Forex Market for Beginners: A Complete Guide
Definition: A foreign exchange market is an over-the-counter (OTC) global marketplace where currencies are exchanged.
What Is Forex Trading?
Forex trading is also known as forex exchange. In forex trading, you exchange the euro with dollars, dollars from pounds, pounds to rupees, it is part of the foreign exchange market. Forex trading is not rocket science and today with the help of the internet you can also do it sitting at home.
History of Forex
A Forex market was established in Amsterdam roughly 500 years ago. Currency exchange rates were stabilized by this possibility of freely trading currencies. Forex trades were initiated in Amsterdam and spread throughout the world. The Gold Standard was introduced 240 years ago, in 1875.
How do currency markets work?
Forex trading does not take place on exchanges, but directly between two parties, over-the-counter (OTC). A global network of banks runs the forex market across four major trading centers in different time zones: London, New York, Sydney, and Tokyo. Forex can be traded 24 hours a day since there is no central location.
There are three types of forex market:
- Spot forex market:
An exchange of currency pairs that takes place immediately after the trade is settled – on the spot – or within a short period of time.
- Forward forex market:
Contracts are agreements to buy or sell certain amounts of a currency at a specified price, to be settled at a set date in the future.
- Future forex market
An agreement to buy or sell a specified amount of a given currency at a specified price and date. Unlike forwards, a futures contract is legally binding.
Forex traders rarely take delivery of the currency themselves; instead, they make exchange rate predictions to profit from market price movements.
How does forex trading work?
Forex trading involves speculation on currency exchange rates in order to make money. By exchanging one currency for another, traders speculate on whether one currency will rise or fall in value against another.
Forex trading takes place over-the-counter (OTC) rather than on exchanges, unlike shares and commodities. London, New York, Sydney, and Tokyo are four major forex trading centers located in different time zones. Trading forex is possible 24 hours a day since there is no central location.
How do currency markets work?
The currency market is a 24-hour market that is only closed from Friday evening to Sunday evening, but the 24-hour trading sessions are misleading. Trading takes place in three sessions: European, Asian, and United States.
There is some overlap in the sessions, but the main currencies are traded mostly during those hours. Therefore, certain currency pairs will have more volume during certain sessions. In the U.S. trading session, traders will find the most volume with pairs based on the dollar.
Advantages and Disadvantages of Forex Trading
| Advantages | Disadvantages |
|---|---|
| Flexibility | Counterparty Risks |
| Trading Options | Leverage Risks |
| Transaction Costs | Operational Risks |
| Leverage | High Brokerage Costs |
| Risk Free Demo Account | Less Regulated |
| It’s Open 24/5 | |
| Nobody owns the market | |
| Largest Financial Market in the world |
How Do I Start Trading Forex?
Starting forex trading is very easy, it is similar to equity trading. Here are some steps to start your forex trading journey.
1. Choose a good forex broker
If you live anywhere in the world, you can probably open an account at an online forex broker. Look for one that meets your requirements as a trader and accepts you as a client. It is essential that the broker you choose keeps your money separate from its own and is regulated by a well-respected regulator, such as the UK’s Financial Conduct Authority (FCA) or the U.S. Commodity Futures Trading Commission (CFTC).
2. Start With Demo Trades
You should always start with a demo account before investing in forex trading. With a demo account, you can get a good idea of whether this platform is for you or not. By the way, there are many platforms to open an account in forex trading and most of the platforms give you virtual money to understand. For example, you can buy and sell trades with a demo account up to $ 10000 by visiting FOREX.com.
3. Use Micro Accounts
After practicing in the demo account, you need to deposit at least $5 to trade on the micro account, and you can also increase the money by learning this slowly.
4. Take Time to Learn
Before you learn any skill, you need to invest time. Just like you cannot become a doctor in 2-3 months, you cannot become a successful forex trader in 2-3 months. You always have to learn. To become a successful trader, you need patience research and analytical skills.
5. Start Trading
Now that you have completed all of the previous steps, you are ready to start trading forex. Demo accounts can also be opened with virtual money to test the broker’s forex platforms and services before going live. Additionally, demo accounts are useful for testing trading strategies and practicing trading without risking any money.
What are Foreign Exchange Price Movements and What Causes it?
Due to the multiple factors that influence price fluctuations in the forex market, forecasting exchange rates may be challenging as currencies from all over the world are traded. It is crucial to understand the factors that drive price changes on the forex market, as well as other financial markets.
| Central Banks | In the case of quantitative easing, for example, the central bank can inject more money into an economy and cause the currency’s price to decrease. |
| News Reports | Investors and commercial banks want to invest in economies with a positive outlook. The demand for the currency in a particular region will increase if favorable news about that location hits the market. |
| Market Sentiment | Currency values may also be affected by the mood of the market, which is typically affected by news. Traders who believe a currency is headed in a particular direction will trade accordingly, and they may persuade others to do the same, increasing or decreasing demand. |
| Political Stability & Performance | The political situation and economic performance of a country can affect forex volatility. |
| Recession | When a country goes into recession for any reason, its interest rates are likely to fall. |
| Credits Ratings | Credit ratings can also be considered when investors decide which markets to invest in, along with interest rates and economic data. |
Forex Market Location: Where is it?
Forex (FX) is a market in which foreign currencies are traded without a central location. Whenever one currency is exchanged for another, foreign exchange transactions take place in a number of different ways, 24 hours a day.
Who Regulates the Forex Market?
| # | Country | Regulated | Currencies |
|---|---|---|---|
| 1 | Switzerland | Swiss Financial Market Supervisory Authority (FINMA) | Swiss franc |
| 2 | United States | The National Futures Association (NFA) and Commodities Futures Trading Commission (CFTC) | United States dollar (USD) |
| 3 | New zealand | Financial Markets Authority | New Zealand dollar |
| 4 | United Kingdom | Financial Conduct Authority (FCA) | Pound |
| 5 | Australia | The Australian Securities and Investments Commission (ASIC) | Australian dollars (AUD) |
| 6 | Japan | The Financial Services Agency (FSA) | Japanese yen |
| 7 | Canada | The Investment Industry Regulatory Organization of Canada (IIROC) | Canadian Dollar (CAD) |
| 8 | Hong Kong | The Securities and Futures Commission (SFC) | Hong Kong Dollar (HKD) |
| 9 | Singapore | The Monetary Authority of Singapore (MAS) | Singapore Dollar |
| 10 | India | The Reserve Bank of India | Indian Rupee (INR) |
| 11 | Saudi Arabia | Capital Market Authority (CMA) | Saudi riyal |
| 12 | United Arab Emirates | Security and Commoditee Authority (SCA) | United Arab Emirates dirham |
| 13 | Belgium | Financial Services and Markets Authority | Euro |
| 14 | Oman | The Capital Market Authority (CMA) | Omani rial |
| 15 | Malaysia | Securities Commission of Malaysia (SCM) | Malaysian ringgit |
Why Is the Forex Market Open 24 Hours a Day?
The biggest reason for the forex market being open 24 hours is the various international time zones due to which the market is open 24 hours a day, 5 days a week.
The Bottom Line
You decide to take €1,000 for dollars. The dollar/euro exchange rate when you bought the euro was 1.45, which meant you had to pay $1,450 for €1,000. After a while, the exchange rate increased to 1.55. You will now receive $1,550 when you sell €1,000. This resulted in a profit of $100. Similarly, if the exchange rate at the time of selling the euro was 1.35, you would get $1,350 for the same €1000, a loss of $100.
Forex trading requires you to be disciplined and knowledgeable in detail about elements of forex analysis charts and technical tools outside of fundamental analysis. It also helps you chart the trading plan and focus on it.
Frequently Asked Questions About Forex Market
- Can You Get Rich by Trading Forex?
- Why Do People Trade Currencies?
- Are Forex Markets Volatile?
- What is leverage in forex?
- What is a lot in forex?
| Lots | No of Units | Volume | $ Per Pips |
|---|---|---|---|
| Standard | 100,000 | 1 | $ 10 Per Pips |
| Mini | 10,000 | 0.1 | $ 1 Per Pips |
| Micro | 1,000 | 0.01 | 10 Cents Per Pips |
| Nano | 100 | 0.001 | 1 Cents Per Pips |