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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.
Buying FOREX with a brokerage account
With a brokerage account you can buy FOREX in lot sizes. These lot sizes are;
- micro lot (1,000)
- mini lot (10,000)
- standard lot (100,000)
- 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
- and you then 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.
Buying FOREX with a spread betting account
You can trade FOREX by betting a $ or £ (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,
- you would then have made a profit$800.
Benefits to trading FOREX
- 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
At the end of each trading day (5pm EST), interest is paid or deducted from your FOREX account, this depends on whether the currency have bought has a higher or lower national interest rate than the currency you are borrowing. Higher means you gain interest, lower means you pay interest.
Different brokers have different terms in relation to rollover fees so it is worth checking that out before you apply for an account. However the bottom line is you could be making money through price change and interest when trading FOREX!
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Stock market basics
Stock charts explained
Stock dividends explained
Stock Split Explained
Why do shares move up and down?
How do I read a stock quote?
Understanding company financial statements
Rights issue of shares
The process of buying shares
Why buy shares
Age limit for trading shares
Tax rules on shares
Styles of trading
Buying (going long)
Shorting stock (going short)
Stop losses explained
Stock market trading guide
Stock market games
Advanced stock market trading