What is FOREX Currency Trading?
What is FOREX currency trading is pretty easy to answer, at least initially, then it gets a little more complicated. Just like everything else.
First of all, FOREX stands for Foreign Exchange. It is the place where currencies are traded against each other using a high amount of leverage. We will talk about leverage in a little bit but essentially it means you can make or lose a lot of money very quickly with a very small investment. Don’t get excited yet, remember we said make OR LOSE.
There are many and I mean many different currency pairs you can trade. Remember, in FOREX you are essentially trading how the two currency pairs you are trading are relating or reacting to them every minute of the day.
There are lots of pairs of currency you can trade if you want to trade currency on the FOREX. There are major currencies like the US Dollar (USD), British Pound (GBP), EURO (EUR), Australian Dollar (AUS) and the Canadian Dollar (CAD). These are the most popular and liquid base currencies.
Liquidity is important because it means there will be a lower spread (this is what it costs you to trade currencies most of the time). For instance you might be able to trade the EUR/USD pair for a spread of 1.5. This means if you purchase the EUR/USD pair, it must move up at least 1.5 pips before you make any money. You want the lowest spreads possible when trading the FOREX.
If you trade the GBP/USD you will typically have a larger spread because this currency is more volatile. In the GBP/USD the larger spread is no necessarily a bad thing because it is because of volatility, not a lack of liquidity.
A pip, is basically the smallest movement in the pair you are trading.
When trading FOREX, most people trade the major pairs. These are EUR/GBP, EUR/USD, USD/CAD and USD/JPY. This is because these are the most liquid which enables you to get in and out of them very fast when you are trading. This helps keep your spread down among other things.
We spoke about leverage above and want to touch on this, this is one of the things that enables you to make a lot of money trading FOREX since you can take control of a large amount of currency without actually investing that much of your own money. This is great when you are winning but you can lose everything in a blink of an eye trading FOREX if you don’t know what you are doing.
Because of how dangerous leverage can be when learning FOREX trading systems you absolutely should trade practice accounts before trading the real thing. Trading currencies is not really like trading stocks when it comes to risk. It is more similar to commodities trading if you have experience with that.
So, why do people want to trade FOREX and How is FOREX trading the best instrument to trade?
One reason is the leverage I spoke of above, yes leverage is a dangerous thing but if you are careful and take the time to learn the risk versus reward of this leverage you can make money very quickly trading FOREX.
FOREX as a rule is also highly liquid, this enables you to get in and out of positions very quickly as long are you are not trading some obscure pair USD/JAR, I guess that is not really the most obscure pair but it is one that you are likely to run across. Some of the really obscure ones you might not see unless you really search for them.
FOREX pairs tend to trend better than most stocks. Commodities like corn, soybeans, etc… can trend also but they are not as liquid or have the same trading options that FOREX does.
FOREX trades just about all the time. FOREX trading is great if you have a day job and can only trade at night, or early in the morning. This is something you cannot do in stocks and is difficult in other commodities because they lack liquidity after normal trading hours. When I refer to normal trading hours I am referencing New York and the US market hours.
In FOREX you have other options when it comes to trading hours. You can trade the United States market hours, the European Market hours or even the Asian market hours. Typically the United States and European market open have the most volatility and quick movements. Which is great if you are day trading FOREX.
I want to discuss trading FOREX trading robots for a moment. As a rule I do not like FOREX trading robots, because I have yet to find one that actually works. They promise the moon and will sometimes work but not consistently.
If you are planning on getting into FOREX trading using a robot that you found online…DON’T!
I know because I have tried way too many of them. I will also caution even if you purchase one and it works in a simulated account that does not mean it will work on a real account.
First if all, market conditions change. A FOREX robot is designed to trade certain patterns and conditions that may occur for a while and then they change. Everything changes eventually.
Second, simulated accounts do not typically account for real trading slippage when trading. Your brand new shiny FOREX robot may look like it is doing great and then all of a sudden you move to real account and lose everything.
Finally, many of the more successful (at least apparently more successful) FOREX robots we have tried double their positions when they are losing. They do this because the programmer believes that eventually the FOREX robot will be correct based on historical market movement.
The problem is, how many times can your account afford to double a position until the robot is correct?
Many times, these types of robots will look like the best ones, but trust me they are not. Do not, ever use a FOREX robot that doubles down on each losing trade. Eventually it WILL wipe you out. I promise, I have seen it happen … personally.
There are some FOREX robots that work to some degree if you monitor them. There are also some FOREX trade copiers where you copy another trader that can make you some money. We will discuss those in other articles of our What is FOREX Trading Series.