Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world's currencies trade.
All the world's combined stock markets don't even come close to this. But what does that mean to you? Take a closer look at forex trading and you may find some exciting trading opportunities unavailable with other investments. If you've ever traveled overseas, you've made a forex transaction. Take a trip to France and you convert your pounds into euros.
When you do this, the exchange rate between the two currencies—based on supply and demand—determines how many euros you get for your pounds. And the exchange rate fluctuates continuously. A single pound on Monday could get you 1. This tiny change may not seem like a big deal. But think of it on a bigger scale. A large international company may need to pay overseas employees. Imagine what that could do to the bottom line if, like in the example above, simply exchanging one currency for another costs you more depending on when you do it?
These few pennies add up quickly. In both cases, you—as a traveler or a business owner—may want to hold your money until the exchange rate is more favorable.
Just like stocks, you can trade currency based on what you think its value is or where it's headed. But the big difference with forex is that you can trade up or down just as easily. If you think a currency will increase in value, you can buy it. If you think it will decrease, you can sell it. With a market this large, finding a buyer when you're selling and a seller when you're buying is much easier than in in other markets. Maybe you hear on the news that China is devaluing its currency to draw more foreign business into its country.
If you think that trend will continue, you could make a forex trade by selling the Chinese currency against another currency, say, the US dollar. The more the Chinese currency devalues against the US dollar, the higher your profits. If the Chinese currency increases in value while you have your sell position open, then your losses increase and you want to get out of the trade. You have an opinion. Open your free forex demo platform and trade your opinion.
All forex trades involve two currencies because you're betting on the value of a currency against another. When you see a price quoted on your platform, that price is how much one euro is worth in US dollars.
You always see two prices because one is the buy price and one is the sell. The difference between the two is the spread. When you click buy or sell, you are buying or selling the first currency in the pair. Let's say you think the euro will increase in value against the US dollar. If the trade moves in your favor or against you , then, once you cover the spread, you could make a profit or loss on your trade.
If prices are quoted to the hundredths of cents, how can you see any significant return on your investment when you trade forex? The answer is leverage.
When you trade forex, you're effectively borrowing the first currency in the pair to buy or sell the second currency. To trade with leverage, you simply set aside the required margin for your trade size. If you're trading This gives you much more exposure, while keeping your capital investment down. But leverage doesn't just increase your profit potential. It can also increase your losses, which can exceed deposited funds. When you're new to forex, you should always start trading small with lower leverage ratios, until you feel comfortable in the market.
Because we're a leading forex provider around the world, when you trade with FXCM, you open access to benefits only a top broker can provide. Plus, you can trade on our proprietary Trading Station, one of the most innovative trading platforms in the market. Open a free forex demo account to start practicing forex trading today.
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