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So you fancy the idea of online forex trading, but don’t know where to start? Don’t be embarrassed of your lack of knowledge, some of the most experienced Forex traders were, at some point, beginners. There is a wealth of information available, either at your local library, bookstore, or online, to bring even the most inexperienced to a certain level of understanding. We hope that you find everything you need here on this site, as it’s very convenient to have a place of reference where all the necessary information is close at hand.
Here, we introduce you to the world of Forex and all it entails, and also offer you reviews and analyses of the best Forex brokers available on the market, since, without the best Forex broker by your side, you’ll struggle to take advantage of this popular form of investment.
So, without further ado, let’s start with a brief explanation of the form of investment known as Forex trading.
What is Forex trading and how can the top Forex brokers help you trade?
Chances are, you have already had experience of partaking in the Forex market. Have you ever travelled to a foreign country? Likely the country you visited used a different currency than the one you use in your everyday life, so you had to find a currency exchange booth at the airport, or visit a local bank, and exchange your spending money into the currency of the country you were visiting. When exchanging one currency for another you are participating in the most basic form of FX trading, via the Forex market.
When it’s time to return home after a restful vacation, the exchange happens in reverse. You’ll also notice that the exchange rate has changed, and this is exactly what allows investors to profit off of the foreign exchange market.
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The foreign exchange market is one of the largest financial markets in the world, with a trade volume of more than $5.3 trillion per day. When you compare this with the trade volume of the New York Stock Exchange, currently at $22.9 billion per day, you can understand the enormity of the FX market.
There are a lot of different names bandied around, in connection with Forex trading – The FX market, currency market, foreign exchange market, foreign currency market, and plenty more. But they all refer to a form of investment that is undertaken by banks, business, governments, and individual traders who exchange and speculate on various currencies. It is open 24 hours a day, 5 days a week. And there are trading centers located in many major cities worldwide, including: New York, London, Tokyo, Frankfurt, Zurich, Hong Kong and Paris. There is no central marketplace, which is the case for stock market trading. Forex trading is said to take place ‘over the counter’. Forex prices are quoted by all the major banks, but not all will have the same exact price. Individual traders, such as you and I, will have to trade via forex trading brokers, and the rates they use are usually an average of a number of bank rates.
There are a variety of participants in the FX market
There are a number of different institutions, organisations, individuals and top FX brokers that participate in the FX trading market.
Banks – Trading between various banks makes up the biggest percentage of commercial Forex transactions. Many of the largest banks will trade billions of dollars everyday. The trading takes place on behalf of customers, but the major portion of it is done by the bank itself.
Companies – Companies use the FX market to pay for goods and services from other countries, and also to sell their own goods and services in other countries. This is actually a very important part of the daily FX market.
Central banks/ Governments – Governments and central banks are able to affect the value of their own currencies, and as such play a crucial role in foreign exchange markets. They are also able to stabilize the market by using their large foreign exchange reserves.
Hedge funds – More than three quarters of foreign exchange transactions are speculative. People buying or selling the different currencies have no real intention of taking actual delivery. The sole purpose of making a FX transaction would be to speculate on whether the price of a currency is going to go up or down. Large hedge funds have a huge part to play in the currency markets, because they control and speculate with billions of dollars every day.
Individuals – When travelling to a foreign country, individuals are participating in the foreign exchange market, when they change up their vacation money.
Investors – If an investment firm manages large portfolios on behalf of their clients, the FX market is used because it allows them to buy and sell foreign securities.
Retail Forex traders – Retail forex traders refers to people like you. This particular section of the industry is growing on a daily basis, as more and more people learn about the top online Forex brokers, and get a taste for the excitement and opportunities it brings. There are also a number of online Forex trading platforms that allow the market to be easily accessible via the internet. To access the currency markets, retail FX traders use the services of a Forex broker, or a bank. There are two types of FX brokers – dealers and brokers. Top Forex brokers act as an agent for the retail trader, trying to find the best possible price and execute trades on behalf of their customers. Dealers, on the other hand, act as the counterparty to a retail traders transaction. The price they quote is the one they are willing to deal at, and they make their money through the difference between the buying and selling price (i.e. spread). Forex dealers are also known as market makers, because they make the market for the trader.
The benefits of trading Forex
As with any form of investment, there are disadvantages and advantages of partaking in the Forex market. Let’s look at the benefits first:
Forex trading online means you are free to trade anywhere in the world, provided of course you have a reliable internet connection;
Low charges and fees, compared with trading stocks and commodities;
There are fewer currency pairs to concentrate on, compared to the large numbers of stocks and shares;
Getting started is relatively easy and usually only requires a couple of hundred dollars of initial investment;
Opening hours are Sunday 5pm EST, to Friday 4pm EST, which means you can trade whenever you want;
Forex is a volatile market, and traders have the opportunity to make massive profits whether the market is rising or falling.
When choosing your ideal broker, it is important to check where the broker is based in, as it may play a key role in the way you will develop your approach to Forex trading.
Your trading experience can vary significantly, depending on which country the broker of your choice is located in, with differences in the regulatory frameworks, your options for bonus promotions, and the level of protection that you, as a trader, will be enjoying.
The UK based Forex brokers, for example, have traditionally been some of the most popular choices for traders worldwide, owing to the better security measures in place, and flexible trading conditions, enabled by the regulatory bodies there.
Lately, however, newcomers to the global Forex market have been gaining traction with traders, such as Australian Forex brokers, enticing traders with highly secure regulatory framework, US based brokers offering unique approach to the Forex market, and Canadian Forex brokers providing more leeway and protection for traders, willing to take bigger risks for bigger gains.
There are a number of markets that hold a significant promise for the future, with a potential to become some of the hottest Forex destinations in the nearest future, such as Malaysia, which is emerging as one of the most unique Forex environments, with Malaysian Forex brokers holding a great promise for both local, and international traders alike.
Before we carry on any further, let’s introduce some of the common words and phrases used in the FX market, as it is important to understand the jargon.
Understanding the basic Forex jargon
We’ve already given you a brief introduction to the world of Forex trading, and now it’s time to discover some of the unusual and unique terms you are certain to encounter while trading. Without this knowledge you won’t be able to fully understand everything you read about the industry, and it’ll certainly help when it comes to looking for the best Forex trading platforms. And it also means we won’t have to keep going back and explaining some of the terms we choose to use here.
Exchange rate – This is the value of one currency expressed in terms of another. For example EUR/USD is 1.1121, which means that one Euro is worth US$1.1121.
Pip – This is a measurement of the movement a currency can make, and one pip is the smallest movement possible. It is also called a point or points.
Margin – This refers to the amount required to keep a position or foreign trade open. There are two types: used margin and free margin. The used margin is the amount being used to keep an open position, while the free margin is the amount available to open a new position. Let’s give you an example so you have a better understanding. Say, for example, a trader has a £1,000 margin balance in their trading account, and there is a 1% margin requirement to open a position. This trader can buy or sell a position worth up to £100,000. This gives the trader a leverage ratio of 100:1. Should a trader’s account fall below the minimum required to keep a position open, they will receive a ‘margin call’. This means more money needs to be added to the trading account, or the open position has to be closed. Even top Forex brokers could decide to automatically close a trade when the margin balance falls below the minimum requirement. The minimum amount will vary from broker to broker, but it could be as high as 50%.
Leverage – Leverage allows a trader to gear their account into a position greater than their total account margin. In the example above, the leverage was 100:1. Let’s look at another example. Say, for example, a $300,000 position is opened with a £1,000 margin in the trader’s account. Leverage in this case would be 300 times, or 300:1. We should mention that leverage can increase gains, but it can also increase losses.
Spread – This refers to the difference between the bid and offer price, or the buy and sell quote.
Bid and ask price – The bid is the price the market or broker quotes for buying a specific currency pair. The ask price is the price the market or broker quotes for selling a specific pair. The difference between these two prices is called the spread, and varies from broker to broker.
Now you have a little bit more knowledge regarding some of the most important Forex terms, let’s take a look at the most common currency pairs and help you to understand a quote.
Understanding FX currency pair quotes
The major Forex currency pairs and their nicknames are:
USD – US Dollar
EUR – Euro
EUR/USD – “Euro”
JPY – Japanese Yen
USD/JPY – “Dollar Yen”
GBP – British Pound
GBP/USD – “Cable” or “Sterling”
CHF – Swiss Franc
USD/CHF – “Swissey”
CAD – Canadian Dollar
USD/CAD – “Dollar Canada”
AUD – Australian Dollar
AUD/USD – “Aussie Dollar”
NZD – New Zealand Dollar
NZD/USD – “Kiwi”
It’s vital to understand how to read a currency pair quote before you start trading, so let’s help with a brief explanation.
The best online Forex brokers quote the exchange rate of two currencies in a pair. This is because in any Forex trading transaction, one currency is being bought, while another is being sold.
Here is an example of a quote relating to the Euro and US Dollars:
EUR/USD – 1.19
The first currency in the quote is the Euro and is called the base currency. While the second currency, the US Dollar, is the counter or quote currency. If you decide to buy this particular currency pair, it clearly indicates how much of the quote currency (USD) is required to buy one unit of the base currency (EUR). In the above example, 1.19 US Dollars are required to buy 1 Euro. If you sell the currency pair, you will receive 1.19 US Dollars for each Euro sold.
If you want an easy way to remember the principle think of the base currency as the basis for the trade. Whether you are buying or selling a currency pair, the base currency is always the same. In other words, it is always based on the first currency in the pair.
The whole point behind Forex trading is to buy a currency pair if you consider the base currency will increase in value (appreciate), in relation to the quote currency. If you think the base currency will decrease (depreciate) in value in relation to the quote currency, then you should choose to sell the pair.
The history of Forex trading and the Forex market
Some of you reading this will find this section a little boring. We appreciate that not everyone will want to know about the history of Forex trading, but we consider it an important part of your Forex journey. It’s good to know at least a little about why Forex markets exist and how it all began. So here it goes.
The foreign exchange market, Forex, FX, or currency market as it is often known, refers to a global decentralized market in which currencies are traded. Under this heading are all aspects of buying, selling, and exchanging different currencies at a current or predetermined price. Currencies have been traded across the globe for centuries, but one of the most important events in the history of the Forex market happened in the 1800s, when the gold standard was introduced. Before its introduction it would generally have been gold and silver that were used for international payment. However, this wasn’t a particularly good method of payment, as the value of these two metals was very volatile, and was affected by global supply and demand. If a new gold mine was discovered it would drive the price of gold down.
The gold standard was introduced so that governments could guarantee the conversion of a currency into a specified amount of gold, and vice versa. A currency that would be backed by gold, and should have stabilized world currencies, sounded like a pretty good idea, at least in theory. In real life, however, it didn’t quite work out so well and tended to create patterns of boom and bust. The gold standard was dropped in 1973, but gold as a precious metal never lost its importance as a form of monetary value.
Towards the end of World War II, Allied nations deduced there would be a need for a new monetary system in the soon-to-come post-war world. 700 representatives from the Allied countries gathered together in Bretton Woods, New Hampshire. The reason for the gathering was to iron out the details of a new international monetary system. They decided to call it the Bretton Woods system. The main part of this new system was for the US dollar to replace gold as the standard used for converting world currencies. It also led to the US dollar being the only world currency backed by gold, at that time. It also created three agencies that would oversee economic activity across the globe. These were the IMF (International Monetary Fund), International Bank for Reconstruction, and the General Agreement on Tariffs and Trade (GATT).
However, this system suffered a number of problems. These included the US Treasury running low on its gold reserves, and not having enough gold to cover all the US dollars foreign central banks had in their reserves. Bretton Woods came to an end in 1971, when President Richard Nixon closed the gold window and refused to exchange US dollars for gold. While Bretton Woods System didn’t last, it did leave an important legacy that still affects the market today, and that is the three international agencies that were created and still exist today, often referred to as the Bretton Woods institutions, albeit in a slightly different form.
Nowadays, currencies are allowed to float freely against one another, which has led to the varying value of various currencies, in turn leading to the need for foreign exchange services. The services were provided by commercial and investment banks on behalf of their clients, but it wasn’t until the introduction of Forex trading online that the FX world was opened up to everyone. It has also led to Forex trading being used as a speculative form of investment.
The skills you’ll need to become successful in the world of Forex trading online
The world of Forex offers amazing opportunities for people to make money. However, we should point out that there are also a lot of risks for people to lose their investments. As with any form of investment, prices can go down as well as up. There are ways to increase your chances of winning big, but there is no guaranteed strategy for a 100% success rate. There are a number of skills required that will help anybody interested in trading Forex online. We’ll give you the list, but it is upto you to ensure that you use them in your trading career:
Be able to accept a loss without getting emotional;
Be confident in your own ability and your trading strategy, and to not be afraid;
Be dedication to trading and learning;
Be calm and unemotional, even when the market is really tempting;
Be able to concentrate and not be led off track;
Have a certain level of objectivity and straight forward thinking mindset;
Be well organized in order to forge and reinforce good habits;
Be a realist and not think that FX trading is going to be the answer to all your financial woes, or make you a millionaire overnight;
Have a certain amount of knowledge, to take advantage of a trading edge when it arises, as well as keeping abreast of what is happening in the FX market;
Be in control of all your trading decisions, at all times, and avoid over-leveraging your trading account.
Now it’s time to look at the first and most important step to take, as you should now have enough basic information to start your Forex journey.
Tips on finding the best Forex trading platforms
You should have realized by now that being a novice isn’t something to be ashamed of. There are thousands of people starting their own Forex journey, same as you are. Unlike many other types of investment market, there are a huge amount of free learning tools and resources to help you on your way. All the best Forex brokers offer free demo accounts, and there are a multitude of mentoring services, online tutorials, and heaps of online and printed resources, charts, and signals. In fact, there is so much to choose from that it can be rather daunting. So let’s guide you with taking your first and possibly most important step.
Selecting the best Forex broker isn’t going to be easy. That is if you want to pick one in an objective and scientific way. Of course there is always an easy way, but you shouldn’t be tricked by various tempting promises. You are going to be bombarded with eye-catching ads online, in magazines, and on TV, a lot of them there to catch the blissfully unaware, but we hope that you aren’t going to be one of them.
You’re going to be using a strategy when it comes to Forex trading, so why not make one when choosing the best online Forex brokers. Let’s look at some of the features you should be taking into account.
Decide on the best Forex trading platform – We’ve put this first in the list of things to consider because it is what you’ll use, and it’s where all the action happens. There are a number of questions you should be asking yourself first. Would you prefer to use an online trading platform or a downloaded version? Would you like to be part of the online Forex community? Are you looking for heaps of features and options, or would you prefer an interface that is clean and easy to use? We hope to be looking at the various Forex trading platforms a little later, which will help you t