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What is Forex Trading?
I’ve been a Forex Trader since 2007 and an instructor since 2017.
I think I am qualified to give you an answer and also to show you the truth behind Forex Trading, so if you are ready, make yourself a cup of coffee because I’m going to write a lot :)
The Definition
Forex stands for Foreign Exchange, so it refers to the process of exchanging one currency into another. Why should someone do that? There are several reasons.
Think of you going on holiday to Japan. You will need to exchange your currency to get some Japanese Yen to spend in Japan. That transaction is a Forex trade. You have exchanged one currency for another.
How to make money in Forex Trading?
Ok, but how can you make money in Forex Trading while sitting on your sofa, drinking a coke? You can open an account with a Forex broker, which gives you access to the currency market and you can exchange one currency with another in milliseconds.
Why would you do that? Currency rates are not fixed, they vary every minute.
Imagine that the exchange rate between the Euro and the United States Dollar is 1.15. It means that if you give 1 Euro, you get 1.15 United States Dollars.
You decide to proceed with the transaction and now you hold $1.15.
After a few hours, the exchange goes to 1.10. You can give back the $1.15 and get €1.05.
Let’s repeat the process:
You pay €1 and get $1.15
The dollar appreciates against the euro, the exchange rate goes down
You give back the $1.15 and you get €1.05
At the end of this, you made a profit €0.05.
Imagine that, instead of €1, you exchanged €10,000. The process would be exactly the same:
You pay €10,000 and you get $11,500
The dollar appreciates against the euro, the exchange rate goes down
You give back the $11,500 and you get €10,500.
You made a profit of €500.
So if you are good at identifying which currency is going to appreciate and which one is going to depreciate, you can make money by simply “betting” on this. This is called speculation in Finance, and it is how you can make money in Forex Trading.
How to Learn Forex Trading?
Learning Forex Trading can be extremely hard and the reason is that there are so many scammers in this business. I’ve been a trader since 2007, and trust me, I have seen disgusting things in this industry.
I actually wrote an extensive answer here on Quora about how to learn Forex Trading, so I’m going to share the link:
Federico's answer to What are the important things that I need to take note when trading in forex?
What should you know before starting?
Trading is very different from what many people advertise. You don’t become a millionaire overnight, unless you start as a billionaire :)
It’s a business and, like any other business, it takes time and effort. If you are not ready to dedicate part of your time to grow your business, you won’t have good results with it.
With patience, I managed to quit my job in 2013 and live off my income as a Forex and Stock Trader.
I can honestly say that my income is much higher than an average job here in the UK. I’m happy with my lifestyle, I work from home and I can take breaks and days off whenever I want. I also travelled around the world for almost a year in 2019, just my laptop with me in order to check my investments.
It hasn’t always been like that. In 2015, I moved to London and I got a part time job for one year, because the cost of life was much higher and I didn’t want to withdraw money from my trading accounts. I was determined to pay the rent and basic expenses only with my income from the part time job, without taking a single cent from my trading activity, so I could grow my accounts faster.
I still remember that, one day, I had less than £2 in my bank account and had to wait for the next day to get my salary. I had a £1 burger at McDonald’s for the entire day, without withdrawing any money from my trading accounts. My desire to succeed in trading and grow my accounts has always been strong, during bad and good times.
So if you are ready to start trading, know that you can achieve very good results and it can really change your life. But you should always know that it’s not always going to be easy and you won’t achieve your goals in a matter of days or weeks.
What else can I help you with?
What is the major attraction of forex market?
The major attraction of forex market is the high leverage used in forex trading. Of course, high leverage also brings high risk to the table.
What is a forex trading school?
In forex trading school, they teach you how to trade different currencies around the globe. It's basically like trading in the stock market. The career has many opportunities. You can eventually become a broker or a market mover for a major fortune coporation.
Is Forex Market Really Reliable?
The Forex market is considered reliable due to its high liquidity, large trading volume, and the involvement of major financial institutions. However, as with any financial market, there are risks involved, including volatility and the potential for sudden price fluctuations. Traders should conduct thorough research and risk management strategies before participating in Forex trading.
What accuratetly explains the difference between the stock market and the currency exchange market?
Foreign exchange (forex) market has many characteristics with the stock market. But they also have a number of differences that distinguish forex and the stock markets from each other, such as trading hours, trading market, financial friction, speed and complexity. 1. Trading Hours Both the stock market and the forex market operates in a strict schedule. Most stock market operates for 8 hours, and then closes until the next morning when it open for trading again. In contrast, there is no downtime in forex trading. The forex market operates 24 hours a day in 3 shifts, throughout the entire year, with US, Asian and Europeans forex trading hours, allowing for currency trading day or night. 2. Trading Marketplace Forex, unlike the stock markets, are not geographically tied down. It is in fact considered an over-the-counter (OTC) exchange. It can be conducted on a location best suited to the demand and convenience of the trader.On the other hand, stock markets are centralized. This means that it is located mainly in one place like New York Stock Exchange (NYSE), in where all trades are entered or exited. 3. Financial Friction The stock market always require a middleman, which thus results to fees. Everytime a stock is sold or bought, a middleman, may it be a broker or some other entity, is always standing between buyer and seller. That is not the case with forex trading. In forex market, a trader can buy or sell directly by spot trading because the forex market is not centralized. There are forex brokers. But the edge is, in forex market, the spread are transparent. Besides, most brokers don't require additional transaction fee or even charge a commission. 4. Trading Speed In forex markets, a trader can use programs to automatically execute a forex trade on a forex trading signal. This makes forex trading almost instantaneous. A forex trader is more less likely to miss a trade because of the time it takes to execute a single tade. In stock markets on the other hand, a trader has to get this order to the trading floor, and from there, it could still take several minutes to be executed. 5. Complexity When you think about it, forex trading boils down to tracking just 4 major currency pairs. Of course, one could argue that in forex trading, you got to do a lot of formulation and study for a sound forex market analysis. On the plus side, many web sites offers forex education resources and forex tips for free. Compare this to keeping tabs on thousands of stocks in the stock market. In forex markets, currency traders has the advantage of using forex systems. These systems help a currency trader in determining the best time to sell, or buy a currency and the best thing that a stock market trader for that is a broker. Reference: Alpari.com Another significant element of these markets are worth emphasizing. For the most part trading in the stock markets is for the purpose of making investments in publicly owned corporations, either buying or selling these stocks or also referred to as equities. The main purpose in buying and selling currencies, for the most part is to acquire a certain currency in order to buy products from a company that will accept payments for their products in their home currency. It should also be noted that in each of these markets, a portion of the buyers and sellers are there for the purpose of speculation.
Where can one find a demo of Forex trading?
All major Forex traders offer a free trial demo. The purpose of these demos is to introduce newcomers to Forex trading, allowing them to learn how it works and experiment without gambling their physical money.
Is Forex trading better than Stocks trading?
As a stock trader, you may have heard about forex trading, or foreign exchange trading, and wondered if it is a better option for your investment portfolio. Both forex trading and stock trading have their pros and cons, and it ultimately depends on your individual preferences and goals. In this article, we will explore the differences between forex trading and stock trading and help you decide which one may be the better option for you. Liquidity One major difference between forex trading and stock trading is liquidity. Forex trading is known for its high liquidity, meaning that there is a large volume of trades happening at any given time. This allows for easy entry and exit from trades, which can be beneficial for short-term traders. On the other hand, stock trading can have lower liquidity, especially for smaller companies or less popular stocks. This can make it more difficult to enter or exit trades quickly, which can be a disadvantage for short-term traders. Volatility Both forex and stock trading can be volatile, meaning that prices can fluctuate rapidly. However, forex trading is generally considered to be more volatile than stock trading. This is because the forex market is open 24 hours a day, 5 days a week, which allows for more opportunities for price movements. Additionally, forex trading often involves leverage, which can increase the potential for gains or losses. If you are comfortable with higher risk and potential for higher rewards, forex trading may be a better option for you. Diversification Another consideration is diversification. Stock traders may choose to diversify their portfolio by investing in stocks across different sectors or industries. Forex trading, on the other hand, involves trading currency pairs, which may have correlations with each other. This means that diversification in forex trading may be more difficult to achieve. However, forex traders may choose to diversify their investments by trading multiple currency pairs. Accessibility Both forex and stock trading can be accessible to individual traders, but forex trading may be more accessible in some ways. Forex trading allows for smaller lot sizes, which means that traders can start with smaller amounts of capital. Additionally, forex trading may have lower transaction costs compared to stock trading. However, it is important to note that forex trading may involve higher leverage, which can increase risk. Conclusion Ultimately, the decision between forex trading and stock trading depends on your individual preferences and goals. Forex trading may be better for those who are comfortable with higher risk and potential for higher rewards, and who are interested in a highly liquid market that is accessible to smaller traders. Stock trading may be better for those who are interested in diversifying their portfolio across different sectors or industries, and who are willing to accept potentially lower liquidity. It is important to do your own research and consider all factors before making a decision.
Where can one find a Forex Trading course?
There are many options for people interested in taking a Forex trading course, but they are almost exclusively online if you happen to live outside a major metropolitan area. At investopedia's site they go over a list of what to look out for when researching online Forex trading courses, and give a brief listing of the best quality courses.
How to start forex trading and which free forex e-book to choose?
Before starting trading, ask yourself: why Forex? Why not stocks or futures?If you have an answer for yourself, start learning the ropes at BabyPips school and major Forex blogs.Personally I don't trust free e-books knowledge. The goal of such books - force you to open account at particular broker or other service.
Why is London the top market for trading foreign exchange?
London is the top market for trading foreign exchange due to its strategic timezone, which overlaps with major financial centers like New York and Tokyo, facilitating global trading. Additionally, the city boasts a robust financial infrastructure, a high concentration of skilled professionals, and a favorable regulatory environment. Its historical significance as a financial hub and the presence of numerous banks and financial institutions further enhance its status in the forex market. Lastly, London’s liquidity and volume of trades make it an attractive destination for forex traders worldwide.
What is the cause of your failure in forex trading?
A major cause of failure in Forex trading is lack of discipline, bad money management rules, poor knowledge, greed and fear.See: http://fxtradecity.blogspot.com/2014/02/8-Popular-Mistakes-Traders-Make-That-Blows-Off-Their-Accounts-in-Minutes.html
Avoiding Slippage in Forex?
To avoid slippage in forex trading, focus on trading during active market hours, such as the London and New York sessions, when liquidity is highest. Use limit orders to ensure trades are executed at your specified price or better, though this may result in unfilled orders if the market doesn't reach your price. Avoid trading during periods of high volatility, such as major economic news releases, by consulting an economic calendar. Choose a reliable broker with tight spreads and fast execution, ideally an ECN or STP broker, and consider using a VPS to minimize latency in automated trading. Stick to highly liquid currency pairs like EUR/USD or USD/JPY, and set realistic stop-loss and take-profit levels to account for market fluctuations. Additionally, practice on a demo account to understand how slippage occurs and test strategies, and explore slippage control tools offered by your trading platform to define acceptable price deviations. While slippage is a natural part of trading, these measures can significantly reduce its impact.
What is an average spread in forex trading?
The average spread in forex trading refers to the difference between the buying (ask) price and the selling (bid) price of a currency pair. It is typically measured in pips. For major currency pairs, the average spread can range from 1 to 3 pips, while for less popular pairs, it might be higher. A tighter spread usually indicates a more liquid market, which can lead to lower trading costs. Traders often look for brokers with competitive spreads to maximize their profits.
