Forex, sometimes called FX, is an international market where many of the world’s currencies float in value against each other. This means that their values go up and down against each other in response to market conditions.
Perhaps you are familiar with trading stocks, but don’t know much about Forex. What is Forex trading and how does it differ from the stock, commodities or futures markets? What makes Forex so special? This Forex trading guide will help you down the right path to a solid understanding of Forex for beginners.
What is Forex Trading?
Forex trading is the act of trading a position in the market, that is buying or selling one currency in opposition to another currency. On the Forex market, the financial instruments you will be buying and selling are currency pairs. For example, if you believed that the Euro (EUR) would rise in value in relation to the U.S. Dollar (USD), then you would want to make a buy order on the pair EUR/USD.
While the stock market is open a few hours a day, the Forex market is open from late afternoon Sunday to Friday afternoon (U.S. Eastern time), making it open 24 hours a day, five days a week. Since Forex is an international market, orders are routed on a rolling basis across the world. So, even if you were located in the U.S. and the New York office was closed, your order would be routed through Tokyo, London or some other office throughout the world.
Unlike the stock market, with its thousands of options, the FX market has much fewer financial instruments to choose from. This allows you to focus on fewer instruments, and makes it easier to keep up with what would otherwise be a bewildering set of news items.
Forex Market Business Hours
As a 24 hour, 5 day a week market, what happens on the weekend during those two days when the Forex market is closed. It is even possible with some brokers to contact the trading desk on the weekends and execute emergency trades. It may be surprising to learn that although the Forex market is not open on the weekends, the prices are in fact changing during that time. Some experienced Forex traders try to avoid keeping trades open over the weekend for this very reason.
So, when the Forex market re-opens on Sunday afternoon, you may notice a gap between the closing price from Friday and the opening price on Sunday.
While regulation of the Forex market is greater than ever before, it is still much freer than that of the stock, commodities and futures markets. It is much more common to have access to margin with a Forex trading account than with a stock trading account and much easier to obtain. This credit provided by your broker magnifies your trading power by several multiples.
Another way that Forex is freer than the stock market is that its much easier to trade short. Since all of the currency pairs in the Forex market are pitted against each other, it is only natural and inherent to the market that you can trade short. For example, to reference our earlier example, if you feel that USD was going to rise against the EUR, you would simply do the reverse and sell EUR/USD instead of buying it.