What is Forex Trading? How to Get Started with Forex Trading

What is Forex? It is the short form of “foreign exchange“. It is an international market where currencies are exchanged. Forex is the biggest financial market in the world, where traders can buy one currency while selling another simultaneously. The profit comes from the difference in the exchange rates between the two currencies. It is a fast-moving, dynamic market that operates 24 hours a day, five days a week and provides endless opportunities for traders to profit from different currency fluctuations.

If you have ever gone to a foreign country and exchanged your home currency for the local one, then you have participated in the Forex market. However, Forex traders do this on a much larger scale and use Forex trading platforms and Forex brokers to facilitate their trades.

How Forex Trading Works

At its very core, Forex trading is the trade of currency pairs. That simply means when you trade in Forex, you’re always buying one currency and selling another. For example, if you were to trade on the EUR/USD, you were simultaneously buying some Euros while selling US Dollars.

Understanding Currency Pairs

Currency pairs are divided into three different types:

• Major Pairs: Those are the most traded pairs in the world. It includes the USD, EUR, GBP, among others. An example is GBP/USD, meaning how much one British Pound is worth in US Dollars.
• Minor Pairs: Does not include the US dollar but involves the EUR, GBP, JPY, among others. The examples include EUR/GBP or EUR/JPY.
• Exotic Pairs: These include a combination of a major currency and a minor or an emerging market currency. One example is the USD/TRY-US Dollar/ Turkish Lira or the EUR/ZAR-Euro / South African Rand.

Long and Short Positions

You may assume either long or short in Forex position for a currency pair:

• Going Long: When you go long in a currency, it simply means that you are buying the base currency with expectations for its value to rise against the quote currency. In this case, an investor goes long or buys the pair, say, when he thinks GBP/USD is going to go up because of his expectation for the price of the British Pound to go high.
• Go short: If you estimate that the base currency is going to weaken in comparison with the quotation currency, take the direction “sell”. 

Example: Sold USD/GBP with the assumption of a fall-that is, dropping the rate of the Sterling Pound.

Spread-Understanding in FOREX Trading.

Whenever you enter the trade, there are two prices present: bid and ask. The bid is where you are able to sell the currency pair and the ask price is where you can buy the same. This difference between bid and the asking price is the spread-which is, in fact, the money Forex brokers receive for each trade as their profit.

For example, if the bid price for GBP/USD is 1.3000 and the ask price is 1.3002, then the spread is 2 pips-a pip being the smallest increment of price movement in Forex. By the time you have bought into the trade, you are already in a slight deficit because of the spread; your aim, therefore, will be to have the price move favorably enough to wipe off this deficit and lock in a profit.

Rollover Fees (Swap Fees)

The third-party fees over a rollover or swap fees in Forex get into operation if you hold the position overnight. Basically, these are influenced by the interest rate differential between the two currencies that constitute a pair. You could receive interest if you hold a position whereby you are buying a currency with higher interest rates against a currency with lower interest rates. You’ll most probably pay interest for selling a higher interest rate currency.

Getting Started with Forex Trading

If one happens to be a complete amateur on this journey, there are a couple of methods one could use to practice prior to diving in with a real account. One of the most popular ways to do this is by opening a Forex demo account in which you will practice trading with virtual money. It definitely can be one of the best ways to get started with Forex, especially for the beginners, so that they get used to both trading platforms, currency pairs, and strategies without exposing their own capital.

You can also find Forex trading courses and tutorials, or even free Forex signals, which help you to understand the market better. Forex prop firms offer funded accounts to trade with their own money in exchange for them giving a share of the profit. Such firms can be a great avenue through which to grow both your skills and trading capital.

Finding the Right Forex Broker

The best way to ensure you enjoy your trading process in Forex includes the selection of a good broker. A perfect Forex broker should include those with great trading platforms, competitive spreads, fast speeds of execution, and excellent support service. While some brokers even provide Forex apps, which offer on-the-go trading solutions, do a thorough study and then pick the very best broker for Forex trading suiting your goals and needs.