What Is Forex Trading? and how can YOU get started?
We’re going to show you exactly what Forex Trading is and how you can be part of this $5 trillion dollar a day market!
Below is a summary of everything you’re about to learn to take you from Zero to Pro on your trading journey, starting with… What is Forex?
Let’s get started:
- What is Forex Trading?
- The Nature of Forex Markets
- What Makes Forex Trading Unique?
- What Is CFD Trading and How Does It Work?
- What Is a Forex Broker?
- What Is a Forex Trading Platform?
- What Is Forex Regulation?
- The Essence of Forex: What Is a Currency Pair?
- What Is Forex Trading?
What is Forex Trading?
Have you ever exchanged currency to go on a trip? If you did, whether you knew it or not, you were Trading Forex.
Forex Trading is also known as:
- Foreign Exchange
- Foreign Exchange Trading
- Currency Trading
- Spot Forex Trading
- FX Trading
… or simply, “FX“.
Essentially all of these are the same thing.
Forex trading is buying and selling a financial asset to make a profit from price differences.
📉 We buy when the price is low and sell back when the price rises. 📈
📈 We sell when the price is high and buy back when the price drops. 📉
Price changes are caused by economic and political events around the world.
Each event affects market confidence, increasing or decreasing the demand for assets.
In turn, this makes any event occurring worldwide a tradable opportunity, on a daily basis.
The Nature of Forex Markets
Forex markets are incredibly exciting and appetising. There is ALWAYS an opportunity.
💵 Greatest of All Time: Daily global trading volume is over $5 trillion! (USD)
The term Forex means ‘foreign exchange’ – trading currencies against each other.
But Forex trading is much more than that!
We can trade all financial assets, currencies, commodities, like Oil and Gold and stocks, without having to own them and with a small amount of capital!
Let’s see how.
What Makes Forex Trading Unique?
- CFD Trading: Contract for Difference (CFD) enables trading on price changes without having to own a financial asset, physically.
- Leverage: Leverage magnifies our available capital to open larger positions, increasing both profit and risk amounts for every price movement.
- 5/24 Open: The digital nature of Forex allows the inclusion of a major stock market from each continent, keeping the market always open for traders.
- Two-way Market: Long (buy) and Short (sell) positions allow profiting both when the prices rise, and when the prices fall.
- Hedging: Due to the two-way market, you can create advanced trading strategies hedging your buy and sell positions with ease.
- High Liquidity & Volatility: Millions of traders act simultaneously at all times, keeping the costs low and causing constant price changes.
- A Wide Range of Assets: Forex traders can invest in currency pairs, commodities, equities, stock indices, cryptocurrencies, exchange-traded funds (ETFs), and bonds.
What Is CFD Trading and How Does It Work?
CFD means “Contract for Difference” and is a financial derivative instrument.
In Forex markets, we trade everything as CFDs, so we don’t have to physically purchase assets.
We would have to carry the barrels home!
Then, find a buyer, transport the barrels and collect the money.
And repeat this EVERY. SINGLE. TIME.
Yeah – that’s why we prefer CFDs.
CFD trading allows us to benefit on price changes without all that extra hassle.
And with the convenience of technology and the Internet, from our computer, laptop or mobile phone we can trade.
This innovative advantage is brought to us by Forex brokers.
What Is a Forex Broker?
Forex trading happens via online brokers.
We use our broker’s trading platform to give Buy and Sell instructions electronically.
Then, usually, instantly, they transmit our instructions to the order execution venues.
Brokers usually offer a wide range of trading tools and services:
- Trading Platforms: accessible from the computer desktop, web browser or mobile device
- Asset Selection: a wide range of assets to trade on the platform
- Leverage: a financial tool which multiplies our capital, allowing larger trades
- Customer Service: account management and trading education materials
- Market Analysis: economic calendar, market commentary and trading signals
- Trading Tools: A range of plugins or tools to make trading easier for the retail client, giving access to professional tools
- Education: their own training programs
What Is a Forex Trading Platform?
A Forex trading platform is our door to the financial markets.
Here, we follow the prices of financial assets and Buy or Sell them.
The most common Forex trading platforms are:
A trading platform usually contains:
- Asset Lists – Buy and Sell prices, asset specifications, trading conditions
- Trading Orders – Market orders, Take Profit and Stop Loss orders, pending orders
- Analysis Tools – Live price charts, interactive chart tools, technical indicators
- Account Information – Balance, margin, equity, open profit/loss
Some brokers also develop their proprietary trading platforms to offer:
- Social Trading: allowing us to copy other traders’ positions
- Automated Trading: we can use trading robots, signals, and expert advisors
- Unique Tools: built-in news feeds, market analytics, and indicators
What Is Forex Regulation?
Forex brokers are financial institutions.
As with everything when money is involved, they are under strict laws and regulations.
These regulations are enforced by national or regional Regulation Authorities.
They ensure business integrity, pricing transparency, and working in the client’s best interests.
Regulation Authorities are legally empowered to penalise brokers who violate the rules.
Some regulatory authorities even have investor protection schemes which we can apply if we experience any conflicts or troubles with the broker.
Brokers can also operate as “unregulated”, this is legal, however, it means you are not protected by a licensing authority and are often dealing with an overseas entity with different laws.
“Regulated brokers” are technically safer due to the regulation authorities.
A common difference between regulatory authorities is leverage restriction differences. For example an ASIC license allows retail traders to leverage up to 500:1 whereas an FCA license allows retail traders a maximum of 30:1.
It is common for brokers to have multiple licenses to on-board retail clients, depending on your geographical location, and your leverage requirements.
The leading regulating authorities are:
|United Kingdom||European Union||Australia||Japan|
|Financial Conduct Authority||Cyprus Securities and Exchange Commission||Australian Securities and Investments Commission||Financial Services Agency|
Regulatory Procedures of Brokers
Brokers are obligated to exercise certain procedures to comply with regulations.
These procedures are implemented to protect us and our money.
- Trader Classification: A small test to assess Forex knowledge and classify clients as Retail or Professional. Each category has different risk and protection parameters.
- Know-Your-Client (KYC): Providing personal ID and proof of address for identification.
- Anti-Money Laundering (AML): Proving the sources of our funds.
Markets in Financial Instruments Directive II (MiFID II) is the current prevailing regulation in the Forex and CFD markets.
It’s a legislation implemented in 2018 by European Securities and Markets Authority (ESMA) to govern the financial markets activities within the European Union (EU).
MiFID II framework requires Forex brokers to:
- Be transparent in costs and trading conditions
- Improve record-keeping procedures
- Classify traders as Retail or Professional through evaluation in 3 criteria:
- Having done at least 10 significant-size trades per quarter in the last 12 months
- Having a financial instruments portfolio over €500,000 value
- Having at least 1 year of professional experience in the Finance industry
(2 of 3 criteria must be satisfied to be classified as a Professional Trader)
|Benefit Type||Retail Trader||Professional Trader|
|Leverage Limits||Up to 30:1||Unlimited|
|Broker Costs||Usually higher||Usually lower|
|Position Size Limit||Usually lower||Usually higher|
|Instruments||No restrictions||No restrictions|
|Negative Balance Protection||Available by default||At the broker’s discretion|
|Financial Ombudsman||Available by default||At the broker’s discretion|
|Regulatory Protection Schemes||Available by default||At the broker’s discretion|
The Essence of Forex: What Is a Currency Pair?
Each currency is valued and traded against another currency.
Two currencies together form a currency pair like EUR/USD.
The first currency, the Euro (EUR), is known as the base currency.
The second currency, the US Dollar (USD), is known as the quote currency.
The base currency is valued in terms of the quote currency.
The value ratio is known as the exchange rate.
When we trade Forex, we trade a CFD of this exchange rate.
If the exchange rate will rise, we Buy the Currency Pair CFD, and vice-versa if it will drop.
Example 1: Trading a Forex Currency Pair CFD
AUD/USD: the currency pair of Australian Dollar (AUD) and United States Dollar (USD).
If AUD/USD exchange rate is 1.1150 – then, 1 AUD = 1.1150 USD.
The exchange rate will move in the same direction of AUD value (positive correlation) and in the opposite direction of USD value (negative correlation).
- AUD gains value: AUD/USD increases
- AUD loses value: AUD/USD decreases
- USD gains value: AUD/USD decreases
- USD loses value: AUD/USD increases
Example 2: Trading a Non-Forex Asset CFD
Same pairing logic applies to non-Forex assets like commodities and stocks.
Gold (XAU): traded against U.S. Dollars (USD) and the two form the pair of XAU/USD.
BMW (BMW): traded against Euro (EUR) and the two form the pair of BMW/EUR.
The exchange rate between XAU and USD (or BMW and EUR) will move in positive correlation with XAU (or BMW) and in negative correlation with USD (or EUR).
Now, we should be able to answer the question:
What Is Forex Trading?
Now we know what Forex trading and how it works, let’s learn how to become a Forex Trader!