The foreign exchange market (forex or FX for short) is one of the largest, most exciting, fastest-paced markets in the world. It seems to be easier to understand, compared to the stock market. Chances are you've already tried it when you've gone on a trip to another country and exchanged some money.



Historically, only large financial institutions, corporations, central banks, hedge funds and extremely wealthy individuals had the resources to participate in the forex market. However, now, with the emergence and popularization of the internet and mainstream computing technology, it is possible for average investors to buy and sell currencies with the click of a mouse from the comfort of their own home.

If you follow the value of a currency, such as the American dollar (USD), you will know that daily currency movements are usually very small. Most currency pairs, on average, move no more than 1 cent per day, which is less than a 1% change. Therefore, to make a respectable return, many currency traders rely on the use of leverage (using margin) to increase their potential returns for small moves in the exchange rate. In the retail forex market, leverage can be as high as 200:1 if you're trading with less than $50,000 or as low as 50:1. For example, to trade $200,000 worth of currency, if the broker is requiring 1% margin, you would only need $2,000 deposited to your account – giving you leverage of 100:1. This is not as risky as it sounds, because currencies don't fluctuate as much as stocks. (Learn to cut out losses quickly, leaving profits room to grow, see Leverage's "Double-Edged Sword" Need Not Cut Deep.)

The availability of leverage, and massive size of the market and the ease of making fast transactions has increased the popularity of the forex market. Positions can be opened and closed instantaneously at the exact price shown to you, and typically with no commission or transaction fees. Also, unlike the stock market, in which one large buyer or seller can adversely move the stock price, currency prices are much harder to manipulate because the sheer size of the market prevents any one player from significantly moving the currency price. Currency prices are largely based on supply and demand.


Another reason why forex is so popular with traders is because the market is open 24 hrs, meaning you can choose when you want to trade – regardless of whether you're a early bird or night owl. (For more, see Where is the central location of the forex market?)

The very popular forex market also provides plenty of opportunity for investors. However, in order to trade profitably in this market, currency traders have to take the time to learn about forex trading and dedicate enough time to practice what they've learned.

This forex tutorial will provide new investors and traders with the knowledge needed to trade in the forex market. This tutorial will cover the basics of the forex market and will slowly progress to more advanced topics, such as forex strategies. For now, let's take a look at "pairs" and "quotes" in the next section, and learn how to read them correctly.


Currencies

Related Articles
  1. Trading

    Forex Tutorial: The Forex Market

    In this online tutorial, beginners and experts alike can learn the ins and outs of the retail forex market.
  2. Trading

    The Pros & Cons Of A Forex Trading Career

    Trading foreign currencies can be lucrative, but there are many risks. Investopedia explores the pros and cons of forex trading as a career choice.
  3. Trading

    Can Forex Trading Make You Rich?

    Forex trading may be profitable for hedge funds or unusually skilled currency traders, but for average retail traders, forex trading can lead to huge losses.
  4. Trading

    Top 5 Forex Risks Traders Should Consider

    With a long list of risks, losses associated with foreign exchange trading may be greater than initially expected. Here are the top 5 forex risks to avoid.
Frequently Asked Questions
  1. I'm about to retire. If I pay off my mortgage with after-tax money I have saved, I can save 6.5%. Should I do this?

    Only you and your financial advisor, family, accountant, etc. can answer the "should I?" question because there are many ...
  2. My wife and I both converted our Traditional IRAs to Roth IRAs over a decade ago and have invested the maximum allowed each year since. We're buying our first home soon. Do we both qualify for one-time, tax-free, $10,000 distributions?

    You and your spouse each qualify for a penalty-free distribution of up to $10,000 for the purchase, acquisition or construction ...
  3. Is a Thrift Savings Plan (TSP) a qualified retirement plan?

    Take advantage of the government's retirement plan for employees with the Thrift Savings Plan. As with a 401(k), contributions ...
  4. Who manages the assets in a Roth 401(k) account?

    Learn how to personally manage the assets in your Roth 401(k) plan and determine the best options available to help meet ...
Trading Center