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Forex is short for foreign exchange and it is also known as FX and currency. Forex trading is buying and selling of currencies to make a profit by taking advantage of price movements between different currencies.
People usually trade forex in currency pairs such USD/EUR. Take note that the base currency is the first currency symbol in the pair while the second is the quote currency. For USD/SGD, the base currency is USD while quote currency is SGD. Price of the base currency is calculated in units of the quote currency.
For example, you buy 1,000 units of USD. Assuming the exchange rate is SG$1.40 to US$1. So to buy 1,000 units of USD, this trade costs SG$1,400. A few days later, the SGD weakens against USD and the exchange rate becomes SG$1.55 to US$1. By selling the 1,000 units of USD you have, you would have made a profit of SG$0.15 x 1,000 = SG$150.
Forex market has the largest daily trade volume. Hence, in terms of liquidity, forex offers the highest liquidity. This allows forex traders to enter and exit any of their positions in the currencies easily and quickly in most situations.
The forex market is traded 24 hours a day for five days a week. It starts the day in Australia and ends in New York. Major centers for forex trading are in Sydney, Singapore, Hong Kong, Frankfurt, London, Tokyo, Paris and New York.
As opposed to trading stocks where you have to pay both commission and the spread, forex trading requires you to cover only the spread. Hence, forex trading has lower transaction cost as compared to trading of stocks. The spread is the difference between the bid price (or selling price) and offer price (or buy price).
|Currency pair||Base currency||Quote currency|
|USD/JPY||US dollar||Japanese yen|
|GBP/USD||British pound||US dollar|
|USD/CHF||US dollar||Swiss franc|
|AUD/USD||Australian dollar||US dollar|
|USD/CAD||US dollar||Canadian dollar|
|NZD/USD||US dollar||New Zealand dollar|
When you borrow money from the broker to trade, this is called leverage. This allows you to trade with more than just your own capital. However, this is a huge risk as you are essentially betting that you will make more money from your forex trade to offset the amount you have borrowed from the broker. Leverage is often used by forex traders and in huge sums, which results in a high risk of making huge losses.
While forex and stock trading are similar in terms of liquidity, they are not the same. Unlike the stock market, currency trading is a zero sum game. This means that for someone to gain, someone else has to lose. However, in the case of stocks, there can be a situation where there is overall gain.
Stock markets are generally considered high risk. However, the fluctuations in the forex market are generally way more violent. Many big forex players make use of huge sums of leverage which allows them to move from a strong position to a weak position in a very short amount of time. Hence, it is highly not advisable for you to trade forex unless you can commit to long hours to frequently monitor the forex market. of the big forex players use enormous amounts of leverage.
Before you can officially start forex trading, you have to have an account with a brokerage that allows for forex trading. Only after you have created an account, you would then be able to execute forex trades on the platform provided by the brokerage.
When deciding what currencies you would like to trade in, it is ideal to have a forex trading plan. This plan will detail all the things you plan to do when you trade such as how you will conduct market analysis and steps to implement your trading strategy. It would be helpful to execute your plan on a demo account first.
After creating your forex trading plan and testing the plan out on a demo account, you are ready to make your trade if there are no issues. Do note that forex trading has high risks and it may not be for everyone. Do do your own research and ensure that you are able to uptake the risk before you start trading on forex.