What Is Forex?
The currency trading market (forex) is the biggest market in the world. About 95% of the market is speculative and the trader does not take delivery of the physical currency he or she is buying.
Retail forex trading is done in currency pairs. For example the AUD/USD exchange rate at a certain point on a certain day is 1.0750 (this number is referred to as the spot rate or just the rate) and you have taken the view that the value of the $A will rise so you buy $A1000 (the base currency) using $US1075 (the quote currency). If the value of the $A rises to 1.0850 you will make $US10. Most forex traders use leverage so if you leverage this deal 100:1 you would make $US1000. Of course if the $A falls against the $US you will lose money, perhaps your entire outlay of $US1075.
You would trade ‘Long’ when you expect the currency you are buying to increase in value relative to the currency you are selling. If the currency you are buying does increase in value, you must sell back that currency to take a profit.
You can also go ‘Short’ in forex. That is when you sell the base currency, expecting it will fall in value, so you can buy it back at a lower price and make a profit. About 80% of all currency transactions last for seven days or less, with more than 40% lasting fewer than two days.
How To Get Started
First, you need to register with your chosen retail forex dealer or broker. You will be required to provide your full name, contact details and some form of checkable identification such as a driver’s licence or passport number. You may also have to provide details of your annual income or your assets.
Second, you will have to deposit the amount you wish to have in your account to invest (referred to as your trading capital). Many, but not all, forex dealers require an additional amount to be deposited known as a maintenance margin.
Once your deposit has been received you can start trading. Most traders execute and monitor their trading online, where you can check on your trading status, close deals and withdraw profits. Online foreign exchange trading occurs in real time. Exchange rates are constantly changing, in intervals of seconds. When a trader locks in a rate and undertakes a transaction, it is immediately processed and the trade has been executed.
The Forex Deal
This is a contract between the trader and the dealer. It is an obligation to buy and sell a specified amount of a particular pair of currencies at a predetermined exchange rate. It is made up of:
- THE CURRENCY PAIR: which currency to buy; which currency to sell; e.g. selling $US to buy $A.
- THE PRINCIPAL AMOUNT: the amount of currency involved in the deal.
- THE RATE: the agreed exchange rate between the two currencies at which the deal occurs.
- THE MARGIN: the investment amount you are willing to risk, determined by the stop loss you set.
Forex trades are leveraged. For example, you use $100 to buy a forex contract with $1000 value and the leverage is 1:100. The $100 is what you invest and risk but the gains you make may be many times higher.
The size of the margin will determine the leverage the higher the margin the lower the leverage. With forex trading you can lose more than your trading capital.
For further information on forex trading, we would recommend that you visit the Learn Forex Academy for support, training and other material related to forex.