What is forex trading?
Forex is short for foreign exchange, and forex trading is the process of exchanging one national currency into another national currency, e.g. exchanging USD for CAD or exchanging EUR for JPY.
What is FX trading?
FX trading, forex trading and foreign exchange trading are the same thing.
The forex market
The global forex market is huge and forex trading is taking place around the clock, five days a week. According to data from the Bank for International Settlements, the daily trading volume for forex reached the equivalent of 6.6 trillion USD in April 2019.
Where is the forex market?
There is no one forex market; the system is instead made up by a multitude of markets around the world, and there is no centralized exchange through which all the transactions pass.
Examples of cities where a lot of forex trading is taking place are London, New York, Frankfurt, Hong Kong, Paris, Sydney, Tokyo, Singapore, and Zurich.
At the forex market, transactions are carried out using currency pairs.
Example: The EUR/USD currency pair denotes that Euro is traded for United States dollars.
The four most actively traded currency pairs on the fx market are EUR/USD, USD/JPY, GBP/USD, and USD/CHF.
In some cases, you will not be able to do a direct trade, since there is no such currency pair on the currency market. If you want to exchange Norwegian krone (NOK) for Nicaraguan cordoba (NIO), it will happen in the form of more than one exchange. First, NOK will be converted into USD, and then USD into NIO.
The fx spot market and the derivatives
The forex market has given rise to a wide range of derivatives, such as currency forwards, currency futures, currency options, and currency swaps. The opposite of the derivatives markets is the spot market for forex, where one currency is exchanged for another straight up. It is the spot market that forms the basis for the derivatives, as they are all in one way or another connected to the spot price exchange rates.
Small-scale forex trading
The forex market contains many giants, such as national central banks, investment banks, enormous hedge funds, and big corporations that need foreign currency for their business. This does not mean that only giants can participate. With the growth of the internet, it has even become possible for micro-investors to carry out forex trading making tiny trades. There are many online trading platforms and brokers where you can sign up and get an account for retail forex trading.
Our recommendation is that you pick a forex broker where you are allowed to create a free Demo Account without making any deposit first. The Demo Account will come filled with free play money, and you can use that money to make play trades on the platform and figure out how everything works. That way, you can see if you like the platform and the trading on offer before you decide if you want to deposit any of your real money. Play-money trading in a Demo Account is also a great way to learn how the interface works before you start risking any real money. If you have a certain forex trading strategy in mind, test-run it using your play money and see if you make a profit or not.
Many of the online brokers that offer retail forex trading for small-scale hobby traders will also offer leverage. If you use leverage, you borrow money from your broker and risk it on a trade.
Example: You take $10 from your trading account and borrow $90 from your broker, to risk $100 on a forex trade.
Using leverage is very popular, since it makes it possible to make bigger trades.. With a bigger trade, you can make a substantial profit even if the win on each unit is small. Regrettably, it also means that you can make a substantial loss. You always have to pay back the money you borrowed from the broker, even if you lose it on the trade.