247cryptoexpress.com Open in urlscan Pro
51.89.192.143  Public Scan

Form analysis
1 forms found in the DOM

GET https://www.investopedia.com/search

<form id="header__search_1-0" class="comp header__search search-form search" role="search" method="get" action="https://www.investopedia.com/search" data-tracking-container="true">
  <svg class="search__icon">
    <use xmlns:xlink="http://www.w3.org/1999/xlink" xlink:href="#icon-magnifying-glass"></use>
  </svg>
  <div class="search__wrapper">
    <input class="search__input" type="text" name="q" value="" placeholder="Search" maxlength="200" required="">
    <button type="submit" class="search__button ">Submit</button>
  </div>
</form>

Text Content

Forex Trading: A Beginner's Guide


 * Education
    * General
      * Dictionary
      * Economics
      * Corporate Finance
      * Roth IRA
      * Stocks
      * Mutual Funds
      * ETFs
      * 401(k)
    * Investing/Trading
      * Investing Essentials
      * Fundamental Analysis
      * Portfolio Management
      * Trading Essentials
      * Technical Analysis
      * Risk Management

 * Markets
    * News
      * Company News
      * Markets News
      * Trading News
      * Political News
      * Trends
    * Popular Stocks
      * Apple (AAPL)
      * Tesla (TSLA)
      * Amazon (AMZN)
      * AMD (AMD)
      * Facebook (FB)
      * Netflix (NFLX)

 * Simulator
    * Simulator
      * Create an Account
      * Join a Game
    * My Simulator
      * My Game
      * Create a Game

 * Your Money
    * Personal Finance
      * Wealth Management
      * Budgeting/Saving
      * Banking
      * Credit Cards
      * Home Ownership
      * Retirement Planning
      * Taxes
      * Insurance
    * Reviews & Ratings
      * Best Online Brokers
      * Best Brokers for Beginners
      * Best Roth IRA Accounts
      * Best Trading Platforms
      * Best Robo-Advisors
      * Betterment vs Wealthfront
      * Betterment vs Vanguard
      * Wealthfront vs Vanguard

 * Advisors
    * Your Practice
      * Practice Management
      * Continuing Education
      * Financial Advisor Careers
      * Investopedia 100
    * Wealth Management
      * Portfolio Construction
      * Financial Planning

 * Academy
    * Popular Courses
      * Investing for Beginners
      * Become a Day Trader
      * Trading for Beginners
      * Technical Analysis
    * Courses by Topic
      * All Courses
      * Trading Courses
      * Investing Courses
      * Financial Professional Courses


Submit

Part Of
Forex Trading Strategy & Education
Explore The Guide
 * Overview
 * Basic Forex Overview
   * Overview
   * Forex Trading: A Beginner's Guide
   * Getting Started in Forex
   * Basics Of Currency Trading
   
 * Key Forex Concepts
   * Overview
   * Exchange Rates
   * Currency Pairs
   * Pips
   * Interest Rates
   * Central Banks
   * Leveraged Trading
   * Forex Trading Account
   
 * Currency Markets
   * Overview
   * Spot Currencies
   * Currency Forwards
   * Currency Futures
   * Currency Swaps
   
 * Beginner/Intermediate Forex Trading Strategies
   * Overview
   * Forex Trading Strategy
   * 9 Forex Trading Tips
   * Strategies for Part-Time Forex Traders
   * 3 Simple Strategies For Euro Traders
   
 * Advanced Forex Trading Strategies and Concepts
   * Overview
   * Currency Carry Trades
   * Currency Options Trading
   * Interest Rate Parity
   * Harmonic Patterns in FX
   * Forex Algorithmic Trading
   


Forex & Currencies Trading Forex Trading Strategy & Education


FOREX TRADING: A BEGINNER'S GUIDE





 * FACEBOOK
 * TWITTER
 * LINKEDIN

By James Chen
Updated Mar 16, 2020
Table of Contents
Expand
 * What Is the Forex Market?
 * A Brief History of Forex
 * Spot Market and the Forwards & Futures Markets 
 * Forex for Hedging
 * Forex for Speculation
 * Currency as an Asset Class
 * Why We Can Trade Currencies
 * Forex Trading Risks
 * Pros and Challenges of Trading Forex
 * The Bottom Line

Forex is a portmanteau of foreign currency and exchange. Foreign exchange is the
process of changing one currency into another currency for a variety of reasons,
usually for commerce, trading, or tourism. According to a recent triennial
report from the Bank for International Settlements (a global bank for national
central banks), the average was more than $5.1 trillion in daily forex trading
volume.1




KEY TAKEAWAYS

 * The foreign exchange (also known as FX or forex) market is a global
   marketplace for exchanging national currencies against one another.
 * Because of the worldwide reach of trade, commerce, and finance, forex markets
   tend to be the largest and most liquid asset markets in the world.
 * Currencies trade against each other as exchange rate pairs. For example,
   EUR/USD.
 * Forex markets exist as spot (cash) markets as well as derivatives markets
   offering forwards, futures, options, and currency swaps.
 * Market participants use forex to hedge against international currency and
   interest rate risk, to speculate on geopolitical events, and to diversify
   portfolios, among several other reasons.


WHAT IS THE FOREX MARKET?

The foreign exchange market is where currencies are traded. Currencies are
important to most people around the world, whether they realize it or not,
because currencies need to be exchanged in order to conduct foreign trade and
business. If you are living in the U.S. and want to buy cheese from France,
either you or the company that you buy the cheese from has to pay the French for
the cheese in euros (EUR). This means that the U.S. importer would have to
exchange the equivalent value of U.S. dollars (USD) into euros. The same goes
for traveling. A French tourist in Egypt can't pay in euros to see the pyramids
because it's not the locally accepted currency. As such, the tourist has to
exchange the euros for the local currency, in this case the Egyptian pound, at
the current exchange rate.



One unique aspect of this international market is that there is no central
marketplace for foreign exchange. Rather, currency trading is conducted
electronically over-the-counter (OTC), which means that all transactions occur
via computer networks between traders around the world, rather than on one
centralized exchange. The market is open 24 hours a day, five and a half days a
week, and currencies are traded worldwide in the major financial centers of
London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and
Sydney—across almost every time zone. This means that when the trading day in
the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the
forex market can be extremely active any time of the day, with price quotes
changing constantly.




A BRIEF HISTORY OF FOREX

Unlike stock markets, which can trace their roots back centuries, the forex
market as we understand it today is a truly new market. Of course, in its most
basic sense—that of people converting one currency to another for financial
advantage—forex has been around since nations began minting currencies. But the
modern forex markets are a modern invention. After the accord at Bretton
Woods in 1971, more major currencies were allowed to float freely against one
another. The values of individual currencies vary, which has given rise to the
need for foreign exchange services and trading.



Commercial and investment banks conduct most of the trading in the forex markets
on behalf of their clients, but there are also speculative opportunities for
trading one currency against another for professional and individual investors.




SPOT MARKET AND THE FORWARDS & FUTURES MARKETS 

There are actually three ways that institutions, corporations and individuals
trade forex: the spot market, the forwards market, and the futures market. Forex
trading in the spot market has always been the largest market because it is the
"underlying" real asset that the forwards and futures markets are based on. In
the past, the futures market was the most popular venue for traders because it
was available to individual investors for a longer period of time. However, with
the advent of electronic trading and numerous forex brokers, the spot market has
witnessed a huge surge in activity and now surpasses the futures market as the
preferred trading market for individual investors and speculators. When people
refer to the forex market, they usually are referring to the spot market. The
forwards and futures markets tend to be more popular with companies that need to
hedge their foreign exchange risks out to a specific date in the future.



More specifically, the spot market is where currencies are bought and sold
according to the current price. That price, determined by supply and demand, is
a reflection of many things, including current interest rates, economic
performance, sentiment towards ongoing political situations (both locally and
internationally), as well as the perception of the future performance of one
currency against another. When a deal is finalized, this is known as a "spot
deal." It is a bilateral transaction by which one party delivers an agreed-upon
currency amount to the counter party and receives a specified amount of another
currency at the agreed-upon exchange rate value. After a position is closed, the
settlement is in cash. Although the spot market is commonly known as one that
deals with transactions in the present (rather than the future), these trades
actually take two days for settlement.



Unlike the spot market, the forwards and futures markets do not trade actual
currencies. Instead they deal in contracts that represent claims to a certain
currency type, a specific price per unit and a future date for settlement.



In the forwards market, contracts are bought and sold OTC between two parties,
who determine the terms of the agreement between themselves.



In the futures market, futures contracts are bought and sold based upon a
standard size and settlement date on public commodities markets, such as the
Chicago Mercantile Exchange. In the U.S., the National Futures Association
regulates the futures market. Futures contracts have specific details, including
the number of units being traded, delivery and settlement dates, and minimum
price increments that cannot be customized. The exchange acts as a counterpart
to the trader, providing clearance and settlement.



Both types of contracts are binding and are typically settled for cash at the
exchange in question upon expiry, although contracts can also be bought and sold
before they expire. The forwards and futures markets can offer protection
against risk when trading currencies. Usually, big international corporations
use these markets in order to hedge against future exchange rate fluctuations,
but speculators take part in these markets as well.



Note that you'll often see the terms: FX, forex, foreign-exchange market, and
currency market. These terms are synonymous and all refer to the forex market.




FOREX FOR HEDGING

Companies doing business in foreign countries are at risk due to fluctuations in
currency values when they buy or sell goods and services outside of their
domestic market. Foreign exchange markets provide a way to hedge currency risk
by fixing a rate at which the transaction will be completed.



To accomplish this, a trader can buy or sell currencies in the forward or swap
markets in advance, which locks in an exchange rate. For example, imagine that a
company plans to sell U.S.-made blenders in Europe when the exchange rate
between the euro and the dollar (EUR/USD) is €1 to $1 at parity.



The blender costs $100 to manufacture, and the U.S. firm plans to sell it for
€150—which is competitive with other blenders that were made in Europe. If this
plan is successful, the company will make $50 in profit because the EUR/USD
exchange rate is even. Unfortunately, the USD begins to rise in value versus the
euro until the EUR/USD exchange rate is 0.80, which means it now costs $0.80 to
buy €1.00.



The problem the company faces is that while it still costs $100 to make the
blender, the company can only sell the product at the competitive price of €150,
which when translated back into dollars is only $120 (€150 X 0.80 = $120). A
stronger dollar resulted in a much smaller profit than expected.



The blender company could have reduced this risk by shorting the euro and buying
the USD when they were at parity. That way, if the dollar rose in value, the
profits from the trade would offset the reduced profit from the sale of
blenders. If the USD fell in value, the more favorable exchange rate will
increase the profit from the sale of blenders, which offsets the losses in the
trade.



Hedging of this kind can be done in the currency futures market. The advantage
for the trader is that futures contracts are standardized and cleared by a
central authority. However, currency futures may be less liquid than the forward
markets, which are decentralized and exist within the interbank system
throughout the world.




FOREX FOR SPECULATION

Factors like interest rates, trade flows, tourism, economic
strength, and geopolitical risk affect supply and demand for currencies, which
creates daily volatility in the forex markets. An opportunity exists to profit
from changes that may increase or reduce one currency's value compared to
another. A forecast that one currency will weaken is essentially the same as
assuming that the other currency in the pair will strengthen because currencies
are traded as pairs.



Imagine a trader who expects interest rates to rise in the U.S. compared to
Australia while the exchange rate between the two currencies (AUD/USD) is 0.71
(it takes $0.71 USD to buy $1.00 AUD). The trader believes higher interest rates
in the U.S. will increase demand for USD, and therefore the AUD/USD exchange
rate will fall because it will require fewer, stronger USD to buy an AUD.



Assume that the trader is correct and interest rates rise, which decreases the
AUD/USD exchange rate to 0.50. This means that it requires $0.50 USD to buy
$1.00 AUD. If the investor had shorted the AUD and went long the USD, he or she
would have profited from the change in value.




CURRENCY AS AN ASSET CLASS

There are two distinct features to currencies as an asset class:


 * You can earn the interest rate differential between two currencies.
 * You can profit from changes in the exchange rate.



An investor can profit from the difference between two interest rates in two
different economies by buying the currency with the higher interest rate and
shorting the currency with the lower interest rate. Prior to the 2008 financial
crisis, it was very common to short the Japanese yen (JPY) and buy British
pounds (GBP) because the interest rate differential was very large. This
strategy is sometimes referred to as a "carry trade."




WHY WE CAN TRADE CURRENCIES

Currency trading was very difficult for individual investors prior to the
internet. Most currency traders were large multinational corporations, hedge
funds or high-net-worth individuals because forex trading required a lot of
capital. With help from the internet, a retail market aimed at individual
traders has emerged, providing easy access to the foreign exchange markets,
either through the banks themselves or brokers making a secondary market. Most
online brokers or dealers offer very high leverage to individual traders who can
control a large trade with a small account balance.


1:52

FOREX TRADING: A BEGINNER’S GUIDE




FOREX TRADING RISKS

Trading currencies can be risky and complex. The interbank market has varying
degrees of regulation, and forex instruments are not standardized. In some parts
of the world, forex trading is almost completely unregulated.



The interbank market is made up of banks trading with each other around the
world. The banks themselves have to determine and accept sovereign
risk and credit risk, and they have established internal processes to keep
themselves as safe as possible. Regulations like this are industry-imposed for
the protection of each participating bank.



Since the market is made by each of the participating banks providing offers
and bids for a particular currency, the market pricing mechanism is based on
supply and demand. Because there are such large trade flows within the system,
it is difficult for rogue traders to influence the price of a currency. This
system helps create transparency in the market for investors with access to
interbank dealing.



Most small retail traders trade with relatively small and semi-unregulated forex
brokers/dealers, which can (and sometimes do) re-quote prices and even trade
against their own customers. Depending on where the dealer exists, there may be
some government and industry regulation, but those safeguards are inconsistent
around the globe. 



Most retail investors should spend time investigating a forex dealer to find out
whether it is regulated in the U.S. or the U.K. (dealers in the U.S. and U.K.
have more oversight) or in a country with lax rules and oversight. It is also a
good idea to find out what kind of account protections are available in case of
a market crisis, or if a dealer becomes insolvent.




PROS AND CHALLENGES OF TRADING FOREX

Pro: The forex markets are the largest in terms of daily trading volume in the
world and therefore offer the most liquidity.2 This makes it easy to enter and
exit a position in any of the major currencies within a fraction of a second for
a small spread in most market conditions.



Challenge: Banks, brokers, and dealers in the forex markets allow a high amount
of leverage, which means that traders can control large positions with
relatively little money of their own. Leverage in the range of 100:1 is a high
ratio but not uncommon in forex. A trader must understand the use of leverage
and the risks that leverage introduces in an account. Extreme amounts of
leverage have led to many dealers becoming insolvent unexpectedly.



Pro: The forex market is traded 24 hours a day, five days a week—starting each
day in Australia and ending in New York. The major centers are Sydney, Hong
Kong, Singapore, Tokyo, Frankfurt, Paris, London, and New York.



Challenge: Trading currencies productively requires an understanding of economic
fundamentals and indicators. A currency trader needs to have a big-picture
understanding of the economies of the various countries and their
inter-connectedness to grasp the fundamentals that drive currency values.




THE BOTTOM LINE

For traders—especially those with limited funds—day trading or swing trading in
small amounts is easier in the forex market than other markets. For those with
longer-term horizons and larger funds, long-term fundamentals-based trading or a
carry trade can be profitable. A focus on understanding the macroeconomic
fundamentals driving currency values and experience with technical analysis may
help new forex traders to become more profitable.


Sponsored


UP TO $5000 DEPOSIT BONUS

Trade forex and CFDs on stock indices, commodities, stocks, metals and energies
with a licensed and regulated broker. For all clients who open their first real
account, XM offers up to $5000 deposit bonus to test the XM products and
services without any initial deposit needed. Learn more about how you can trade
over 1000 instruments on the XM MT4 and MT5 platforms from your PC and Mac, or
from a variety of mobile devices.




ARTICLE SOURCES


Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews
with industry experts. We also reference original research from other reputable
publishers where appropriate. You can learn more about the standards we follow
in producing accurate, unbiased content in our editorial policy.

 1. The Bank for International Settlements. "Foreign exchange turnover in April
    2019." Accessed Sept. 26, 2019.

 2. NASDAQ. "Forex Market Overview." Accessed Sept. 26, 2019.

Compare Accounts
Advertiser Disclosure
×
The offers that appear in this table are from partnerships from which
Investopedia receives compensation.
Provider
Name
Description






RELATED ARTICLES

Forex Trading Strategy & Education


HOW DO YOU MAKE MONEY TRADING MONEY?

Forex Trading Strategy & Education


8 BASIC FOREX MARKET CONCEPTS

Forex Trading Strategy & Education


5 WAYS TO INVEST IN CURRENCIES

Forex Trading Strategy & Education


SIX MOST POPULAR CURRENCIES FOR TRADING

Forex Trading Strategy & Education


BUYING AND SELLING IN THE FOREX MARKET

Forex Trading Strategy & Education


UNDERSTANDING BID-ASK SPREADS WHEN EXCHANGING FOREIGN CURRENCY


Partner Links






RELATED TERMS

Forward Market
A forward market is an over-the-counter marketplace that sets the price of a
financial instrument or asset for future delivery.
more
Foreign Exchange (Forex) Definition
The foreign exchange (Forex) is the conversion of one currency into another
currency.
more
Forex (FX) Definition and Uses
Forex (FX) is the market where currencies are traded and the term is the
shortened form of foreign exchange. Forex is the largest financial marketplace
in the world. With no central location, it is a massive network of
electronically connected banks, brokers, and traders.
more
Currency Pair Definition
A currency pair is the quotation of one currency against another.
more
Forex Analysis Definition and Methods
Forex analysis describes the tools that traders use to determine whether to buy
or sell a currency pair, or to wait before trading.
more
Currency Pairs Definition
Currency pairs are two currencies with exchange rates coupled for trading in the
foreign exchange (FX) market.
more

 * About Us
 * Editorial Policy
 * Privacy Policy
 * California Privacy Notice
 * Terms of Use
 * Advertise
 * Contact Us
 * Dictionary
 * News
 * Careers

 * #
 * A
 * B
 * C
 * D
 * E
 * F
 * G
 * H
 * I
 * J
 * K
 * L
 * M
 * N
 * O
 * P
 * Q
 * R
 * S
 * T
 * U
 * V
 * W
 * X
 * Y
 * Z


Investopedia is part of the Dotdash publishing family.