FOREX is a term heard time and time again in relation to the stock market. The term stands for foreign exchange and involves trading currencies instead of stocks. To trade in FOREX you must buy a pair of currencies e.g. USD:GBP.
FOREX is huge and is the most liquid market in the world. The average daily volume in FOREX is over $4 trillion, an incomprehensible amount! A main reason for the huge volume is that global banks trade FOREX and it is how they make their money (now you know where your money goes when you are waiting 4 days for your check to clear!). London is a clear major player in FOREX accounting for over a third of the daily volume.
FOREX is traded 24hours a day but is usually very quiet on the weekends. Another unique aspect to FOREX is the huge leverage you receive when you open an account, some accounts offer 400-1!
Increases and decreases in FOREX are measured by pips (percentage points), which equals 0.0001 in the exchange rate. The spread given by brokers is usually between 0-3 pips and this is where the they make their money.
Reading a FOREX quote
An example FOREX quote would be USD:GBP = 0.6100
This means USD is the base currency as its on the left hand side and GBP is the quote currency. In the example above you would have pay £0.61 GBP for $1 USD. To buy and go long you would buy the base currency, in this case would be USD. To go short you sell the base currency, which means you are buying the quote currency.
With a brokerage account
With a brokerage account you can buy FOREX in lot sizes. These lot sizes are;
For example
-
if you bought $100,000 USD at USD:GBP 0.6100 (100,000 USD: 61,000 GBP)
- and the exchange rate changed to 0.6200 then
- you converted your USD back in to GBP you would be left with 62,000 GBP (a profit of £1,000!)
You might think "I cant 100,000 USD" but that's where leverage accounts or micro and mini lots come into play. With micro and mini lots you can buy 1,000 or 10,000 USD. However the real beauty when trading FOREX is the leverage on the accounts, some account offer 400:1 leverage. This means to buy 100,000 USD you would only need an initial deposit of $250!!
For an easy to use FOREX account that offers leverage up to 400:1, a free practice account and a $200 free start up bonus, I recommend choosing eToro.
With a spread betting account
You can trade FOREX by betting a $/£ (we'll use dollars for now) per pip. E.g.
- Your bet is $10 per pip and the exchange rate goes in your favor by 0.0080, that means you would have made $800.
- The market is extremely liquid, which means you can enter and exit a trade whenever you want.
- The huge leverage, meaning only a small starting deposit is required!
- 24 hour trading meaning you can get up whenever you want, unless you choose to autotrade then you don't have to get up at all!
- Ever noticed annoying massive jumps in stock prices with little volume? This doesn't happen in FOREX due to the sheer size of the market.
- Due to the less erratic movements, your stop losses do not get kicked out all of a sudden as they can do in the stock market.
- Because the market is so liquid, technical analysis works a lot better in FOREX than it does in stocks.
A second way of making money with FOREX
