investment banks, were allowed to trade currencies. Because of this, it works with something called the "interbank market."
But the number of people who don't work for banks but still trade on the Forex market is growing quickly. These people include multinational companies, money managers, money brokers, and private speculators. And because you only need about $500 to open a trading account, Forex is becoming more and more accessible to more and more people all the time. If you are over 18 and have access to the internet and enough money to open a trading account, you can join the world of Forex.
When can you trade on the Forex market?
Forex is the only financial market in the world that is open 24 hours a day, 7 days a week. Every day, forex trading starts in Sydney and moves around the world as the big financial markets in Tokyo, London, and New York open.
In other words, traders are always buying and selling foreign currencies somewhere in the world. This means that you can trade and react to important social, economic, and political events at any time of day or night. But there is a short break between when the American financial market closes on Friday and when the Australian market opens on Monday morning. But because of the different times in different parts of the world, this only lasts about 48 hours.
What is a margin of trading?
When you trade in forex, you do so in lots of $100,000. If you had to cover your position with that much money before you could trade, the market would once again only be open to banks and other large investors. So brokers have set up the idea of trading on margin. In practise, this means that they let people trade $100,000 blocks of currency if they can offer some protection against possible losses.
For example, they might let people trade with a 1% margin (in comparison, traditional stock brokers often require a 50 percent margin). This means that they can trade blocks of $100,000 as long as their account has at least $100,000 x 1% = $1000. One thousand dollars will protect the broker from any losses that their client might make (currency values rarely fluctuate by more than 1 percent in a single day). If a client's account goes down because of losses, which lowers the broker's security below an acceptable level, the broker will close all trades and ask for more money before allowing any more trades.
People can control a lot of currency with a small amount of capital when they trade on margin (often 50, 100 or even 200 times the amount of capital that they have invested). This can make you a lot of money, but it also makes it more likely that you will lose most or all of your investment capital.
What is the price?
Most Forex brokers offer trading margin, which means that you can open an account and start trading with a relatively small amount of capital.
When you trade in forex, you do so in lots of $100,000. But most Forex brokers will give you a leverage ratio of up to 100:1. This means you can control a trade worth $100,000 with as little as $1,000 in your account. Some brokers offer 200:1 or even 400:1 leverage, which means that you can start trading with as little as $500 or $250 in your account.
But please keep in mind that even though more leverage lets you make more money, it also makes the risk level higher. The smaller a change in your trading will have to be for you to lose all of your trading capital, the higher the leverage ratio. So be smart about the amount of leverage you use.
For new traders, it might be better to start with 20:1 or 50:1 leverage. This will raise the amount you need to open an account, but it will make it less likely that a small change in the value of a currency will wipe out all your trading capital.
