Forex Trading For Beginners

The forex market is the largest and most liquid of the capital markets. The current trading volume is more than 6.6-trillion in notional transactions per trading day. Forex trading consists of exchange one currency called the base currency for another currency called the counter currency. Although some governments try to control their currencies’ movements with a specific policy, the forex markets’ exchange rates float. Forex trading is facilitated by forex brokers who help clients buy and sell currency pairs. Broker’s will offer their clients full-service trading platforms that allow you to see your balances, profit and loss, and transaction history. Many brokers will also provide their clients leverage with the use of a margin account. 

What Securities are Traded in FOREX?

When you trade the forex markets, you are swapping one currency, known as the base currency, for another currency, known as the counter currency. When you exchange, you are trading a specific amount of the counter-currency for the base currency. For example, at an exchange rate of 109 for the USD/JPY currency pair, you can exchange 109 Japanese yen to purchase one U.S. dollar. The base currency will be the first currency referenced in a currency pair, and the counter currency will follow. For example, when you see the currency pair EUR/USD, the Euro is the base currency, and the U.S. dollar is the counter currency. 

When Should You Trade Currencies?

The forex market operates 24-hours a day, six days a week, and the global forex markets are open somewhere due to time zone differences. However, not every global market actively trades every currency. Australia is most liquid when the country is available for business, which is also true for Canada. The Euro is the most liquid of the currency pairs. The best time to trade currencies is during the European time zone. There is a significant increase in the volume in the currency markets between 0700 through 2000 GMT. After this, movement each hour begins to taper off.

What are the Most Liquid Currencies?

The most liquid currencies are the major currency pairs. The U.S. dollar is the most actively traded currency. Approximately 88% of the currency pairs sold throughout the globe consist of a trade that incorporates the U.S. dollar. About 28% of the currency pairs traded are EUR/USD. The next most liquid currency pair sold is the USD/JPY, which provides 13% of the transactions traded daily. The British pound versus the dollar is next, followed by the Australian dollar and then the Swiss Franc.

The most liquid currency pairs are called the major currency pairs. The EUR/USD, USD/JPY, USD/GBP, USD/CHF, USD/AUD, and USD/CAD are major currencies. Currency pairs that do not fall into this category are called minor currency pairs, cross-currency pairs, or emerging currency pairs. A cross currency pair is a currency pair that does not have the U.S. dollar as one of its components. An emerging currency pair is a currency pair that has one currency that is from an emerging market. When a currency pair is not a major currency pair or an emerging currency pair and is also not a cross currency pair by default, it is referred to as a minor currency pair. 

How Do You Trade Currencies?

The traded majority of the currencies are through the over-the-counter market. Over-the-counter transactions generally are sold through brokers who will provide you with market-making capabilities. Brokers will give the customers leverage, allowing you to enhance the returns you will receive when you trade the currency markets. Leverage enables you to increase the volume of currency that you are dealing with through borrowed capital. You might be familiar with this concept if you have purchased a home. Banks will provide you with a loan to buy a home while you only put down a fraction of the money needed to close on your transaction. Forex brokers will allow you to purchase or sell a currency pair but only put up a fraction of the value. Some brokers provide leverage that is up to 400 to one. 

Leverage is provided through a margin account. A margin account is similar to a credit account. A broker will determine if you are an acceptable risk and use the currencies in your account as collateral. If your account’s equity falls below a specific level, your broker will ask you to add money to your account. If you don’t or can’t, your broker will take control of your account and liquidate your positions. 

The Bottom Line

The currency market provides investors with the most liquid capital markets to trade. Most of the liquidity is through the major currency pairs, with the U.S. dollar taking up the lion’s share. Brokers facilitate most of the global currency trading through the over-the-counter markets. They offer the ability to trade through a platform that provides leverage through a margin account. It would be best if you were careful trading with leverage. While it can enhance your returns, it can also increase your potential for losses.

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