What is Forex Trading
Forex is short for Foreign Exchange, and forex trading – also known as FX trader – is the same as currency trading. Forex trading is not a new invention; as long as there has been currencies and international trade there has also been a need to exchange one currency for another.
Today, the forex market is huge and electronic trading dominates. Two thousand years ago, a forex exchange professional would have accepted physical coins of one currency as payment for physical coins of another currency, but today, the FX trade is chiefly carried out by traders in front of computer screens.
The global FX market is characterized by high liquidity and a lack of centralization. On average, the equivalent of around $3.2 trillion USD are traded on this market per day. The eight major currencies (especially the USD, EUR, GBP, and JPY) account for a vast majority of this amount.
Being a small-scale forex trader
In the 21st century, a large number of trading sites and trading platforms have appeared online, making it possible to engage in FX trading even with a very modest bankroll. Small-scale forex trading has become a popular hobby and getting started is easy. You sign-up with a trading site, make a deposit into your trading account, and start trading.
Commission or spread
Companies that facilitate FX trading – such as the many retail FX trading sites available online – typically make the bulk of their profits either from commissions or from the spread or a combo of both.
The commission is a fee that you pay when making a trade. Exactly how it is calculated will vary, so always check this before you pick a trading site. A fixed fee charged per trade can become very expensive if you make a multitude of nano-trades instead of a few big ones per day, and you might be better off with a trading site where you pay commission based on trade size.
A trading site that makes money on the spread makes money from the difference between the sale price and purchase price for the various currencies. In essence, they pocket the difference and are thus, in a sense, FX traders too. Several trading sites are available where you don’t pay any commission because the site makes money from the spread instead. If this is beneficial for you or not depends on various factors.
Leveraged FX trading
Most sites that offer FX trading also offer leveraged FX trading. This means that you can borrow money from the site to buy FX currency. This is, of course, risky since you can end up losing more money than what you have in your trading account.
Many small-scale traders like to use leverage since it makes it possible for someone with a tiny bankroll to make a substantial profit from minute changes in the currency exchange rates. However, leverage also makes it possible to incur substantial losses, and you can end up owing the site a lot of money.
Never risk more than you can afford to lose! There is no such thing as a completely risk-free FX trade.