A Beginner’s Introduction to FOREX Trading

So you’re interested in becoming a trader. You’ve heard of stocks and bonds, maybe you’ve heard of commodities trading – but more and more you’re hearing about something called FOREX, Spot FOREX, Retail FOREX Trading, or just FX.

What the Heck is FOREX? 

Simply put, trading FOREX is a way to profit from the shifts in value between world currencies. If you’ve ever converted money to visit a foreign country or make an online purchase, technically you’ve participated in the foreign exchange market.

You’ve probably noticed the fluctuating exchange rates if so. Perhaps you converted your Euros to Dollars for a vacation and had to cancel at the last minute. When you converted your money back to your native currency, you made a surprising discovery: you lost or gained money because the exchange rate changed.

Trading FOREX is a way to profit off of these changes.

FOREX is short for “Foreign Exchange” and refers to the worldwide decentralized market in which currencies are traded. FOREX is what we call an over-the-counter (OTC) market. What does that mean …? OTC is also called off-exchange trading, which is a good definition: trades which take place between two parties directly, not through a centralized exchange like NYSE.

We also call it “Spot” trading because those trade orders are delivered immediately (of course, no system is perfect, and as you’ll learn later in your FOREX education, some things like slippage can disrupt those perfect orders).

FOREX trading for individuals is conducted through brokers and is regulated by the National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC). When you’re ready, check out the NFA’s official publications on FOREX free on their website: http://www.nfa.futures.org/NFA-investor-information/index.HTML .

These are informative as to the risks of trading futures, some basic information about the FX market, and also helpful in assisting you to pick the best broker. Not all brokers are regulated – you need to make sure you choose one that is. Prior to 1996, there were no platforms for individuals to participate in the FOREX market; trading for individuals (like you and me) is called retail FOREX trading.

FOREX trading is a high-risk business and may not be suitable for everyone. If you’re looking to get rich quick or gamble for the big win, trading currencies isn’t for you. All investing, whether of currencies, commodities, stocks, bonds or any other asset–is a business and should absolutely be treated as such. If you’re not ready to invest a lot of time and energy into your education, you’re not ready to invest money in anything.

Otherwise, read ahead!

Why Trade FOREX? 

There are a lot of great and unique advantages to trading FOREX.  Here are some of those advantages:

• Low or no commissions; you usually pay to trade through currency spreads, making this the least expensive market to trade!
• FX Market is open 24 hours a day. The American, European and Asian sessions are all available to you since FOREX is an off-exchange market.
• You can open a FX trading account with a relatively small amount of investing capital.* Flexible lot sizes are available through some brokers which means you can enter the market with as little as a penny (or whatever you base currency’s smallest unit is!).  Trade on leverage – or not.  The choice is yours.  You can manage your money completely.
• Practice through backtesting and fully operational demo platforms for as much time as you need without risking a penny. How many businesses do you get that kind of opportunity with?  Experiment without consequence.
• Can you follow thousands of stocks and interpret thousands of companies?  Especially while holding down another job, as you probably are right now?  While there are dozens of currency pairs available to trade, it’s a LOT less to keep track of and choose from.  You can even choose to focus on just a few and become a successful trader.  There’s a lot less overwhelm here.  Plus, a lot of what you learn trading FOREX can directly translate to trading commodities or stocks!
• Profit long or short. There are no restrictions on short-selling in the FOREX market.  Since the market is based on the relative changes between two currencies, both long and short trades are considered legitimate.  A bear market can be as profitable as a bull market.  All you have to do is learn to ride the waves.

*Mind you, if you do this, you will either need to trade on leverage – which involves elevated risk – or you will need to take it slow and steady.  Or both.  I recommend the latter.

Still interested?  Then stay tuned for more articles coming soon, or check out some great links:

Great introductory site: www.babypips.com/

Smart guy offering some helpful ebooks: www.robbooker.com/

Message board, news, friendly community: http://www.forexfactory.com/