Lesson 1: What is Forex Trading?
Forex Trading introduction
Forex Trading is short for “foreign exchange trading” which is governed by pairing the value of one country’s currency against another.
For example: If you were to go on holiday to America, then you would have to exchange your English pound Sterling into American dollars in order to buy things in the USA. If you had £100, the amount of dollars you would be able to buy with this amount is governed by the Exchange Rate between the two currencies.
The difference between Forex trading and other stock exchanges
Forex trading differs from other stock exchanges, such as the FTSE 100 in the UK or Wall Street in the USA, which deal with shares in companies, such as, Sky, Virgin, and Tesco etc.
Forex is different because you are buying shares in country’s economies, such as the UK, USA and Japan for example, not private enterprises.
Furthermore, while normal stock exchanges have centres in all major cities across the globe, Forex is all Internet based, meaning that trading can take place 24/5 from anywhere in the world. The market is closed to retail traders on weekends, however the price may still move when the market is closed. This is because central banks still trade with one another in the background. But we’ll get more into this later.
While traders in the normal stock exchanges, involves the physical sale of stocks and shares in businesses, forex trading is largely speculative. Will the exchange rate between the dollar and the pound go up or down?
What are the advantages of Forex Trading?
- In certain scenario’s there’s zero commission, government fees, brokerage fees, or tax on profits
- No middlemen taking a chunk of your profits and affecting prices (Unless you use a bad broker, we’ll cover this in the broker lesson)
- No fixed lots or assets, you can start with as much or as little money as you like
- Low transaction costs (usually less than 0.1%) depending on leverage.
- The market is open 24 hours a day so you can integrate trading time into your day. Trades can be conducted in reaction to breaking news immediately, without waiting for the markets to re-open.
- It is the traders who control the market, not governments or banks, although they can have a major impact.
- High liquidity. There are lots of traders in forex if you want to sell, there will always be somebody else willing to buy.
- Limits are available to stop losses spiralling out of control.
- Anybody can trade forex with a small deposit to start an account, some as little as £100
- Forex brokers provide free demo accounts for traders to practice and hone their skills with virtual money.
- Simplicity- there are thousands of different companies, but only relatively few countries, with 8 major currencies at the forefront
- Buying and selling is instant and in real-time. The price you see is the price you get.
- Equal access to the market. You can always buy or sell currencies at any time (24/5), no matter who you are.
- No restrictions on short-selling.
- There is massive competition between brokers, meaning it is easier for traders to get the best deal for them, not the other way round.
Next Lesson: No2. Common Currencies