Forex Trading Information Library

What is Forex Trading?

'Forex' comes from the words 'foreign' and 'exchange' and is used to describe the foreign exchange market. This is the biggest financial market in the world, accessed by corporate and private traders or investors all hours of the day and night. The daily turnover of the forex market is now estimated at over US$3 trillion.

Forex trading is the trade of currency pairs – e.g. the AUD/EUR, EUR/USD, AUD/JPY and so on…Trading takes place between any two entities at one time – between individual investors, large banks and other big corporations.

Who Can Trade Currencies?

Formerly, the forex market was exclusively accessed by financial professionals, but now private individuals can open a trading account and trade currencies from their personal laptops at home or even from their cellphones on the go!

To open a trading account, you must fulfil certain criteria, including:

• Minimum age 18 (this age may vary)
• Minimum capital for investment
• Some knowledge of the forex market
• Suitable software

The minimum account opening or minimum investment amount depends on the broker you are using – so check this in advance. Some will require a minimum account trade of $10,000.

Forex trading is a fast-paced way to trade and invest. It falls under the category of 'day trading' – that is trade that takes place over a short period of time. Longer-term ways to invest include shares or other fund types that last over a number of years. Forex trading relies on smaller market movements and therefore the level of risk is higher than with other long-term investment types.

How Can I Trade?

To get started, you will need to set up an online account with a good forex broker. You can compare and view a range of top brokers in our forex trading comparison area. They can offer their clients a high level of service, including:

• Tight spreads
• Account management OR direct trade
• Fixed and variable spreads
• Risk management (such as Limit / Stop Orders)
• Additional features such advisory services
• Free trials

Most brokers can offer a range of additional services and features which might cost extra. Usually it is best to discuss these individually with a broker.

Most brokers also offer a free demo account. These usually last around 2 weeks and allow you to try and test a broker before you open a full account. This is ideal to make sure that their software suits you; additionally many platforms are quite varied so it pays to work out how it works. If you are new to the forex market, a demo account will allow you to test your knowledge of the market without the risk of losing your money!

When is the Market Open?

The forex market is open at different times around the world – so that it never really sleeps (except on weekends!). The trading day begins in Sydney and continues around the world until it reaches New York.

Sessions overlap – so you can access the market day and night.

The main trading sessions are:

• Sydney
• Tokyo
• London
• Frankfurt
• New York

Within each region the market has normal hours – approximately between 8 a.m. and 5 p.m.

What is Volatility?

Volatility affects most financial markets – it is the movement and changes that occur frequently within the market. What makes volatility both exciting but risky is the unpredictability of it; changes can occur suddenly and without much warning.

You can manage your risk by trying to predict what direction the market will take; this is done with both technical and fundamental analysis, research, training and the right software. Guesswork or speculation is one of the main factors of financial markets – it is both loathed and liked alike.

Investors guess the movements of any particular market and take positions accordingly. For instance, there may be rumour that a certain economy will announce poor GDP results for a quarter. This is likely to make investors sell their positions on the currency of that country and move to buy 'safer' currencies (often the US dollar) or gold.

The element of rumour and speculation can lead to a large market movement – the more that a rumour is circulated, the more investors will act on it. This, clearly, can have a dramatic effect on the value of certain currencies and commodities, thereby leading to further economic impacts.

If you decide to join the forex market as an investor it is therefore important that you do as much research and training as possible. This allows you to act from knowledge and make better decisions – though you will never have a guarantee of success. In fact, loss of capital can happen at any time on the forex market – this is one of the elements that is most dangerous about the market.

Most newcomers to the market will opt for extra advisory services or even a full management service – this means you are putting your money in the hand of an expert to do the guessing and analysis for you. As ever, this still doesn't give you a guarantee of returns!

What are the Market Risks?

As discussed in the section on above, the forex market is notoriously risky. In other words, people that invest their money in this market stand a high chance of losing all of their original investment – and in some cases, more than their original investment. However, you can also make large returns on your investment. This is the factor that makes the market so intriguing...

Here are the main risk factors:

• Market is highly volatile – sudden price changes
• Major loss of capital
• Some currencies are higher in risk than others
• Your investment can go from winning to losing unexpectedly and quickly

You can feel absolutely sure that your decision to buy or sell a certain currency is going to bring you profits – then suddenly an unexpected change occurs and you lose it all.

Unexpected news from the financial and economic world is constantly having its impact on markets – such as worse-than-predicted corporate earnings data or a sudden interest rate change.

Even political and natural (such as bad weather) events can have their effect on the value of a currency.

How Can I Manage Risk?

Most traders take some cautionary measures to try and manage their exposure to risk. You can do this by asking your broker about these:

• Advisory services
• Training tools
• Stop Losses
• Limit Orders

You can also take your own steps. For instance, it is vital to carry out research on the market – how does it work? What impacts prices? Who are the main market players? What can change and how? It is also a good idea to open a demo trading account, which allows you to practise with virtual funds. There are other basic market 'wisdoms' which are sensible to remember:

• Invest only as much as you can afford to lose
• Start with small trading positions
• Don't get carried away with a 'winning streak'

Regardless of how much advice you receive however, the risks are always there. Before you get involved in trading forex, it is therefore also highly advisable to seek independent financial advice. This can help you to decide whether or not forex is suitable for your individual circumstances. Additionally you may also discover other forms of investment that are more suitable and less risky.

*Note: the risks in forex trading are significant; for this reason we have outlined a separate risk information page.