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When investors trade currencies in the large liquid foreign exchange market, they’re engaging in forex trading. Forex — short for foreign exchange — offers opportunities to turn a profit in the world’s most traded 24/7 market, where traders exchanging one currency for another at an agreed price. Given its complexities, forex trading is highly suited to experienced investors, though many new traders quickly succumb to the excitement of this dynamic market.
Forex traders come to the market with one main aim: profit from the sometimes minute changes in value of one currency against another. They do this by basing their investment decisions on whichever way they think forex prices will fluctuate in the future.
For example, if experts anticipate that the Australian dollar will decrease in value against to the US dollar, forex traders will sell their Aussie dollars and buy US bucks. If the US dollar then increases in value, the trader gains greater purchasing power to buy more Australian dollars than they initially had — resulting in a tidy profit.
On the global forex market, currencies are quoted in pairs — that is, in terms of their value against other currencies. In the forex market, these pairs are expressed as AUD/USD, GBP/EUR and USD/GBP. You’ll sometimes hear these pairs referred to by nickname. Keeping things lively, AUD/USD is often called the “Aussie,” EUR/GBP the “Chunnel,” GBP/USD the “cable” and USD/CHF the “Swissy,” among others.
You’ll find a range of trading platforms to choose from for forex. To place a trade, you simply select what you want to buy or sell and indicate the amount of your transaction.
Access more than 80 currency pairs from your desktop or phone with this all-in-one hub.
| Available asset types | Currencies |
|---|---|
| Stock trade fee | |
| Option trade fee | |
| Annual fee | 0% |
Forex trading has many advantages for the right investor, starting with its 24/7 accessibility. Unlike the New York Stock Exchange, which is open weekdays only from 9:30 a.m. to 4 p.m. EST, the global forex market runs Monday through Friday around the clock. This means that forex prices constantly fluctuate, offer plenty of investment opportunities for traders.
Investors use leverage to significantly increase their profits. Leverage allows investors to conduct a trade without putting up the full amount of that trade, controlling a large amount of money using a little of their own and borrowing the rest.
The forex market offers investors the highest achievable leverage among other markets, which means there is a much higher potential for profit from a small initial outlay. Unfortunately, this also means a greater risk for suffering a loss.
Graham is a veteran investor who buys and sells currency pairs. Anticipating that the US dollar will increase in value against the euro, Graham purchases $100,000 in US dollars using a forex contract at €0.90. Because his forex trading platform allows him to place trades at a margin of 1%, this investment costs Graham $1,000 to place.
Time shows that Graham’s prediction is correct! The US dollar rises to €0.925, resulting in a profit of around €1,575 or $1,700 for Graham after factoring the cost of his investment.
Several forex trading services are available to US investors, some geared toward beginners and others for experts.
As with any other form of investment, you need to carefully review the fees and charges that apply specifically to trading forex. To start, compare among a range of providers the margin you’re required to meet in order to make a trade. This margin of 0.5%, 1% or more will affect the total amount you’ll spend to buy or sell forex. For instance, if your account has a margin of 1%, a trade worth $100,000 will require you to spend $1,000.
In addition, most providers charge a commission for every trade you make. These fees can be as low as a few cents per thousand dollars, but some providers charge no commission on your trades. You may pay a fee to pay by credit or debit card.
Finally, consider the spread — or the difference between the buy and sell prices for each currency pair. The spread is effectively what a broker or trading platform charges you to make a trade. Look for a trading platform that offers tight spreads to minimize your overall costs.
Most forex trading platforms allow potential traders to apply online for an account within minutes. The application process varies by provider, but you typically complete an online application and then wait to learn whether your application is approved.
To comply with the law, a provider may require you to supply:
With so many experts touting strategies for nearly any kind of investment, it’s no surprise that you’ll find several strategies for trading forex — from the basic tools to complex approaches.
One common strategy is to perform technical analysis or fundamental analysis to more solidly predict the future performance of a currency pair. Also common is a day-trading strategy, which is based on the simple premise that you don’t hold forex positions overnight. In general, the longer you hold open a position, the greater risk of suffering a loss. To minimize risk, traders can close all positions held before the end of the trading day.
A third strategy is researching the past fluctuations of a currency and using what you’ve learned to predict future price movements. The previous upper limit of a price is called its resistance limit, and the previous lower limit is its support limit. Traders use these resistance limits and support limits to make an educated guess as to when a currency’s value might rise or fall.
Learn more about tactics in our guide to forex trading strategies.
While it’s possible to make money trading, it’s also inherently risky. Experience trading, time and the ability to make upfront investments—and recover in the case of losses—are all necessary if you want to make meaningful gains.
Trading currency isn’t a get-rich-quick business. You’ll need to dedicate a fair amount of time to watching the markets, and if you’re inexperienced, you’ll also need to spend time immersed in learning the system. Strategies come in handy, but no one strategy is right for every situation.
Before you start trading forex, research and understand the risks involved with this sort of trading.
Read up on how to compare offshore accounts
Trading stocks and forex may seem fairly similar, but there are a number of notable differences. Learn the risks involved with both.
IG offers tight spreads and lets you access over 80 currency pairs with leverage as high as 1:50, but the platform is far from risk-free.
A basic guide to forex futures and how you can use them.
A foreign exchange option offers flexibility and could insulate you from poor exchange rates.
A cross-currency swap could help you acquire foreign currency at a better price.
Foreign exchange derivatives are easy to understand — we explain them here.
The stop-loss order can help you avoid big losses on your currency holdings.
Learn the terminology and how the market works before you begin trading forex.
Find out whether OANDA could suit your forex trading needs.
Good foreign exchange robots can simplify how you trade in foreign currencies and they can also work in maximizing profits, but relying on them is not a good idea.
