What Is Forex?
If you have not heard of the term “Forex” before, then you might be a little confused as to what it is. For those who have asked themselves, “What is Forex?”, then this article is for you.
First, let’s take a look at the definition from the good people at Wikipedia.
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the Credit market.
Wikipedia definition retrieved 12/31/2018
As you can see from the definition, Forex is the ‘simple’ trading of currency. However you are not buying one currency with another, or selling your currency for another currency. In fact would be purchase a contract for a derivative, or CFD.
Derivatives
Wait. What? A derivative. What’s that? Let’s visit Investopedia to see how they define it.
A derivative is a financial security with a value that is reliant upon, or derived from, an underlying asset or group of assets. The derivative itself is a contract between two or more parties, and its price is determined by fluctuations in the underlying asset.
Investopedia – November 15, 2018
Suppose that based on your research you expect the Japanese Yen to appreciate compared to the Australian dollar. It would be possible for you to profit from this purchasing a CFD that rises in value with the Yen. With derivatives, you would not need to own either the Yen or the Australian dollar. Instead you could purchase a Contract For Derivatives that would allow you to profit from this movement. You do not need to have an interest in the underlying asset.
The Process
Now that you have learned some of what Forex is, let’s talk about the process in which you ‘trade’ on the Forex market.
Your first step is choosing a broker that you wish to use. Picking a broker is one of the most asked questions out there. The reality is, all brokers are going to suck. Unless you have hundreds of thousands of dollars in a broker account, the brokers won’t really care about you. Sounds harsh, but it’s true.
After you chose a broker you will fund that account with an amount of money that you are willing to lose. Remember, trading involves risk! You should always use proper risk management in your trades.
Example
Suppose you think the United States economy is going to get weaker. You want to trade the Euro (€) versus the US Dollar ($). You would enter into a BUY on this pair, because you expect the Euro will RISE in value against the dollar.
If you see the price for EUR vs. USD listed as 1.15, then you could purchase $1.15 for every €1.
If, as you expect, the US economy weakens you might see the price go to 1.16. This would mean that you could purchase $1.16 for every €1.
Yes, simple math tells us that’s only a 1 cent movement. However, in Forex that’s known as 100 PIPS. Based on the Leverage and Lot Size you’ve used, that 1 cent movement could gain you an amount from $1, $100, $500 or much more.
[WARNING! See Disclaimer.]
What’s Next?
Once you have a broker account, you are ready to begin trading. It is strongly recommended, however, that you place trades from a demo account first, so that you can learn how quick the Forex market moves. Without proper risk management, you could lose your entire account in the span of 2 minutes.
If you haven’t done so yet, then join iMarketsLive so that you can get an education in Forex, and better your chances of being a successful trader.
