Forex
(FX) is traded in lots, which represent 100,000 units of the base currency. If
the EUR/USD is quoted at 1.2253, that means that one Euro is currently worth
just over $1.22. If the market moves from 1.2253 up to 1.2254 that represents a
move of one pip. A pip is the smallest increment a currency pair can move and
in the case of the EUR/USD currency pair a pip is worth $1 in a Standard 10K
account and $0.10 in a Micro account (Source: http://www.forexmicrolot.com/how-is-fx-traded.jsp).
There
are a number of factors that makes this market attractive for investors such as;
·
The
forex market’s three trading regions (Australia, Europe and North America)
cover all time zones, which creates good trading flexibility as the market is
open 24 hours per day
·
High leverage is available for invested money,
which lets an investor with limited investment assets access the forex market. 100:1
leverage is not uncommon. Even though leverage can be seen as an advantage, it
is also a huge risk (see the next section under “risks”)
·
Both
buying and selling positions (orders) are available, providing the possibility
to make profit in both good- and bad economies
·
There
is high liquidity on the forex market, providing good opportunities to instant
execution of your trading
But
there are definitely risks
worth
considering before investing in the forex market. I have found the following
points from ESMA (European Securities and markets authority, http://www.esma.europa.eu/news/Investing-foreign-exchange-forex):
Complexity
Not
all forex transactions are straight-forward. If you do not understand the
complex nature of certain transactions in currency-derivatives transactions,
you should exercise care.
Before
deciding to trade, you should carefully consider your investment objectives,
level of experience, and risk appetite.
Exchange rates fluctuate depending on several factors, including political situations, interest rates, monetary policy and inflation. Fluctuations are unpredictable, and the market could suddenly move against your interest. This will affect the price of your forex contract and related potential gains and losses.
Leverage
To
start trading, you deposit an amount of money (also called a ‘margin’, or
‘account’, or ‘security deposit’) with your forex broker. Even a small amount
of money can enable you to trade large volumes of currency. This is because
some forex trading products are highly ‘leveraged’.
The
smaller the deposit is in relation to the underlying value of the contract, the
greater the leverage. And the higher the leverage, the more likely you are to
lose your entire investment if exchange rates move in a direction you do not
anticipate.
It is very important to understand that although leverage can increase the returns on your investment, it can equally work against you by magnifying your losses. There is a risk that you could lose some of, all, or even more than, your initial deposit. For example, if you invest €100 with a leverage of 200, you will owe €2000 if the value of the instrument loses 10% of its value (10% of 100 multiplied by 200). In addition to this, you may be obliged to pay transaction fees and/or financing charges.
So how does it work if I want to start trading?
Starting to trade forex is actually quite simple (making money is harder though J ). You will need a so called trading platform that you can install on your computer. From this trading platform trades are executed towards the global forex market.
(Figure to the right comes from: http://w.mintkit.com/2011/02/how-forex-affects-etf-for-global.html)
The
most common trading platform is probably based on MT4 (MetaTrader 4). Many forex
brokers offer trading platforms for free, as they are making profits of the FX
spread when you execute your forex trading orders from their platforms. A good
thing with trading platforms is that they often have a demo account set up with
real forex data so you can test forex trading without using real money, very
convenient and safe! Below are some brokers you could consider if you want to start
trading:
Best ECN/STP
Broker - World Finance Foreign Exchange Awards 2012.
FxPro’s client
base primarily consists of retail traders but it is increasingly servicing
institutional partners as well, with transactions exclusively being executed
online. Due to its rapid progression, FxPro’s client services are now offered
to more than 150 countries worldwide.
Voted Largest Forex Provider by Investment Trends (2012).
FXCM Inc.
(NYSE: FXCM) is a global online provider of foreign exchange (forex) trading
and related services to retail and institutional customers world-wide.
I
have found a homepage reviewing forex trading platforms that may be handy for
you, http://www.fxstrategy.com/forex-platform-reviews.
Below is an screenshot I have taken from my own forex trading platform to show what a FX MT4 trading platform could look like:
Below is an screenshot I have taken from my own forex trading platform to show what a FX MT4 trading platform could look like:
P.S.
for more reading about forex, see also:
http://www.babypips.com/school (this “forex school” is
awesome if you want to learn more!)
Interesting, thanks for sharing!
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