So, You've Heard About Forex Trading?
Forex Trading become increasingly popular over the last year, as people look to develop a second source of income after Covid-19 impacted the workplace. We put together a brief introduction for those new to the forex markets and unsure of how to get started in forex trading!
What is Forex Trading?
Forex Trading, commonly known as foreign exchange trading or fx trading, is the trading of different currencies. There are many different reasons for Forex Trading, such as international business necessities, hedging against local currency depreciation, or the most popular reason which is to create short term profits from fluctuations in currency exchange rates.
The Foreign Exchange market is often regarded as the most liquid market in the world, with over $5 Trillion worth of transactions taking place every day! The advantage this poses to Forex Traders is that markets typically move gradually, unlike stocks which can have big gaps in the price charts, meaning that risk to market volatility is easier to manage.
In the Forex Markets one currency is quoted in terms of another. An example of this is the EUR/USD.
Say you had 100 Euros and wanted to know what they were worth you would have to measure their worth in another currency. The EUR/USD quote price is exactly this, the valuation that one Euro is given in terms of US Dollars. At the time of writing this article the EUR/USD rate is 1.2130, meaning that those 100 Euros would be multiplied by this rate of exchange to be valued in USD.
100 x 1.2130 = 121.30
Those 100 Euros at that exchange rate would be worth 121.30 United States Dollars in this Forex trade.
Typically in retail forex trading, forex traders aren’t buying/selling the actual currencies, but rather a contract for difference (CFD). Trading a Forex CFD means that rather than owning the currencies the trader owns the contract for difference, and takes a profit or loss from any difference in the underlying asset exchange rates after the contract has been executed.
Forex traders often refer to “standard lots” or “contracts”. One “standard lot” or “contract” is equivalent to 100,000 units of the currency which you are trading. Below is a simple overview of “lot sizes”.
0.01 lots = 1,000 units of currency.
0.10 lots = 10,000 units of currency.
1.00 lots = 100,000 units of currency.
One advantage of trading forex CFD’s is that retail traders may access high levels of leverage, allowing them to trade position sizes that the trader doesn’t have equity for. Leverage is the ratio of buying power to equity. In many regulated countries retail leverage is capped at 20:1, meaning that for every $1 you have you can trade $20 worth of an asset. Some brokers globally even offer leverage of up to 2000:1! Below is an overview of leverage, based on the trader having $1000.
$1000 x 20 = $20,000.
This means that the trader could trade up to $20,000 worth of contracts at one time, or a 0.20 lot size. With most Forex CFD brokers a trader isn’t charged for using leverage however most stock brokers charge overnight fees for using leverage.
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If you’d like to get started but don’t know what broker to trade with check out our recommended forex broker! Our broker is regulated in New Zealand, a Tier 1 Jurisdiction, and has leverage up to 500:1!