Looking to enter the exciting world of forex trading and tapping into the world’s largest financial marketplace with an average daily trading volume of over $7.5 trillion?
While you have probably heard plenty about crypto, stocks,
77% of retail CFD accounts lose money.
What is currency trading?
So what exactly is currency trading? Currency trading refers to the speculative buying and selling of currencies by investors who are looking to make a financial return by predicting if a currency will go up or down in value. It is a part of the wider currency markets which also includes participants such as governments and large corporations who buy and sell currencies to carry out their day-to-day business, such as importing or exporting goods. Currency trading is also referred to as the foreign exchange market, forex or the FX market.
Find out more about currency trading with our video guide to the forex markets.
The forex market provides the opportunity for those with relatively small amounts of capital to still be able to invest. Traders invest in exchange rate pairs to trade one
So, for example, you might want to invest in USD/AUD, thinking that the USD will become stronger against the AUD. This isn’t very different to when you used to exchange your native cash at the airport when travelling overseas.
While the term forex is a shortened version of “foreign exchange,” there is not a specific marketplace or platform on which currencies are traded.
How to invest or trade forex
The basic idea behind investing or trading forex is quite straightforward. If you believe the value of a particular currency may rise in relation to another, you can buy that currency and then sell it later for a potential profit.
You may choose to select a currency pair or may look to invest in a currency ETF, providing exposure to the performance of a currency when compared to another or a broader basket of currencies.
Some investors also trade currencies to
Certain currencies are considered “safe-haven” investments. This means that they are viewed as less risky by investors than those from emerging markets. Some common “safe-haven” currencies include the US dollar, the Japanese yen and the Swiss franc. When the market is unsettled, it is not uncommon for there to be an increase in demand for these currencies.
Now that you have an understanding of what forex is, it’s time to start trading forex. Here are four steps to follow to start forex trading:
1. Choose a currency pair
Trading in currencies involves buying one fiat currency while selling another simultaneously. This is why they are called “currency pairs.” You can go with common pairs of major currencies or more obscure currency pairs.
2. Review the market
Constant learning and research are key to being a competent trader. Take your time researching your favourite currency pairs and keep an eye on both current and historical charts. Also, read about daily economic announcements and search for other technical and fundamental analysis news on your chosen currencies.
3. The quote
The quote — or “term currency” — has two rates, indicating the two currencies (e.g., USD and EUR). The first rate is the price for which you can sell the currency pair (also known as the “bid” price), while the second rate is that at which you can buy it (also known as the “ask/offer” price). The difference between the two rates is known as the “spread,” which is what a forex broker charges you for carrying out the trade.
4. Choose a position
In forex trading, you have to consider both the up and down movements in the market — because you are both buying a currency and selling another at the same time.
In terms of having a “buy position,” you expect the base currency’s value to rise compared to the quote currency (the second currency). Whereas having a “sell position” means you expect the base currency’s value will fall compared to the quote currency.
Tip: Set financial goals and create a plan before you invest to help mitigate risk.
What are currency pairs?
A currency pair is exactly what it sounds like — a pair of currencies. In forex trading, a currency pair shows which type of currency is being traded for another.
Or, in another way of looking at it, it shows how much of one type of currency it costs to purchase one unit of another type of currency, following a similar principle to other forms of pairs trading.
The way in which the currencies are listed in the pair matters. The first currency listed in a currency pair is the base currency. The second is called the quote currency. The currencies are listed by standardised abbreviations used in markets around the world.
For example, let’s say you are looking at a forex market, and you see AUD/USD = 1.10000. The AUD represents Australian dollars, which is the base currency. The USD represents US dollars, which is the quote currency. That means you can exchange 1.10 US Dollars for 1 Australian Dollar.
Risks of forex trading
Every investment opportunity comes with risks that potential traders need to be aware of. Here are a few of the major risks to think about before you get started.
Leverage
If you get in too deep with real leverage, you can quickly lose a large portion of your capital with even a small shift in the market.
Failure
It is no fun to think about failing when it comes to investing, and nobody plans on losing money when they enter a market. But it is important to go into forex trading with your eyes open.
Education
To be a successful forex trader, you need to have a big-picture understanding of global economies and what makes them tick. Getting a handle on so many global factors can be a barrier to success for relative newcomers.
Final thoughts
Forex trading can be an excellent opportunity for traders with various levels of experience and capital available for investment. It provides you with access to a truly global market that is the largest in the world. Of course, it also comes with risk, as does any investment opportunity.
Learn more about currency trading by visiting the eToro Academy.
FAQs
- What’s different about forex trading compared to traditional share trading?
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There is no central governing body for foreign exchange trading — this is in contrast to stocks, futures and options trading which can be traded using regulated exchanges.
- What currencies can I trade in forex?
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While there are a number of exotic currencies available, most forex traders tend to deal with the most liquid currency pairs: EUR/USD, USD/JPY, GBP/USD, USD/CHF.
- Can I trade forex using technical analysis?
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Yes. Some investors use technical analysis to identify trading opportunities in the currency markets. The huge trade volumes seen in the major currency pairs mean that they are highly liquid which limits the risk of one individual or entity being able to steer the price and keeps trading costs down.
- What are the typical trading hours for major forex markets?
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Forex markets typically operate on a 24/5 basis with trading possible around the clock from Monday morning to Friday evening. There may be intervals where exchanges or brokers close for a short period of time for technical reasons or when there is a public holiday.
- How does leverage affect profits and losses in forex trading?
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Leverage increases the size of potential gains and losses. This is because the total exposure to a market is greater than the amount of funds deposited and used as collateral/margin.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.