Foreign exchange (forex) is the market for currencies. The U.S. dollar, Japanese yen, British pound and the euro, along with over 160 other currencies, are traded worldwide. Forex plays a major role in international commerce and tourism. Market participants include such big players as central banks and foreign governments. Anyone can get started in forex trading by opening an account with a broker. Forex trading can be profitable if the trader uses his head and stays smart.

How To Forex Trading

Currencies are traded in pairs. When trading forex, a market participant simultaneously buys one currency and sells another. Each pair has a price known as the exchange rate. The exchange rate shifts constantly as one currency strengthens or weakens relative to the other in a pair. There are eight “major currency pairs” that use currencies from the European Union, the United States, New Zealand, Australia, England, Japan, Canada and Switzerland. In the forex market, the U.S. dollar is the undisputed currency king.

How Does Forex Trading Work

Foreign currencies do not trade on a centralized exchange like the stock market. Forex is completely over-the-counter, run by a global network of banks. Importantly, the forex market is always open, 24 hours a day, seven days a week. A typical forex broker is open at 4:00 PM Eastern time on Sunday and closed at 4:00 PM Eastern the following Saturday. Customer service is also usually available on demand.

Forex Trading How

The forex market is enormous, with a total daily trading volume equivalent to $4 trillion. By comparison, the total daily trading volume of the New York Stock Exchange is a mere $74 billion. Central banks use forex to keep the value of their currencies high or low relative to other currencies. Foreign governments engage in “exchange-rate diplomacy” as part of a negotiating strategy. Forex trading accomplishes multiple purposes for the various participants.

About Forex Trading

Buying a foreign currency is akin to buying a piece of that currency’s country. The price of the currency reflects what the market thinks of the country’s economic and geopolitical prospects. The exchange rate is the price of one currency in terms of another, mirroring the relative valuations and prospects for each country’s economy. As such, forex is a critical market for governments, central banks, commercial banks, tourists and businesses to pay attention to. It can influence the health or illness of an economy.

Demo Forex Accounts

Traders routinely destroy, or “blow up,” their accounts through trades that turn out badly. New traders often start out with a demo forex account so this does not happen. Demo accounts are practice accounts that look and work exactly like real accounts, except the money is fake and the trader cannot lose any of his cash. Practice accounts are an excellent way for new traders to learn the ins and outs of the forex market.

Mini Forex Accounts

These accounts require much less money to start trading forex. A regular account has a trading lot of 100,000 currency units. The smallest unit amount is known as a percentage point or pip. In a regular account, one pip is equal to 10 U.S. dollars. In a mini forex account, one pip is equal to one U.S. dollar. Mini accounts may be opened with as little as $25 in starting cash. Forex mini accounts allow new traders to get in the game while risking only a small amount of money. Forex is no longer limited to big players.

Forex Brokers

The Internet has made it possible for retail investors to get involved in the forex market at low transaction costs. A forex broker is the middleman that carries out trading orders on behalf of their clients. Brokers must meet certain qualifications before a trader opens an account. The National Futures Association and the Commodity Futures Trading Commission regulate forex brokers. Low transaction costs, fast execution and customer service are other important factors to consider.

Forex Charts

Traders can use techniques to judge what trades to make and at what times. One of the most common is technical analysis, which uses price charts and quantitative analysis to determine entry and exit points for trades. Price charts are the most common images associated with forex trading and with good reason. A chart can put a trend into sharp relief and help traders decide whether it is real or false.

Forex Software

Forex trading software has become more prevalent with the birth of the Internet. Some of the offerings are of dubious quality and seek to scam unwary traders. One of the most popular terms in this field is “forex robot,” meaning an automated program that seeks out and executes trades without any human input. The quality of these programs vary widely, and traders are probably better off avoiding them.

Best Forex Brokers for Beginners

We recommend Easy Forex or Etoro for novice traders. Both these brokers offers free forex practice accounts as well as great mini accounts.