Forex trading – a shorthand for foreign exchange trading – is a way for traders to capitalize on the change in relative value between two different currencies. Unlike stocks, which are traded on centralized marketplaces, forex trading takes place at over-the-counter exchanges. This means that it is organized primarily through the global banking network and forex trades can be placed 24 hours a day.
When trading forex, investors are exchanging one currency for another. This exchange involves simultaneously selling one currency and buying another in a paired transaction.
Four currency pairs with the US dollar make up more than half of all global forex trades: British Pound/US Dollar, Euro/US Dollar, Japanese Yen/US Dollar, and Swiss Franc/US Dollar. That said, virtually any combination of currencies can be traded, although often, trading outside these four major pairs focuses on regional currency pairs (e.g. Norwegian Krone/Euro).
Trading Forex with CFDs
The majority of traders don’t actually exchange currency directly. Instead, they trade derivatives that allow them to trade based on the future price of currencies without actually buying them.
Contracts for differences (CFDs) are one of the main types of derivative that forex traders use. CFDs are typically free from commissions and allow traders to buy on margin, meaning they do not need to have the entire value of a transaction available as cash on hand. This is important because the profit margins in forex transactions are often fractions of a cent, so buying and selling in large volumes is an advantage, although it increases the risk of large losses. CFDs for currency pairs are traded on over-the-counter markets 24 hours a day.
Trading Forex Online
Finding a Forex Broker
The first thing you need to do when trading forex online is to find an online forex broker. You need to make sure that the broker of your choice has a license to offer trading services and that it is safe and honest.
Brokers earn money from the spread on transactions – the difference between the bidding price and asking price. Spreads vary from broker to broker, so it’s worth your time to shop around before you start trading. Different brokers also have different margin requirements, so this is another issue to look at.
Tips for Success
Once you choose a broker you can start trading online. Follow a few simple rules to increase your chances of a successful trading activity.
Forex trading is different from stock trading, so strategies you’ve developed for stocks, or any other asset, for that matter, won’t necessarily be successful when trading currencies. Many brokers offer demo trading accounts so you can practice strategies without the risk of losing money.
It’s essential to trade with your head and not your heart. You should use a combination of technical and fundamental analysis to make informed trading decisions, keeping in mind that currencies are influenced by monetary policies of central banks like the US Federal Reserve and the European Central Bank (ECB) and economic and political climates.
Always enter a trade with a specific profit target and maximum allowable loss in mind. In addition, it’s worth following the common rule among day traders of never risking more than 1% of your account value in any single trade.
Forex trading is a way for traders to predict the relative change in the value of two currencies. It typically relies on derivatives like CFDs rather than direct exchange of two currencies. When starting out with this activity, it’s important to start small and proceed cautiously until you develop a proven winning strategy.