Forex (FX) refers to the global electronic marketplace for trading international currencies and currency derivatives. It has no central physical location, yet the forex market is the largest, most liquid market in the world by trading volume, with trillions of dollars changing hands every day. Most of the trading is done through banks, brokers, and financial institutions.

The forex market is open 24 hours a day, five days a week, except for holidays. The forex market is open on many holidays on which stock markets are closed, though the trading volume may be lower.

Its name, forex, is a portmanteau of foreign and exchange. It’s often abbreviated as fx.

Forex traders use various analysis techniques to find the best entry and exit points for their trades. Forex exists so that large amounts of one currency can be exchanged for the equivalent value in another currency at the current market rate.

Some of these trades occur because financial institutions, companies, or individuals have a business need to exchange one currency for another. For example, an American company may trade U.S. dollars for Japanese yen in order to pay for merchandise that has been ordered from Japan and is payable in yen.

A great deal of forex trade exists to accommodate speculation on the direction of currency values. Traders profit from the price movement of a particular pair of currencies.

There are some major differences between the way the forex operates and other markets such as the U.S. stock market.

Fewer Rules

This means investors aren’t held to as strict standards or regulations as those in the stock, futures, or options markets. There are no clearinghouses and no central bodies that oversee the entire forex market. You can short-sell at any time because in forex you aren’t ever actually shorting; if you sell one currency you are buying another.

Fees and Commissions

Since the market is unregulated, fees and commissions vary widely among brokers. Most forex brokers make money by marking up the spread on currency pairs. Others make money by charging a commission, which fluctuates based on the amount of currency traded. Some brokers use both.

Full Access

There’s no cut-off as to when you can and cannot trade. Because the market is open 24 hours a day, you can trade at any time of day. The exception is weekends, or when no global financial center is open due to a holiday.

Leverage

The forex market allows for leverage up to 1:50 in the U.S. and even higher in some parts of the world. That means a trader can open an account for $1,000 and buy or sell as much as $50,000 in currency. Leverage is a double-edged sword; it magnifies both profits and losses.5

Example of Forex Transactions

Assume a trader believes that the EUR will appreciate against the USD. Another way of thinking of it is that the USD will fall relative to the EUR.

The trader buys the EUR/USD at 1.2500 and purchases $5,000 worth of currency. Later that day the price has increased to 1.2550. The trader is up $25 (5000 * 0.0050). If the price dropped to 1.2430, the trader would be losing $35 (5000 * 0.0070).

About the Rollover

Currency prices move constantly, so the trader may decide to hold the position overnight. The broker will roll over the position, resulting in a credit or debit based on the interest rate differential between the Eurozone and the U.S.

If the Eurozone has an interest rate of 4% and the U.S. has an interest rate of 3%, the trader owns the higher interest rate currency in this example. Therefore, at rollover, the trader should receive a small credit. If the EUR interest rate was lower than the USD rate, the trader would be debited at rollover.

Rollover can affect a trading decision, especially if the trade can be held for the long term. Large differences in interest rates can result in significant credits or debits each day, which can greatly enhance or erode profits (or increase or reduce losses) of the trade.

Most brokers provide leverage. Many U.S. brokers leverage up to 1:50. Let’s assume our trader uses 1:10 leverage on this transaction. If using 10:1 leverage the trader is not required to have $5,000 in an account, even while trading $5,000 worth of currency. Only $500 is needed.

In this example, a profit of $25 can be made quite quickly considering the trader only needs $500 or $250 of trading capital (or even less if using more leverage). That shows the power of leverage. The flip side is that the trader could lose the capital just as quickly.

Is Forex Trading for Beginners?

Forex trading can be risky and complex, involving quick decisions due to how fast exchange rates change. It is likely not suited for beginner traders; however, traders can spend time learning forex trading with test trading or with low levels of capital.

How Much Do You Need to Start Trading Forex?

There are many risks to forex trading. Exchange rates are very volatile, changing often, which could quickly impact a trade. There is also a significant amount of leverage involved in FX, meaning small movements can result in large losses. In addition, there is transaction risk, interest rate risk, and global or country risk.

You can start trading Forex with around $100. This will be enough to get you started in buying and selling currencies. It is also a good level for beginners as it isn’t a very large amount of capital to lose.

What Are the Risks of Forex Trading?