Forex trading has always been a mystery for me until about couple of weeks ago when I started reading more about it. For most people forex trading is something that is meant for the corporates & banks and perceived as a very complicated thing to do. Now, after doing enough research, I realized that it is the one of the easiest make money online instrument to get started and make money instantly – of course with its associated risks. In this post, let me explain the basics of forex trading and how easy it is for anybody to get started with online forex trading pretty quickly.
Forex trading for beginners – Basics
Forex market or currency market (or simply FX) is the place where currency trading takes place. It primarily facilitates the exchange (buy / sell) of currencies from one to another and is the backbone of international trade and investment between countries – major banks being the main parties involved. For example, if a US company has to import something from Japan, it has to pay in Japanese Yen and and hence need to convert the US dollars into the acceptable currency. This happens on a continuous basis round the clock to help with global trades and hence make a mammoth US $7 trillion daily turnover which is bigger than any stock market turnover.
Forex trading by individuals is nothing but the act of involving in the above process with your small amount of money whereby you buy and sell currencies at the prevailing market price.
Basically, when you buy a particular currency (e.g. US Dollar), it is exchanged against another (e.g. Euro) and hence the entity that is traded is known as a pair. For example USDEUR is a pair whereby you are trading US Dollars against Euro and you buy (or sell) that pair at something like 1.5000 per pair.
Just like the stock market, you buy or sell – not shares but pairs.
Difference between Forex trading and Stock trading
Many of us are familiar with the stock markets and share trading. The currency trading is slightly different from stock trading because of the following reasons.
- In the stock market, there are too many (thousands) companies and their stocks that you need to track. But in the currency market, you mainly deal with those leading currencies in the world. Fourteen of these major currencies count for majority of the transactions. They include US Dollar (USD), Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Australian Dollar (AUD), New Zealand Dollar (NZD) and Swiss Franc (CHD). The other currencies are traded as well but these are trader’s favorites and high volume currencies
- The stock market is active only for a certain number of hours per day and you transact in a particular stock market (e.g. NYSE) at a given time. But currency trading is done 24 hours a day in some market or other and you don’t need to worry about where you are trading. The trading system takes care of this part and simplifies things for you
- Because of the leveraging (margin trading), even a small amount such as $50 can get you exposure to buying 1000s of units of a particular pair
- Even a small change (such as 0.0001) in the price can result in a significant return on your investment due to leveraging
- Volume is so high that buy and disposal is easier
- Usually there is no account opening fee or even brokerage charges – the forex company’s commission is only the difference between the sell and buy price at any time (buy price will be always slightly more than the sell price at any time)
- There is no physical shares, documents or dematerialized form of the traded currencies maintained anywhere. The trading system just keeps your buy-sell status
- Due to the huge volume nature and global span, currency market cannot be manipulated by traders where as stocks, sometimes, can be manipulated by insiders and market makers
How to forex trade?
In order to trade forex you need to open an account with one of those online forex trading agencies. There are plenty of them to choose from and I found that eToro is a good platform for the reasons mentioned in the next section. Once you sign up, all that you have to do is to add money to your forex trading account and start trading. Money transfer to the account can be via PayPal, Credit card, bank – wire transfer and many other online money transfer options. Of course, after signing up one still has the option of continuing with the practice account without adding any real money to your account.
It is a matter of couple of minutes before you start trading but wait till you do your homework. All your money can disappear in no time if you are not careful. This is why practice trading accounts are useful. Most trading platforms allow a practice account whereby you can trade using virtual money but use real time features such as price quotes, charts etc.
(Please proceed to the next page to read Forex trading tips and common forex terminologies)
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