Forex trading, also known as FX trading, is the practice of trading currencies. Traders use fluctuating foreign exchange rates to trade currencies at favorable prices — at least, in theory.
The reality is that traders need a solid understanding of how currency markets behave, the different terms, and the different broker platforms.
This guide will cover the basic terms that you need to know before you try FX trading. We’ll also explain how to get started and what you should bear in mind before becoming a trader.
Forex Trading Terminology
Before you begin forex trading terminology, you’ll need to understand these terms:
Forex market is where currency trading takes place. The forex market is the largest trading market globally, with a daily volume of over 6 trillion USD. Things you need to know about this market include:
- It is fully decentralized, so no central authority governs or can manipulate the value of currencies.
- It operates 24 hours a day, 5 days a week M-F worldwide.
- There’s no direct access to the market — there’s no single website that is the marketplace, as such. Instead, you get access through brokers (see below).
A broker offers a platform for individual traders to access the market. Brokers face restrictions on accepting clients from certain regions; for example, Pepperstone is the largest broker in the U.S. and Canada but can only accept traders from these regions.
Untrustworthy platforms do exist, so it’s worth researching trustworthy FX brokers before choosing one.
Leverage in forex trading refers to the additional sum you can borrow from a broker to finance your trade decisions. There are maximum leverage ratios that brokers may offer depending on the region.
For example, US brokers have a maximum leverage ratio of 50:1 for major currency pairs (the rate is lower for some currency pairs; see below). It means that a broker may offer a loan of 50 USD for every 1 USD put in by an investor.
Leverage lets investors take advantage of favorable exchange rates. However, the leverage ratio cap exists because borrowing large amounts is only beneficial if you invest it successfully. Otherwise, it’s a lot of debt you don’t need and may not be able to repay.
Currency pairs in forex trading are any two currencies that you might trade, for example, USD/EUR. There are three types of currency pairs:
- Major currency pairs involve USD and another major currency such as GBP.
- Minor currency pairs/crosses do not involve USD but still use major currencies, such as EUR/JPY.
- Exotic currency pairs involve emerging market currencies such as USD/BRL.
The first currency listed is the base currency, which is the currency you hold. The second, known as the quote currency, is the currency you intend to purchase. So, in a major currency pair of USD/JPY, you could use 100 USD to purchase 11,008 JPY if the exchange rate was 1/111.08.
Your margin refers to the funds available in your account when using leverage. For example, with $1,000 in your account and a leverage ratio of 20:1, you could enter a trade worth $20,000. In forex trading, the margin is the collateral held against your trades by the broker.
Pip stands for ‘percentage in point,’ or ‘price interest point.’ It is a unit of measurement denoting the smallest possible movement of a currency pair. In major forex trading currency pairs, this is $0.0001.
If your base currency increases by 1 pip against the quote currency, you will get a slightly more favorable rate. If it decreases by 1 pip, the opposite is true. Pips help inform traders of the risk associated with a purchase.
The spread is an ever-changing value representing the difference between a currency’s buy price and its sell price. It can change depending on broker fees, although most prominent brokers try to avoid a high charge on the spread.
How to Trade Forex
We’ll now cover the basics of getting started with Forex trading.
1. Choose a Broker
Do your research thoroughly. Choose a broker that is regulated: in Australia., the leading regulatory authority is the ASIC. Other countries have their regulatory authorities, such as the FCA in the U.K. Whichever region you’re operating in, make sure you use a broker that is compliant with regulators.
2. Learn the Trading Conditions
Each broker will have different trading conditions. Though many major brokers operate on a commission-free basis, brokers still have to make their money somehow. You should thoroughly compare the costs and rates each broker offers and make sure you understand the platform’s conditions.
3. Create a Forex Demo Account
A demo account lets you experience live FX trading without risking real money. We’d recommend it for beginner traders as well as traders trying out new platforms.
It may take longer than you think to familiarize yourself with a platform, but you’re not losing anything by waiting.
4. Select Your Account Type and Trading Platform
Brokers offer a wide range of accounts from various trading platforms. The best choice for you depends on the trading volume you’re interested in, which will also affect the rates you can access.
Again, the best decision is to do your research thoroughly. Many FX traders fail from a lack of understanding of how brokers use their funds. Make an informed decision based on your means and goals.
5. Make Your Initial Deposit
The account funding is the last step in opening your forex trading account. Usually, brokers will make several deposit options available, including:
- Bank wire transfers
- Debit card
- Credit card
Depending on the deposit method, there may or may not be a fee.
How to Open a Forex Trading Broker Account
Once you’ve created your forex trading account, you’ll want to open a broker account:
When you set up a broker account, you’ll need the following documents:
- Proof of ID (driver’s license or passport)
- Proof of residence (a bank statement or bill dated within the last three months).
You’ll need to upload these documents to the broker’s platform, after which they will go through a verification process. Once approved, you’re ready to trade.
Conclusion: Forex Trading
Forex trading can be for everyone, so long as you’ve done your research and avoid reckless decisions. The golden rule is to invest in learning as much as currency trading and be cautious about your prospects.
With this guide, you’re ready to trade Forex!