What is Forex Trading and How Does it Work?
In this article, we will take you through the basics of what is Forex trading.
- How does Forex trading work?
- What is maximum leverage in Forex?
- What’s the meaning of swap in Forex trading?
We will compare the Pros and Cons of swing vs day trading, the benefits of Forex trading, and whether you can get rich by trading Forex.
Finally, we’ll tell you how you can choose the best Forex trading platform, the best forex broker to start trading Forex, and conclude with a forex glossary and beginner’s FAQs.
What is Forex Trading?
What is Forex Trading all about? – Forex (FX) trading, or foreign exchange trading, is the largest financial market in the world, with $6.6 trillion worth of FX transactions taking place daily. This averages out at $250 billion per hour worldwide.
In simple words, answering our primary question: “What is Forex Trading” – forex trading is the process of making a profit from buying one currency while simultaneously selling another.
In the past only large banks, financial institutions, and trading houses could actively trade in the forex marketplace. In recent years, however, online trading and increased access to financial service providers like tixee and accessible trading platforms like MetaTrader 5 have made it easier than ever for novice retail investors to trade in Forex.
Fortunately, as an individual trader, you no longer need a large amount of capital to trade in FX. By using leverage from a regulated and trusted financial service provider, you can start forex trading with small amounts.
Tip: The terms forex, FX, foreign exchange market, and currency market are interchangeable, and all refer to the forex market.
What is Forex Trading and How Does it Work?
Forex is a global, decentralised network of traders, including individual investors, brokerage houses, banks, and hedge funds, who buy and sell currencies to each other over the counter (OTC) at an agreed price, based on an exchange rate that constantly fluctuates due to supply and demand.
How does trading work?
Trading in forex involves speculating on the movement of one currency against another. For instance, you can predict that the value of one currency will increase or decrease in comparison to another. Then, if you make a successful prediction, then you make a profit.
There are several factors affecting the forex market value of currencies at any given time, including:
- Interest rates
- Inflation and central bank policies
- The pace of economic growth
- The current political climate, and
- Natural disasters
Forex Trading working Hours
The global forex market is highly liquid; it runs 24 hours a day from Sunday night to Friday evening. Thus, traders can respond to market changes much quicker than in the traditional stock market.
Forex trading is like buying and selling other types of securities, with the difference that it’s always done in pairs. There are numerous ways to trade in Forex. That said, they all work under the same principle: you always buy one currency while simultaneously selling another.
As mentioned earlier, you can make a profit in a forex trade when the currency you buy moves up against the currency you sold.
What is Leverage in Forex Trading?
How does leverage work in Forex?
With leverage you can use extra capital to open a position for larger amounts of currency than you could afford on your own.
But what happens when you enter a small deposit, also known as a margin? The financial service provider will put in the rest of the required funds to make a trade.
Please be aware that leverage can magnified both potential profits and losses.
What is Maximum Leverage in Forex Trading?
What does Maximum Leverage mean in Forex?
Brokers usually provide you with capital according to a predetermined ratio. At tixee, we offer leverage of up to 1:500, meaning that for every 1 USD you put up for trading, tixee would put up 500 USD. Hence, you would only need to add 1,000 USD from your funds to open trading positions of 500,000 USD.
How to use leverage in forex trading?
Using leverage potentially helps you increase your earnings if your trade is successful, much more than if you had traded currencies using just your funds.
Meanwhile, it’s important to note that leverage in any form of trading, multiples your gains and losses. This also applies to the foreign exchange market. Consequently, when you’re trading in larger amounts of currency, you increase your risk should the transaction prove unsuccessful. So, before using leverage, make sure you fully understand:
- the risks involved
- what happens if your losses exceed your margins
Forex Swap Meaning
What does swap mean in Forex?
A currency swap, or FX swap, is an agreement where two counter-parties exchange currencies. As a result, they swap principal and interest payments on a loan made in one currency for a loan of equal value in another currency.
The reason for doing currency swap is usually to obtain better interest rates on loans than if borrowing directly on the foreign market. Trading swaps are different from interest rate swaps because they involve both the principal and the interest rate payments on a loan.
Eventually, at the end of the loan period, both parties pay the interest on the swapped principal amounts. Then, the principal amounts are exchanged again at a pre-agreed rate.
What is Swap in Forex Trading?
When you trade with leverage, you borrow money from your broker to open a forex position. At that time, when a position is left open overnight, interest must be paid on that loan.
Meaning of swap in Forex Trading
A swap in forex is essentially the interest you either pay or earn on a trade made with leveraged funds that are kept open overnight. There are two types of forex swap:
- Swap long (when you keep long/buy positions open overnight), and
- Swap short (when you keep short/sell positions open overnight).
Note:A long position opens a trade that may generate profit if the exchange rate moves higher; a short sale may generate profit if the exchange rate moves lower. Swaps are expressed in pips per lot and differ depending on the financial instrument you’re trading.
You may profit from swap rates with the Carry Trade. Kindly note that this involves buying a currency with a high-interest rate while simultaneously selling a currency with a low-interest rate. You may make an earning on the net interest of the difference.
What is Swing Trading in Forex?
What is Swing Trading?
Swing trading is very popular in the forex market.
A swing trader is not interested in the long-term value of a currency but is looking to profit from expected price movements of currencies over an intermediate timeframe of days or weeks, but generally no longer than a couple of months.
Swing trading potentially maximises short-term profit by capturing a proportion of market swings. It involves anticipating where a currency’s price is likely to move, entering a position, and seizing a portion of the potential profit if that move happens.
The high liquidity of the forex market makes it an ideal environment for swing trading. Since trades are worked out over a few days or weeks, rather than minutes and hours, you can be a swing trader while maintaining a separate full-time job. Having a source of income independent from the forex market can help make the trading process much less stressful.
Swing trading can also be done with an ordinary computer and standard trading software and doesn’t require any specialist or state-of-the-art technology.
The use of various forms of technical analysis simplifies the process of swing trading that hunts down trading opportunities by observing price trends and patterns on charts. Anyone with some knowledge and a small amount of investment capital may try swing trading in their spare time.
What is Forex Day Trading?
What is Day Trading?
Day trading is a short-term trading strategy that involves buying and selling currencies within the same trading day. The highly liquid forex market, combined with access to high leverage, means forex day traders may capitalise on the slight price movements in currencies throughout the day. The idea is to potentially make small profits on multiple trades and attempt to cap losses on unprofitable trades.
When done properly, forex day trading can be a thrilling experience but being a successful day trader generally requires in-depth knowledge of the marketplace and an advanced understanding of technical trading and charting. Day trading also involves access to sufficient capital, a trading desk, multiple news sources, and advanced analytical software.
Swing Trading vs. Day Trading
Both swing traders and day traders seek to make a profit from short-term trading currency price movements. The key difference between the two is how long they keep their trading positions open. Swing trades involve at least an overnight hold and can even be carried out over a week or more, whereas day trade positions are closed within a single day.
Holding positions in Forex for longer does mean that swing trading can incur unpredictable risks, such as up or down gaps in their positions, so they are usually conducted with a smaller position size than day trading. However, because of this, swing traders usually need a smaller margin and can obtain higher leverage.
Traders should choose between swing and day trading based on their skills, preferences, lifestyles, and levels of knowledge and experience.
Day Trading and Swing Trading the currency market:
- Anyone with some knowledge and investment capital can dabble in swing trading.
- A swing trader can set stop-losses. This, combined with swing trades being worked out over days or weeks, means they require less monitoring than day trading and can be done part-time.
- Swing trading is less stressful than day trading and having a separate source of income means traders can potentially offset or mitigate trading losses.
- Swing trading is much simpler than day trading and doesn’t require in-depth market knowledge, experience, or advanced software access.
- Keeping trade positions open overnight or on the weekend may result in higher profits than day trades that trade in and out of the same security throughout the day. However, being kept open for longer means that swing trades are subject to increased market risk.
- Swing trading can lead to substantial gains but can also result in high losses as well so before engaging in trading, ensure that you fully understand the risks involved.
Can You Get Rich by Trading Forex?
The short answer is potentially YES. However, you should not assume that forex trading is just another get-rich-quick scheme. Trading in Forex aims to provide profit from taking calculated risks, which requires careful planning and effective discipline.
Anyone can learn to trade, but you need to invest a certain amount of time to learn trading techniques and understand why specific methods work. Done right, you too will be able to trade with confidence and discipline.
When making a trading plan, keep some things in mind:
- Keep it simple. Without in-depth market knowledge and experience, it’s best to ignore complicated methods and keep your trading strategies simple.
- Take calculated risks. The high liquidity of the forex market can lead to substantial profits. Be careful though, not to risk more money than you can afford.
- You will suffer periodic losses. Even successful traders lose money on some trades. So, in the process of learning how to trade, you may initially lose more money than you earn. In that case, make sure you have sufficient capital to mitigate your losses.
- Learn trading with a demo account. At tixee, we have trading demo accounts with virtual funds that you can use to learn how to trade without risking any money.
- Choose a reliable broker. Make sure to choose a trustworthy, reputable, and professional broker.
Benefits of Forex Trading
While the Forex market is dominated by large financial and business institutions, and banks, because of its relatively easy access and suitability for beginners, individual retail and hobbyist traders can also trade with the help of reliable brokers like tixee.
Free trading demo accounts mean that you can practice trading forex without risk, giving you the chance to learn in a simulated live trading environment without losing any money. Our free demo account lets you get used to trading platforms, familiarise yourself with market movements, and test your trading strategies without making any financial commitments.
Advantages of Foreign Exchange Market:
- It’s the largest financial market globally.
- It’s highly liquid, and effective strategies that carry a smaller risk.
- There are significant movements in currency values due to the currency market volatility, meaning more opportunities to make a profit (and also losses, as movements occur in both directions).
- It’s great for beginners who have some experience in trading.
- You can trade 24 hours a day, during your spare time.
- The availability of simple, intuitive, and powerful trading platforms like MetaTrader 5 are easy to use and allow you to trade in real-time from anywhere in the world/
- Low transaction costs.
- You can benefit from leverage from your broker and don’t need huge amounts of capital to start trading.
- It’s well regulated.
Best Forex Trading Platform
Which platform is best for forex trading?
You open and close positions through your broker’s trading software when you trade in forex. To trade sophistigated, you want to use a platform that includes a mix of stand-alone, web-based, and mobile trading platforms.
At tixee, we use MetaTrader 5 and MetaTrader 4, which are advanced trading suite that holds the industry standard for stand-alone software and is trusted by many traders worldwide.
Important note: MetaTrader 5 comes in both Windows and macOS compatible desktop versions. It is also available in a mobile version for both iOS and Android mobile devices.
A multi-asset platform, MetaTrader 5 provides a robust set of features that include real-time quotes, price charts, up-to-date news, research, and customisable watch lists. It combines advanced trading features with various technical tools designed to give you detailed and extensive price analysis and movement forecasts.
While using MetaTrader 5, you can keep track of your entire portfolio in detail, with the option to have up to 100 trading charts open on your screen at any time. Additionally, the in-built charting system allows unparalleled access to price and trend analyses over timeframes ranging from 60 seconds to thirty days.
MetaTrader 5 supports one-click trading, allowing you to trade your positions in line with your personal trading strategy and preferred risk management settings.
MetaTrader 5 at a glance!
- Trusted by many traders worldwide
- Secured data connection
- Desktop and Mobile versions
- One-Click Trading
- Multiple trade execution modes
- 30+ technical indicators
- Support for custom indicators
- Full charting capabilities
- 21 timeframes
- Comprehensive trade history
- Market watch real-time quotes
- Market depth feature
- Support for Expert Advisors (EAs)
The Best Forex Broker
What is the best forex broker?
Once you have decided to enter the forex market as an individual trader, deciding on a dependable broker is the next big step. Some of the most important things that should consider when choosing a broker are:
- Whether the brokerage house is regulated
- The level of security offered to keep your account safe from hackers
- Currency pairs offered
- Account features
- Available trading platform
- Level of customer service
It’s worth taking some time to consider how much money to invest, how much you are willing to pay in fees, and what your forex trading goals are.
A regulated forex broker
Using a regulated forex broker, like tixee, you will have peace of mind that its activities will be tightly checked and conducted fairly and transparently. Having confidence in your broker allows you more time to devote your attention to market analysis and developing your trading strategies. On top of that, using an experienced and trusted forex broker can remarkably enhance your trading experience. You can effortlessly access to trade in the most popular assets and pairs and empower you to open trade positions for much larger amounts than you could afford on your own.
At tixee, we’ve designed our trading accounts around our traders’ needs, emphasizing offering premium trading conditions, regardless of what type of account you hold with us or your experience as a trader.
Whatever your starting balance, tixee accounts aim to grow as your needs as a trader grow. We offer a wide range of trading accounts suited to all trading levels, and all our accounts come with our range of trading platforms, the renowned tixee trade execution, and our Negative Balance Protection. For novice traders, we offer a free demo account that you can use to empower your trading skills in a risk-free environment.
What we offer at tixee:
- Active clients across countries
- Negative balance protection
- Exclusive access to webinars
- Daily market news
- Free demo account to enhance your trading skills in a risk-free environment
- 220+ CFD Assets
- Trade on 5+ platform options
- Sophisticated insights and charts
- Straightforward withdrawals procedure
- 24/5 customer support
We hope we’ve covered the basics of forex trading for you today to help you decide for yourself whether to invest in forex trading.
We looked at what forex trading is and how it works. We also discussed how to get started in forex trading, how leverage from a broker can help you enter larger trading positions, the differences between day and swing trading, and which would be best for a novice trader. And we finished by discussing whether you can potentially benefit by trading Forex and outlining the things you need to look for when choosing the best platform and best broker for your trading needs.
It’s only natural that you’ll still have questions about forex trading. We’ve put together a list of frequently asked questions below, along with explanations of some key forex trading terms.
We also have a dedicated section on our website for education and research, with training webinars, live market reports, and the opportunity to create a free demo account using virtual funds so you can learn how to trade Forex in a risk-free environment.
We believe that sophisticated trading requires effective communication. That’s why our experienced team is available to answer your questions 24/5.
Contact our team today and let us explain how you can upgrade your experience by choosing tixee as your preferred broker.
Frequently Asked Questions:
Each currency has its own three-letter code in forex trading, like a stock’s ticker symbol. Did you know that the most forex transactions include the US dollar? For this reason, it’s helpful to remember its code: USD.The second most commonly traded currency is the euro, accepted across all 19 countries in the European Union. Its code is EUR.
Other major currencies that it’s important to recognise are:
- JPY: Japanese Yen
- GBP: British Pound Sterling
- AUD: Australian Dollar
- CAD: Canadian Dollar
- CHF: Swiss Franc, and
- NZD: New Zealand Dollar
Most importantly, you can trade currencies always in currency pairs because Forex trading involves the simultaneous exchange of one currency for another.
In that event, the following currency pairs account for three-quarters of all trading in the foreign exchange market, making them known as the majors:
Forex prices are described as rates. The exchange rates represent the value of one currency against the other (how much of the quote currency needs to exist to buy one unit of the base currency). Rates are always expressed as a base currency and a quote currency:
- The Base Currency is always first listed, and its value is always equal to one
- The Quote Currency is always listed second, changing based on the current market value.
Particularly, if we compare the euro against the Dollar (EUR/USD) today, it would be:
EUR/USD = 1.10
Based on the above currency pair, the base currency is EUR (euro), and the quote currency is USD (US dollar). As a result, this means that 1 EUR will buy you 1.10 USD. Put it differently, it will cost you 1.10 USD to buy 1 EUR.
The exchange rate can rise or fall depending on the relative value of the base currency to the quote currency. Hence, if the exchange rate has increased, the base currency has risen compared to the quote currency (1 euro will buy more US dollars). If the exchange rate has fallen, the euro will have fallen in value and won’t buy you as many US dollars.
In simple words, a pip is a basic Forex concept, and it stands for ‘point in percentage,’ ‘percentage in point,’ or ‘price interest point.’ It’s the unit of measurement that shows a change in one currency’s value against another.Specifically, when you trade in Forex, you buy and sell a currency with its value in relation to another currency. For your information, a pip is the smallest price move that an exchange rate can make in reference to Forex market conventions. Thereby, pips measure the movement in the exchange rate.
Most currency pairs include a maximum of four decimal places, except for Japanese yen (JPY) pairs that include two decimal places.
The pip is equivalent to one-hundredth of one percent, or the fourth decimal place.
Traders use the term ‘pips’ to refer to the spread between the bid and the ask prices of a currency pair to indicate the amount of gain or loss coming from a trade.
Keep in mind that very Forex trade involves buying one currency and selling another. According to this, Forex trades are always quoted in currency pairs, e.g., EUR/USD: the base currency on the left (and always equal in value to 1) and the quote currency on the right.The “bid price” is the cost of buying the base currency in every Forex trade, whereas the “ask price” is the cost of selling.
You will have noticed a pip difference between the two. This indicates the variable spread of Forex trade. The spread in Forex is the small cost that exists into the bid and ask prices of every currency pair trade. The spread and your lot size will decide the total cost of every trade.
A position in forex trading is the exposure of an amount of currency held by a trader to movements of that currency against other currencies. So, a position can either be long (buying) or short (selling).A position is open when it may make a profit or incur a loss. Thus, it becomes closed once the trade has finished, at which point you realise your profit or loss.
Three things determine a forex position:
- The currency pair that you chose to trade
- Its direction (either long or short)
- The size of the lot
For these reasons, your position varies depending on whether you buy or sell your asset and how much you have of it.
The essential goal of forex trading is to buy low and sell high, making a profit on your initial investment. Understanding the basics of going long or short in forex trade is fundamental for all beginner traders. Moreover, in a forex trade, you are simultaneously buying and selling currency pairs. Still, taking a long or short position comes down to whether you think a currency will go up (appreciate) or go down (depreciate) in value compared to another currency.
You can open Forex trades in either direction. When predicting that a currency will go up in value, you would “Go Long,”. Given this, you would buy a base currency in anticipation that it will rise in value against the quote currency.
Eventually, if predicting that a currency will go down in value, you would “Go Short,”. This means that you would sell a currency pair if you predicted that the base currency would fall in value against the quote currency.
One of the advantages of forex trading is that you can make these kinds of directional trades based on the state of the market. The forex market is open 24 hours a day. Reacting to breaking news, you can make trades much quicker than on the traditional stock market.