Figuring out what is forex and how does it work can be frustrating. Still, you’ve got to start somewhere. Welcome to somewhere. You’ve just found something few forex (foreign exchange or currency) beginners ever ﬁnd — an ideal starting point. Going beyond simpliﬁcations and theory, here is a practical, well-detailed, step-by-step guide to actually understand WHAT is forex and HOW does it work.
Table of contents
- What is Forex (Foreign Exchange Market)?
- How Forex Works
- An Overview of Forex Markets – The 3 Must-Know Facts
- 1. Everyone needs Forex diversiﬁcation even if you don’t trade actively
- 2. Forex market offer signiﬁcant advantages over other asset markets
- The Best Risk/Reward Potential
- The Most Flexible Hours
- The Lowest Startup and Trading Costs
- The Best Liquidity
- Less Slippage
- Advanced Warnings of Changes in Other Markets
- No Centralised Exchange with Specialists Holding Monopoly Power to Regulate Prices
- No Uptick Rule: Just as Easy to Proﬁt in a Falling Market as in a Rising One
- 3. Forex Needn’t Be Any Riskier Than Other Markets
- You can do this. We’ll show you how
- What is Forex FAQ
What is Forex (Foreign Exchange Market)?
FOREX, also known as the FX market, Foreign Exchange Market, or Currency Market, is a global decentralized market for the trading of currencies. This includes all aspects of buying, selling, and exchanging currencies at current or determined prices. The foreign exchange market assists international trade and investments by enabling currency conversion. It also supports speculations on the floating exchange rate and interest rate between two currencies.
Like everything else, currencies need to be priced in the currency, so currencies always quote and trade in pairs. Foreign exchange (forex) prices are the product of the movement of one currency relative to another. For example, when people talk about the price of the JPY (Japanese Yen), they’re referring to the Yen value relative to another currency, depending on which pair they’re considering (e.g. USD/JPY).
Forex market is the largest financial market in the world, with up to $5 trillion traded every day.
How Forex Works
Trading in Forex is the simultaneous buying of one currency and selling another for capital gains and/or steady income.
A Brief History
In its most basic sense, the forex market has been around for centuries. People have always exchanged or bartered goods and currencies to purchase goods and services. However, the forex market, as we understand it today, is a relatively modern invention.
After the accord at Bretton Woods in 1971, more currencies were allowed to float freely against one another. The values of individual currencies vary based on demand and circulation and they are monitored by foreign exchange trading services.
Commercial and investment banks conduct most of the trading in the forex markets on behalf of their clients, but there are also speculative opportunities for trading one currency against another for professional and individual investors.
There are two distinct features to currencies as an asset class:
- You can earn the interest rate differential between two currencies.
- You can profit from changes in the exchange rate.
Forex for Speculation
Forex Trading for capital gains includes all speculative trades or proﬁting on floating exchange rate between two currencies (eg. EUR/USD) by either:
- Buying low and selling high a currency pair anticipating that the base currency (the one on the left) will appreciate against the counter currency (the one on the right);
- Selling high and buying low a pair anticipating that the base currency will depreciate against the counter currency.
In either case, the forex trader could earn an amount of money on the difference between the opening and closing price of the trade.
>> Forex Trading for Beginners Guide
Forex for Income
Forex Investing for Steady Income includes all carry trade or proﬁting on the interest rate differential between two currencies by either:
- Buying a forex pair with a higher interest rate base currency (the one on the left) and lower interest rate counter currency (the one on the right);
- Selling a forex pair with a higher interest counter currency and lower interest base currency.
In either case, the forex investor could earn interest income on the difference between the two yields, also known as Overnight Interest or Swap in Forex.
>> Forex Investing Guide
PRO TIP: Get a free forex demo account or a no deposit bonus forex and learn what is forex and how does it work without investing money.
An Overview of Forex Markets – The 3 Must-Know Facts
Here are the three most important fact you’ll ever learn about foreign exchange market:
- Everyone needs Forex diversiﬁcation even if you don’t trade actively: Just as every competent investor needs to diversify by asset classes and sectors, so too they need exposure to assets in multiple currencies and an understanding of forex trends and what’s driving them.
- Forex market offers signiﬁcant advantages over other asset markets: If trading with leverage, there is more risk, but that can be controlled and managed if you invest the time to learn and practice proper risk and money management.
- Forex Needn’t Be Any Riskier Than Other Markets: making money trading forex can be easier than in stocks and other more traditional asset markets, particularly in bear markets.
1. Everyone needs Forex diversiﬁcation even if you don’t trade actively
All those responsible for managing assets need some forex exposure and awareness of what is forex and what drives forex markets.
You’re Exposed: Cover Your Assets
Like it or not, you’re exposed to currency risk. Every asset is denominated in some kind of currency. For example, consider the case of the US investor. Even if your portfolio has done well in Japanese YEN terms, the picture is less rosy against other major currencies and commodities over the past decades. Because we all use imported products, this means your purchasing power and wealth are melting away if your assets are in a declining currency like the Yen.
Since 2012 till 2020, Japanese Yen is down more than 30 percent versus a basket of currencies.
Today, currency diversiﬁcation is no longer optional. As governments maintain historically low-interest rates and assorted stimulus plans that risk devaluing their currencies and your savings, currency diversiﬁcation is as essential for your portfolio as sector and asset class diversiﬁcation. Failure to do so is foolhardy. You don’t have to be an active trader to ride the strongest long-term forex trends. We’ll show you many ways that passive, longer-term investors can protect themselves.
Even Long-Term Buy-and-Hold Investors Need Forex Diversiﬁcation
Therefore, just as wise investors diversify into different kinds of assets and sectors, they must also diversify into the different kinds of currencies, particularly those likely to appreciate versus their peers. Even long-term buy-and-hold passive investors who don’t actively trade forex can protect and grow their wealth by allocating portions of their portfolios to instruments denominated in the most promising currencies.
Although most forex market participants are short-term speculators, currencies can be excellent long-term plays, because currency pairs tend to form stronger, more stable long-term trends compared to stocks. Why? Because the fundamentals of the underlying economies that drive currency prices change much more slowly than those of individual companies. It’s a longer, more complex process to change the relative growth rates of entire economies than it is for an individual company. Even better, unlike stocks, currencies don’t all move together in the same direction, nor do they all respond in the same way to other markets or global indexes. Indeed, some currencies move in the opposite direction, providing a genuine bear market hedge without the complications (or periodic bans) involved in shorting stocks.
2. Forex market offer signiﬁcant advantages over other asset markets
There are more reasons to have forex market exposure beyond currency diversiﬁcation.
Once you do some homework, you’ll realize that forex is arguably among the most rewarding asset classes for traders and investors. Even though forex market is dominated by short-term, high-risk speculators, there are investing/trading styles suitable for both:
- More conservative active traders use longer-term holding periods and speciﬁc methods and instruments to reduce risk.
- Long-term investors who know how to:
– Ride stable, proven, long-term forex trends for capital gains.
– Earn steady income from “carry trade” or from investing in bonds, dividend stocks, and other income vehicles denominated in the right currencies.
Here are the 8 main advantages of the forex market that make it one of the most attractive for traders and investors worldwide.
The Best Risk/Reward Potential
Forex market offers some of the best risk/reward opportunities of any ﬁnancial market IF (big if here) you learn how to control the risk. The availability of leverage in forex, meaning the use of borrowed funds to control large blocks of currencies and thus magnify gains and losses, creates the unmatched proﬁt potential for those with limited trading capital IF (again, really big IF here) they learn how to control the downside risk. For example, with 100:1 leverage, a 1 percent move means 100 percent proﬁt. It also means a 100 percent loss.
This allows us to make substantial proﬁts on small price movements. However, as noted above, that also means:
- For every $1 you have at risk, you control $100.
- For every $1,000, you control $100,000.
Much of the Forex Masterclass is about how to minimize the risk of large losses while maximizing the odds of proﬁting. It involves learning to cut losing trades short and let winners run so you can be proﬁtable even when wrong on most of your trades.
The Most Flexible Hours
One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange.
Forex market trade in a seamless 24-hour session, 5.5 days a week, from Sunday 5:15 P.M. EST until Friday 5:00 P.M. EST. So, those with work or family commitments can trade a fully liquid market whenever convenient. Learn more about the forex market program and the best hours to trade.
The Lowest Startup and Trading Costs
Forex trading has among the lowest entry or startup costs in money and time of any ﬁnancial market, in terms of trading capital and training/equipment costs, as follows: Unlike most markets, you do not need many thousands of dollars to get started. That’s because, in the forex market, we can trade with leverage (borrowed funds), typically 100:1 or more.
In theory, you can often start with as little as $100. However, you’ll learn that you’ll lower your risks and have more chances to proﬁt by starting with at least a few thousand dollars (or the equivalent) if possible. As we’ll see later, the small forex position sizes available from mini and micro-accounts allow those with limited funds to trade smaller positions, which keeps the percentage of capital risked per trade acceptably low.
- Training and equipment costs: Forex brokers typically provide free full-featured trading platforms and data feeds, and the best forex brokers offer extensive archives of free training materials and market analysis. With online stock brokers, traders typically need to maintain minimum balances or minimum trading volumes to get free quality charting and trading platforms from their brokers or get access to worthwhile research.
- Free Practice Accounts: Even better, they typically provide full-featured practice or demo accounts that allow smart beginners to simulate most of the trading experience and practice with play money until they feel ready to risk their capital.
- Low transaction costs: Most forex brokers charge no fees, commissions, or hidden charges. They earn their money on the difference, called the forex spread, between the buy and sell price, typically a few ten-thousandths, called pips, of the price. Depending on the lot sizes traded, a typical two-pip spread, four pips total to open and close a position, can cost anywhere from $0.40 to $40. In general transaction costs are very competitive compared to those of online stock brokers.
The Best Liquidity
A liquid market is one that has many buyers and sellers. The more buyers and sellers at any given moment, the more likely you are to get a fair market price when you buy or sell. The more liquid a market is, the less likely it is that a few otherwise insigniﬁcant orders or players can move prices in wild, unpredictable movements.
Indeed, unlike in stock markets, even the biggest players will have trouble manipulating the price action in major currency pairs beyond a matter of hours. Two exceptions to that, are a few central banks and crooked forex brokers. Fortunately, dishonest brokers can be identiﬁed and avoided with some research, and central bank intervention risk is usually known or soon uncovered after the ﬁrst incident, putting markets on guard. The more liquid the market, the easier it is to be proﬁtable.
Prices are fairer and more stable, less subject to sudden unpredictable movements. You should generally avoid trading in illiquid markets, except on rare occasions when trying to enter positions at bargain prices offered by those desperate to close a position. Forex market trading volumes dwarf those of equities. The latest estimates put average daily forex turnover at around $6.59 trillion per day in 2019, according to the 2019 Triennial Central Bank Survey of FX and over-the-counter (OTC) derivatives markets (Forex Turnover), of which individual retail traders alone account for about $2 trillion. That huge trading volume, going on 24 hours a day, means abundant buyers and sellers are usually present at any given time. That means you’re more likely to get a fair price no matter when you buy or sell. It means that you rarely see partial ﬁlls, which are cases in which you can only buy or sell part of your intended order.
Slippage is the difference between the stated price on your screen and the actual price you pay or receive. The less liquid the market, the more often slippage happens because fewer traders are present to take the other side of your trade. For example, let’s say you buy 1,000 shares at $30, and to protect yourself in case the price falls, you place a protective stop-loss order to sell the shares at $29. However, if there are no buyers at $29, then the price “gaps” lower until it hits the next buy order, so you incur a greater loss.
Because forex markets are:
- typically running at full speed in at least one if not two continents 24 hours a day, over five days a week
- have no specialists controlling prices, and r trade at such larger volumes than equities,
forex traders face a lower risk of slippage. Indeed, many forex market makers provide some kind of “no slippage” policy that lessens the degree of price uncertainty.
Advanced Warnings of Changes in Other Markets
Forex markets often react to changing conditions before other markets, providing valuable advanced warning of possible trend changes. As detailed with examples and illustrations in the Forex Trading Masterclass, certain currencies tend to move in the same direction as “risk assets” like stocks or industrial commodities, and others tend to act like “safe haven assets” like bonds. When these correlations break down, that too can often be a warning of a change in direction for other markets.
No Centralised Exchange with Specialists Holding Monopoly Power to Regulate Prices
In most stock markets, the specialist is a single entity that serves as buyer and seller of last resort and controls the spread, which is the difference between the buy and sell price for a given stock. Though in theory they are regulated and supervised to prevent they are abusing that power to manipulate prices at the expense of the trading public, specialists are experts at knowing when they can get away with a degree of this and force you to buy higher or sell lower. In forex, no single specialist regulates the prices of individual currency pairs. Rather, multiple exchanges and brokers are competing for your business. Though the lack of centralized exchanges can complicate regulation, competition and easy access to pricing information have brought competitive pricing.
No Uptick Rule: Just as Easy to Proﬁt in a Falling Market as in a Rising One
Just as it’s easier to row with the current than against it, it’s easier to proﬁt by trading in the direction of an established market trend. Unlike with stocks (and other ﬁnancial markets), in forex, it’s as easy to proﬁt from falling markets as from rising ones. This is a huge advantage of forex markets. During an uptrend, when prices are rising, most traders go long, meaning they buy the asset with the hope of selling it at a higher price. They’re attempting to buy low and sell high, the classic way most people view investing.
During a downtrend, when prices are falling, it’s easier to proﬁt by trading with that downtrend. So, the more sophisticated equities traders try to exploit that downward momentum and sell short; that is, sell borrowed shares with the hope of buying them back later at a lower price, returning the borrowed shares, and proﬁting on the difference—for example, sell borrowed shares for $100 per share, buy them at $80, return them to a broker, and pocket $20 per share. However, most stock exchanges are controlled and regulated by those who have an interest in keeping stock prices high with short selling restrictions and huge costs.
In sum, you can earn more with less investment. Better still, you can do it while keeping your current job. The first step is to study this course.
3. Forex Needn’t Be Any Riskier Than Other Markets
Forex market has a gotten a reputation for being excessively risky due to a combination of:
- High failure rates due to forex beginners who failed to do their homework and understand the risks associated with the high leverage commonly used in most forex trading.
- Forex brokers who failed to provide sufﬁcient forex trading for beginners type of education to deal with the risks of using leverage.
However, you can reduce and manage the risks. There are:
- Highly regulated Forex brokers like Admiral Markets allow you to adjust your leverage down to what you can handle, and they will guide the appropriate level.
- Unleveraged ways to play forex, which are no riskier than an Exchange Traded Fund (ETF) or a stock.
- A variety of forex methods to reduce risk in trading and new instruments for simpler, safer forex trading.
As we’ll see further on, making money trading forex can be easier than in stocks and other more traditional asset markets, particularly in bear markets. However, you do need to do your homework, especially if trading with leverage, which adds risk as well as reward. Part of that homework is to learn more conservative, simpler techniques that make it easier to succeed at forex than those most commonly used. Until recently, there was no single source for learning this more sensible, conservative forex. No longer. This is the only book to gather these methods into one collection.
Part of forex’s reputation for excessive risk comes from stories appearing in the mainstream media. The typical plotline runs like this: Some gullible novices believed a broker’s get-rich-quick pitch about how they’d score fast money with little effort or background in forex. These geniuses were shocked (shocked!) to find out otherwise. The conclusion: Forex should either be avoided altogether or is unsuitable for most people.
If you’re smart enough to be reading this guide, you will see the absurdity of that reasoning. Just because there are individuals who behave stupidly with cars or power tools doesn’t mean that these should be avoided altogether. The same goes for forex, including the typical leveraged trading. If you’ve had the right preparation and have the discipline to practice proper trade planning risk and money management (RAMM), you can keep the risk to acceptable levels, just as with any other kind of investing or trading. As with driving, there are ways to simulate the experience (forex demo) until you’re ready for the real thing, and ways to then start slowly under less challenging conditions (no deposit bonus forex or welcome bonus forex) until you’re ready for more challenging conditions (real forex account).
You can do this. We’ll show you how
You can understand what is forex and how to succeed in forex trading if you learn and practice what follows.
As with any kind of financial market trading, you need to be able to answer the following question:
How Can I Compete against the Pros and Big Institutions?
Whenever you are trading in global asset markets, most of your competition consists of the top professionals who are responsible for most of the trading volume. They have nearly every advantage over you: skill, experience, and any advantage that money can buy, the best equipment, information sources, industry insider contacts, whatever.
You have no better chance of beating someone like David Woo or Stephen Jen at short-term forex trading than you do at beating Michael Jordan or Lebron James at basketball.
So how can you compete?
The real answer obviously is, don’t even try to trade like they do.
That’s fine; there’s plenty of money to be made if you know the secret, which is really no secret. It’s just common sense.
In the beginning, don’t try to be a bad imitation of an experienced pro. Instead, focus on becoming a great forex beginner. That means finding and using the trading techniques, styles, and instruments that even a beginner can, in measured stages, start to implement successfully. You’ll spend most of your time calmly and persistently searching the charts for those few easier opportunities, rather than spending long hours glued to your computer, frenetically making lots of trades based on rash decisions, based on short time frames in which price movements are harder to predict, with the odds firmly against you.
How do you identify and execute these simple, low-risk, high-yield trades? Funny you should ask. The following is a summary of how we’ll do it.
Forex Trading Masterclass
As we’ve said before, you have to start somewhere. Welcome to the somewhere. We’ll teach a variety of ways to harness the power of forex markets that are safer, simpler, and more likely to be profitable than the higher-risk methods most commonly practiced. Regardless of your skill level or risk tolerance, there are solutions here to suit you.
A prime focus of this Masterclass is to be a trader’s roadmap for finding, planning, and executing trades that are safe and simple enough for beginner to intermediate skill levels. More specifically:
- We will teach you how to identify and trade only the lowest risk, highest potential yield opportunities with easy-to-identify low-risk entry and exit points.
- We will show you simple ways to trade the more predictable, persistent, and thus safer, longer-term forex trends. We will show you alternative instruments to the usual high leverage spot market forex trading.
- We will show you to how to be a disciplined trader, focused on profits, not gambling. This includes doing something you’ll rarely see in forex courses, books or seminars.
- We will coach you to manage risk so you can be profitable even when most of your trades lose money.
- We will explain the basics of trader psychology so you don’t defeat yourself with the wrong expectations, and you will learn how to handle winning and losing streaks.
What’s the Catch?
There is a catch: Forex trading requires time and effort as with any other competitive, lucrative field. Through the Masterclass will show you some approaches that are easier than the usual trading methods, but even these require study and practice. Like achieving anything else worthwhile, especially a lucrative, stimulating career, you’ll need the discipline for a sustained investment of time, effort, and money. You’ll suffer some uncertainty, frustration, and failure, with no guarantee of success, as you would in achieving anything else worth attaining.
Sorry if we’re bursting anyone’s bubble. Fortunately, you’ve got the right course to minimize the drain on your time, emotions, and finances.
Until recently, there was no single source for learning what is forex and how to make it profitable through simpler, safer, smarter methods. No longer. This is the only source to gather these methods into one collection.
>> Enroll in Course for FREE
What is Forex FAQ
Forex Trading includes all speculative trades or proﬁting on floating exchange rate between two currencies in order to earn an amount of money on the difference between the opening and closing price of the trade.
Forex Investing includes all carry trade or proﬁting on the interest rate differential between two currencies in order to earn interest income on the difference between the two yields.
Forex Masterclass is a 6 hours online trading course with certificate of completion.
Forex trading is legal, but not all forex brokers follow the letter of the law. … While forex is legal, the industry is rife with scams and bad actors. Investors need to do their due diligence before venturing into what can be a Wild West version of global financial markets.
Simply put: Forex is not a scam. The Forex market is a legitimate trading market where the world’s currencies are traded. It is not a scam in itself. Without the Forex market it would be difficult to trade the currencies needed to buy imports, sell exports, to go on holidays or do cross border business.
Spread betting forex is a tax-free* method of trading the currency markets. Traders are able to speculate on the price movements of currency pairs by opening a position based on whether they think the currency will appreciate or depreciate.
A forex pip, short for “percentage in point” or “price interest point,” represents a tiny measure of the change in a currency pair in the forex market. It is usually $0.0001 for U.S.-dollar related currency pairs, which is more commonly referred to as 1/100th of 1%, or one basis point.
The forex spread is the difference between the exchange rate that a forex broker sells a currency, and the rate at which the broker buys the currency.
A forex broker essentially works as the middle-man between a forex trader and the interbanks, or network of banks, to enable you to buy and sell foreign currencies.
A foreign exchange spot transaction, also known as FX spot, is an agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on the spot date. The exchange rate at which the transaction is done is called the spot exchange rate.
- Foreign exchange turnover in April 2019 – https://www.bis.org/statistics/rpfx19_fx.htm
- Foreign Exchange Rates – https://www.federalreserve.gov/releases/h10/current/
- The History of Foreign Exchange -https://books.google.com/books
- The FED’s Foray into Forex – https://www.richmondfed.org/publications/research/econ_focus/2017/q2/federal_reserve
- What is Forex? – https://www.forex.com/en/education/education-themes/trading-concepts/what-is-forex/
- Trading in foreign exchange (forex) – https://www.esma.europa.eu/system/files_force/library/2015/11/2011-412_1.pdf?download=1
- Foreign Exchange Market – https://www.bot.or.th/Thai/FinancialMarkets/ForeignExchangeMarket/Pages/default.aspx
- Management of Forex Service Provision – https://www.sbv.gov.vn/webcenter/portal/en/home/sbv/fagm/moctafsp
- What is Foreign Exchange (Forex) – https://www.bcb.gov.br/estabilidadefinanceira/oqueecambio
- Patterns of Foreign Exchange Interventions – https://www.imf.org/en/Publications/WP/Issues/2020/05/29/Patterns-of-Foreign-Exchange-Intervention-under-Inflation-Targeting-49252
- Foreign Exchange: A Practical Guide to the FX Markets (a review) – https://www.cfainstitute.org/en/research/financial-analysts-journal/2007/foreign-exchange