What is Forex Trading and Why You Should Try it?

Forex trading can also be known as currency trading or foreign exchange. In short, it is a decentralized market where currencies are traded. What does traded mean in Forex? well, the simple answer is money exchange.

Why money? This is because everything we buy and sell in this market is not tangible or physical. Similar to buying stocks of a company or shares in a country, in the Forex market we buy currencies.

How do we estimate the monetary worth of a currency?

In general, the value of a currency is a reflection of the market's opinion about the economy of a respective country, its present, and its future. Basically, in the Forex market when you buy an Australian dollar, you are buying a "share" in the Australian economy.

Therefore, by buying an Australian dollar, you are believing that Australia's economy is going well, and it will be better in the future. Once you sell those "shares", you might, hopefully, ended up with some profit!

To sums up, the exchange rate of a currency versus other currencies is a reflection of the condition of that country’s economy, compared to other countries’ economies.

What are the currency symbols?

The currency symbols are 3 letters. The first 2 represent the name of the country and the last one, identifies the country's currency. For example, in the case of "usd", "us" stands for the United States, and d stands for a dollar.

It is important to take into account that there are major and minor currencies. The former ones are usd (United States / dollar), eur (Europe / euro), jpy (Japan / yen), gbp (Great British / pound), chf (Switzerland / franc), cad (Canada / dollar), aud (Australia / dollar), NZD (New Zealand / dollar) . While the latter is the rest of currencies.

In the Forex market, we buy a currency and sell another simultaneously. For instance, the U.S dollar and the Japanese yen (usd/jpy) or the British pound and the U.S dollar (gbp/usd). Therefore, in this market, we buy and sell currencies in pairs. It is important to notice, that exchange rates will fluctuate based on the currency that is stronger at the moment of the transaction.

The "major" currency pair contains the U.S dollar on one side and usually are the most traded. In addition, they are the most liquid and widely traded currency pairs worldwide. These pairs are the following: eur/usd, usd/jpy, gbp/usd, usd/chf, usd/cad, aud/usd, nzd/usd.

Generally, the currencies that do not contain the U.S dollar are known as cross-currency pairs or simply as the “crosses". "Minors" is the name given to the Major crosses. The most actively traded crosses are derived from the three major non-usd currencies: eur, jpy, and gbp.

Also, there are other currency pairs known as the exotic pairs, which contain one major currency paired with the currency of an emerging economy, such as Mexico, Brazil, or Hungary. Keep in mind that these pairs are not as heavily traded as the “majors” or “crosses,” so the transaction costs associated with trading these pairs are usually bigger.

Now, I will answer the question "why you should try forex?". This can be answered by simply telling you the main advantages of the forex market. So, here they are:

1. There is no commission

In the Forex market, most of the retail brokers are paid for their services through something called bid/ask spread, which is the difference between the bid and offers price. Therefore, you do not need to pay an extra commission, brokerage fees, exchange fees, or government fees.

2. There are low barriers to entry

You can open an account with only $25! Compared to trading stocks, getting started as a currency trader is very cheap. In this sense, forex trading market is accessible to the average person who does not have a lot of capital.

3. There are no middlemen

You can trade directly in the currency trading market without an intervention of the middlemen. In addition, you are the responsible for the pricing on a particular currency pair. Consequently, in the Forex market, you have the freedom to chose!

4. There is high liquidity

The currency trading market is extremely liquid. This is because the market is enormous, so with only one click you could buy and sell instantaneously, and be sure that there will be someone willing to take the other side of your trade.

5. There is not fixed lot size

In this market, you can determine the position size or lot, which can allow you to participate with accounts as small as $25. However, in my opinion, open an account for such amount of money is not advisable!

6. Leverage

In this market, you can control a large total contract value with only a small deposit. You could make nice profits and keep risk capital to a minimum. For instance, with $500 you could trade $25000. It is important to consider that without a proper risk management you could have large losses!

7. There is low transaction cost

Under normal market conditions, the retail transaction cost (the bid/ask spread) is commonly less than 0.1%. At larger dealers, the spread could be as low as 0.07%. Of course, this depends on your leverage.

8. No one can corner the market

In the Forex trading market, there is no a particular entity that controls the market price for an extended period of time. This is because there are a lot of participants that make it impossible!

9. It is a 24-hour market

The Forex trading market never sleeps! There is not an opening time in this market. It operates from the Monday morning opening in Australia to the afternoon closing in New York. It is perfect if you want to trade only on a part-time basis because you could do it at any time!