The word “forex” is an abbreviation for “foreign currency exchange.” The term refers to the act of trading currencies on the global market by exchanging one currency for a different one with the goal of making a profit as a result. Forex, also abbreviated FX, is a decentralized worldwide market where people can trade any and all of the world’s currencies.
The forex market is the biggest financial market in the world in terms of total trading volume. The average amount of currency that is traded per day is greater than $5 trillion. This far exceeds all the stock trading volume per day of the entire world. If you have ever exchanged money for a currency of a different nation, then you have completed a forex transaction.
If you are intending to trade currencies from home on your computer, you would be what is called a “retail trader.” The vast majority of forex trading volume consists of transactions done by this type of forex trader.
Individual traders who trade from home are interacting in the “spot market.” Usually, when people talk about the forex market, this is the market they are referring to. The term “spot market” means that currencies are bought or sold according to their current price.
Currency prices are determined by supply and demand. For example, if more people are willing to buy than are trying to sell, the buyers will bid up the price in order to close a deal with one of the sellers, and this causes the price to go up. Conversely, if more people want to sell than buy, the sellers will need to bid the price down in order to close a deal with a buyer. As a retail spot market forex trader, you will buy a currency or sell at the current price that is set by these market activities.
The procedure for becoming a trader is simple today because of the prevalence of electronic platforms and the internet. To trade from home as a retail trader, you will need to open a trading account with a brokerage firm. You don’t need very much money to open an account, and there is no limit imposed on the number of trades you execute per day as long as there are funds in your account to cover the transactions.
Retail forex trading in Canada is a relatively popular pursuit. The forex market is generally unregulated in most places, as it is a global, decentralized market. The regulation that exists is at the local level. Forex traders who want to operate in Canada would benefit from choosing one that is authorized by the Investment Industry Regulatory Organization of Canada (IIROC).
If you want to trade forex in Canada, look for the IIROC regulation membership disclosure at the bottom of the brokerage firm’s website page. Forex trading has a lot of risk, and dealing with an unregulated broker carries even more risk. Successful traders thrive by minimizing risks as much as possible.
After you have opened an account with a brokerage firm, you will either do trades through their browser-supported platform or download a desktop platform such as Metatrader that will give you a more robust user interface to watch the market and use various tools for analysis and trading.
When you are looking at the currency market, you will see charts for various currency pairs that show the real-time exchange rates for each one. A currency pair displays two currencies that are denoted by a three-letter acronym, and they are separated by a forward slash. The most actively traded currency pair is the Euro and US dollar pair. This pair is displayed as “EUR/USD.”
The first currency in the pair, the euro in this case, is always the base currency, and the second is always the quote currency. This means that the given price for that pair is a quote for how much of the second currency is required to buy one unit of the base currency.
When you decide to buy this currency pair, you will be placing an order to buy Eurodollars at the currently quoted price in USD for the euro. Your goal as a trader is to make a profit after exiting a trade. So, in this example, you are hoping that the quote price of the EUR/USD will go higher when you sell than it was when you bought, thereby increasing your forex brokerage account with a profit after the transaction is complete.
When traders describe price movements of currency pairs, it is always in units called “pips.” It takes ten thousand pips to equal one full unit of currency, except for some lower-valued currencies, such as the Japanese yen, where it takes only 100 pips to equal one full unit. For a more standard example, such as US currency, it takes 10,000 pips to make a single dollar.
When you look at the price of a currency pair it is expressed as a whole digit followed by five decimals such as 1.10015. The fourth decimal place is the pip. For example, if the price were to go up to 1.10115, then it would be said to have increased by 10 pips.
How would this work in a trade? In the case of US dollars, if you open a trade with a position size of $100,000, which is called a “standard lot,” the value changes by $10 per pip. For example, if you sell after the price increases by 50 pips, you have made $500 in profit on one trade, which is pretty good for the average retail trader.
Leverage is a service offered by the broker which means they are increasing your position size by a multiple of how much money you have available to trade. For example, if you have $1,000 in your trading account with your broker, they will usually be willing to leverage your purchasing power to trade $10,000 worth of currency. This would be expressed as a leverage of ten to one or 10:1.
Leverage allows retail traders who don’t have large amounts of capital to make more profit, but greater leverage also carries greater risk of big losses. The broker is essentially lending money in this situation, but they have the ability to cancel your trade if your account is getting too low, which helps ensure that they can collect their fee from the transaction.
The amount of leverage that brokers are allowed to offer is regulated by local governing bodies, and it varies a great deal from one country to another. Most countries are lenient in this regard, and brokers can offer over 500:1 leverage. Some countries, such as the United States, imposes a limit of 50:1 in order to protect traders from making foolish transactions that risk too much of their capital in one transaction.
CFD is an acronym that stands for “contract for difference” which means that the brokers agree to perform a transaction on behalf of the client at a different price from the one that is quoted by the market at the time. The difference in price gives the broker a profit after closing the deal. The transaction functions as a contract between the broker and the client. These contracts can be used for foreign currency trading, and they can also be used for other markets, such as oil and gold.