Beginners Guide to Forex - Module 1

Beginners Guide to Forex 

Module 1: Basic Information on the Forex Market

The foreign exchange (forex, FX) market is the largest financial market in the world in terms of daily turnover. The retail sector is a small, but rapidly growing, portion of the overall forex market. As with any other market you may trade, you need to do your homework, read everything you can, paper trade with a demo account and then decide for yourself if the forex market suits your investing personality.

Our goal with these modules is to create a community to introduce novice or newbie traders to all the essential aspects of trading forex in an easy to understand and readable format.

The first question you may find yourself asking is, “What is the big deal? Why are people getting into the forex market?”

What is traded on the forex market?

Forex trading is the simultaneous buying of one currency and the selling of another. In the retail market, currencies are traded through a ‘broker’ who generally acts as the counterparty to all trades.  These trades always involve a pair of currencies such as the European euro against the US dollar (EUR/USD) or the British pound against the Japanese yen (GBP/JPY).

Convenience of the Currency Market

Unlike other financial markets that trade on an exchange, the forex market has neither a physical location nor a central exchange. The forex market is considered an Over-the-Counter (OTC) or Off Exchange market.  There is no central authority that regulates or monitors forex trading.  Any two counterparties that agree to exchange currencies are in effect a part of the global forex market.  The majority of forex trading, especially in the retail market, is conducted electronically via the internet. Given the global, borderless nature of forex trading, the market is open for business 24 hours a day during the trading week.

All you need to get started is a computer (or suitable hand-held device), a high-speed Internet connection, a live FX trading account, the information contained in these tutorials and a little homework on your part.

Which Currencies Are Traded?

The most popular currencies along with their symbols are shown below:

As stated above, currencies are always traded in pairs.  The most frequently traded pairs are known as the ‘majors’.  These include:

EUR/USD             euro/dollar

USD/JPY               dollar/yen

USD/CHF             dollar/swiss

GBP/USD             sterling/US – also known widely as ‘cable’

AUD/USD            aussie/US – often referred to simply as ‘aussie’

Forex Market Hours

Unlike other financial markets, the forex market operates 24 hours a day, 5.5 days a week, starting on Monday morning in New Zealand and ending on Friday afternoon in New York (6:00 PM New York time on Sunday until 4:00 PM New York time on Friday). Although the FX trading world is divided into three broad time zones covering Asia, Europe and the Americas, mid-week opening and closing times for each region have little impact on retail traders.  While the majority of trading action follows the sun around the globe, you can stay up through the night and continue trading if you wish to.  By convention, 5:00pm New York time is regarded as the end of one FX trading day and the start of another.

What Does It Cost to Trade Forex?

Forex ‘brokers’ such as IBFX do not charge commissions.  Instead, is compensated through a margin that is built into the bid/ask spread.  The only other potential cost relating to trading relates to the daily roll-over.  In simple terms, at 5:00pm New York time each day, any open positions are rolled-over into the next day in a seamless back-office transaction.  If you have an open position and are long the currency with high domestic official interest rates and sold the currency with low domestic official interest rates, you are likely to earn interest on your position.  However, if you have bought the low yielding currency and sold the high yielding currency, you will incur a charge that is approximately equal to the difference in the official interest rates between the two countries concerned, pro-rated for one day.  Other fees may exist, for example for withdrawals or dormancy, but these vary from one broker to another.

We recommend getting your feel for the market by opening a demo account. Many brokers offer demo accounts, and this is a great way to get your feet wet and dabble in the market without risk to your capital before jumping into the exciting world of currency trading with a live account.

Forex trading is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. The possibility exists that you could sustain a substantial loss of funds and therefore you should not invest money that you cannot afford to lose.

Posted By: 

Alex Douglas

As the Managing Director of IBFX Australia Pty Ltd, Alex plays a key role in the global expansion of IBFX. He brings with him a wealth of market knowledge and business development skills acquired during more than twenty years working in the financial markets in Australia and South East Asia.