The forex trading market is the largest financial market in the world, with a turnover of more than $5 trillion every day.
On the face of it, forex trading can be overwhelming, with complex terminology and a number of external factors influencing the market. However, it’s actually relatively simple, with lower risks and minimum deposits compared to other trading markets.
FXTM has created a beginner’s guide to forex trading to provide more background on the history of the market, and to explain how new traders can get involved.
What is forex trading?
Forex trading (also called foreign exchange trading, or FX trading) is the buying and selling of currencies in the global market, with the aim of making a profit from price fluctuations.
The market is open 24 hours a day, 5 days a week, during which time banks, businesses and individual traders exchange currencies.
How does it work?
Currencies are traded in pairs and are composed of a ‘base’ currency and a ‘quote’ currency. It is the relative value of the base currency compared to the quote currency that determines your potential profit.
For example, if you bought 1 EUR / 1.2 USD and the value of the Euro increased to 1 EUR / 1.25 USD, you could then sell your currency back to the market for a profit. Similarly, if you sell your currency at 1 EUR / 1.2 USD and the Euro value dropped to 1 EUR / 1.1 USD, you could then buy the currency back for less.
On the other hand, if you bought 1 EUR / 1.2 USD and the value of the Euro decreased to 1 EUR / 1.1 USD, you would be making a loss if you sold your currency back to the market. By the same token, if you sell your currency at 1 EUR / 1.2 USD and the Euro value rises to 1 EUR / 1.3 USD, buying the currency back would result in an overall loss.
The value of each currency is determined by economic, political and environmental factors, so it is vital to understand wider market trends to make confident, informed decisions that will potentially result in more profits than loss.
Real world examples of forex trading profits
In 1992, George Soros predicted the fall of the British Pound Sterling, short selling £10 billion, for a profit of £1 billion when the value of the GBP plummeted. The trade earned him the nickname “the man who broke the Bank of England”.
In contrast, Stanley Druckenmiller studied the depreciating German Mark in 1980 and believed that the currency was undervalued. He eventually purchased around $2 billion of the currency for a $1 billion profit when the Mark picked up.
While these are extreme examples of successful forex trading, they demonstrate the opportunities available with sound knowledge of the market and unwavering confidence. Of course, one must always remember that it’s possible to incur losses as well as profits while trading the currency markets.
How to start forex trading
Forex trading is extremely accessible compared to the stock market due to its low minimum capital required (most brokers accept a minimum $100 deposit) and greater liquidity. In fact, the foreign exchange market is the most liquid market in the world. This is because the forex market is open 24 hours a day – meaning that there is almost always some kind of trading activity going on.
If you’re looking to trade in the forex market, the first step is to find a regulated broker that has at least 5 years of experience in the business. You can then set up an account and provide a deposit to cover the cost of your trades and make your first purchase.
New traders should take the time to research the market and consider completing a training course in order to fully understand the market’s cycles and best practice behaviours before buying and selling currencies.
It’s also recommended that beginners follow the 1 percent rule, risking only 1 percent of their account on a single trade. This protects against drastic losses, while still allowing you to build up a significant profit pot if your trades are successful.
Want to find out more about how to start trading? Take a look at FXTM’s ‘Beginner’s Guide to forex Trading’ and let us fill you in.
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