Forex trading

The global forex market is huge and decentralized. There is no one hub or clearing house, but some cities have larger forex exchange markets than others. Such cities include London, New York, Tokyo, Frankfurt, Sydney, and Singapore. There is no central body that oversees the whole global forex market.

On an average trading day, the combined trading on the global forex market will be equivalent to around 6.6 trillion USD. The liquidity in the system is enormous, especially for the most traded currencies: USD, EUR, JPY and GBP.

Examples of major players in the forex market are investment banks, hedge funds, large corporations that need foreign currency for their business, and central banks. In the 21st century, it has become easier than ever before for small-scale non-professional traders to enter the forex market, as there is a wide range of retail forex brokers available online. ‘

In addition to basic spot trading (trading one currency for another), some forex brokers also offer to trade with financial instruments such as forex options, forex futures, currency swap contracts, fx forward contracts, non-deliverable fx forwards, and power reverse dual-currency notes (PRDC).

Using Contracts for Difference (CFD:s) has become very popular for forex speculation, as they make it possible to gain exposure to exchange rate movements without actually buying, owning and selling currency. Using CFDs:s can cut down transaction costs and is a straightforward way of speculating on rising and falling prices.

Currency pairs

In order to understand how the forex market works, you need to understand the concept of currency pairs since they form the foundation of forex trading.

On the trading platform of your choice, you will see currency pairs listed, together with a number.

Example: 1.2808 USD/CAD

This means that it costs 1.2808 Canadian dollars (CAD) to buy 1 United States dollar (USD).

The first currency in a pair is the base currency, and the second currency is the quote currency. In the example USD/CAD, USD is the base currency, and CAD is the quote currency. In the pair GBP/USD, pound sterling (GBP) is the base currency, and USD is the quote currency.

Examples of commonly traded currency pairs

USD/JPY: The United States dollar and the Japanese yen

GBP/USD: The British pound sterling and the United States dollar:.

USD/CHF: The United States dollar and the Swiss franc:

AUD/USD: The Australian dollar and the United States dollar:

USD/CAD: The United States dollar and the Canadian dollar:

NZD/USD: The New Zealand dollar and the United States dollar.

Forex lots

On the forex market, currencies are typically traded in lots. In addition to the standard lots, many forex brokers are now also offering micro, mini and even nano lots to cater to the needs of small-scale non-professional traders.

If you are a small-scale trader, it is important that you select a broker that will allow you to make small trades suited for your bankroll. Otherwise, you will either not be able to make any trades, or you will be forced to risk a very large portion of your bankroll on each trade – which is poor risk management.

What is a Forex Forward transaction?

Most fx spot market transactions have a T+2 settlement date. If a transaction has a settlement date beyond this, it is considered a forward. Forex forward contracts are not standardized. They are tailor-made and can vary vastly.

What are FX Futures?

An FX futures contract is a contract between two parties, where one party is obliged to deliver a set amount of one currency at a predetermined later date (expiry date) in the future, and the other party is obliged to pay a predetermined amount of another currency in exchange.

FX futures contracts are standardized.

Most traders using FX futures contracts do not hold them until the expiry date; they sell them beforehand to realize their profit or loss.

What is an fx rollover?

Most small-scale hobby traders are day traders who do not keep positions open overnight. If you wish to keep positions open overnight, it is important that you inform yourself about what that may cost.

Background

If you are a small-scale hobby forex trader, you are probably only interested in making a profit from speculation. When you buy CAD and pay with USD, you do not actually want Canadian dollars to be delivered to you.

Because of this dynamic, most retail forex brokers automatically “roll over” the currency positions at 5 pm EST each trading day. In essence, the broker resets the positions and provides either a credit or debit based on the interest rate differential. The trade carries on, and the trader never needs to actually deliver or receive. When the trade is closed, the trader realizes a profit or loss based on the original transaction price and the closing price. The rollover credits or debits will now either add to or detract from the account balance.

Since the forex market is closed on Saturday and Sunday, the credit or debit from these days is applied on Wednesday.

Selecting a retail forex broker

Below, we will look at a few good examples of points to keep in mind when selecting a retail forex broker.

Make sure the broker is suitable for your bankroll.

If you want to start making real-money trades but only have a small bankroll to risk, select an fx broker that caters to nano or micro traders. The smallest possible trade size must be small enough for you to carry out proper risk management. If you are forced to put all or most of your bankroll on the line for each transaction, proper risk management is not possible. You will be putting all or most of your eggs in one basket, which is not recommended.

This also ties into the issue of how large your first deposit into the account must be. Select a broker that accepts a first deposit of a size that you are comfortable with.

The trading platform

Before you make your first deposit, we strongly recommend you try the platform using play-money. Many brokers will allow you to open a demo account for free. It will be filled with play money, and you can use it to make play-money trades on the platform, check out the tools, and so on. Use this opportunity to test-run the interface and see if you like what this broker has to offer.

If you plan on trading on your mobile phone or tablet, make sure you test out the mobile app.

Transaction methods

You will need to make one or more deposits into your account, and hopefully, you will also become a profitable trader who sometimes makes withdrawals. Therefore, it is important that you select a broker who accepts a transaction method for deposits and withdrawals that you are okay with using and that will not cost too much.

Customer support

What are your deal-breakers when it comes to support?

Is phone support so important that you are willing to walk away from a broker that does not offer it, or is live chat and/or email support okay (or maybe even preferable) for you?

When do you plan to do your trading, and do you want the support to be staffed when you are active? If you are trading mostly during the nights, you will not be able to get help quickly from customer support that keeps to normal office hours.

Is there a toll-free or local number to call, or does phone support require a potentially costly phone call to another country?

Regulation

It is recommended to stick to brokers that are licensed by reputable licensing authorities. Examples of licensing authorities that have earned themselves a good reputation among small-scale hobby traders are CySec, BaFin, UK FCA, FINMA, and ASIC.

Reputation

Your fellow hobby traders can be a great source of information. Does this broker have a good reputation? Are a lot of different traders complaining about the same issues regarding a specific broker? Are issues (e.g. long wait for live chat support) fixed or does the same problem keep popping up over and over again in reviews?

Tip! All real brokers who have been in the business for a while have a few disgruntled clients, so if a broker has 100% positive glowing five-star reviews, that can also be a bit of a red flag.