Forex Walkthrough

AAA

Level 1 Forex Intro - Currency Trading

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. Forex Education

    Forex Tutorial: Foreign Exchange Risk and Benefits

    In this section, we'll take a look at some of the benefits and risks associated with the forex market. We'll also discuss how it differs from the equity market in order to get a greater understanding ...
  2. Forex Education

    Forex Tutorial: Currency Trading Summary

    While this online forex tutorial only represents a fraction of all there is to know about forex trading, we hope that you've gained some insight into this topic. We also encourage those of you ...
  3. Forex Education

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  4. Forex Education

    Forex Tutorial: Introduction to Currency Trading

    Contributors include: Kathy Lien, Boris Schlossberg, Casey Murphy, Chad Langager and Albert PhungThe foreign exchange market (forex or FX for short) is one of the most exciting, fast-paced markets ...
  5. Forex

    Forex Vs. Stocks

    The differences between forex and the equities market
  6. Forex Education

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some beginner trading strategies to get started.
  7. Forex Education

    Forex Broker Guide: Introduction

    As of January 2012, foreign exchange market accounts for more than $4 trillion in average traded daily value, making it the largest financial market in the world. No central marketplace exists ...
  8. Forex Strategies

    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.
  9. Forex Education

    Forex Tutorial: How To Trade & Open A Forex Account

    So, you think you are ready to trade? Make sure you read this section to learn how you can go about setting up a forex account so that you can start trading currencies. We'll also mention other ...
  10. Forex Education

    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.
RELATED TERMS
  1. Forex Market

    The market in which participants are able to buy, sell, exchange ...
  2. Forex Spot Rate

    The current exchange rate at which a currency pair can be bought ...
  3. Forex - FX

    The market in which currencies are traded. The forex market is ...
  4. Forex Option Trading

    A security that allows currency traders to realize gains without ...
  5. Real Time Forex Trading

    A form of speculation in which a trader bets on the movement ...
  6. Forex Hedge

    A transaction implemented by a forex trader to protect an existing ...
RELATED FAQS
  1. How is the value of a pip determined?

    Learn how the pip is used in the pricing of a currency pair in forex trading, and see how the foreign exchange market is ... Read Answer >>
  2. In the forex market, how is the closing price of a currency pair determined?

    The foreign exchange market, or forex, is the market in which the currencies of the world are traded by governments, banks, ... Read Answer >>
  3. How do you make money trading money?

    Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in ... Read Answer >>
  4. How does leverage work in the forex market?

    The concept of leverage is used by both investors and companies. Investors use leverage to significantly increase the returns ... Read Answer >>
  5. What am I buying and selling in the forex market?

    The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank ... Read Answer >>
  6. How is spread calculated when trading in the forex market?

    First, remember that in the forex markets investors trade one currency for another. Therefore, currencies are quoted in terms ... Read Answer >>

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center