On this page we give you a gentle introduction to what forex trading is, how it works and how you can profit from it. Forexboost is a free forex training site and we're here to help you learn about trading forex for a profit. If forex currency exchange is new to you, in addition to the information below, you can read our Forex Trading For Novices section. This is a lot of excellent free forex trading information on our site. Let's start at the beginning.
What is Forex?
'Forex' is a contraction of foreign exchange. It is also sometimes called F/X, 'spot trading', or 'spot.' They all mean the same thing.
Most people have a vague idea that forex is buying and selling foreign currency, but how does anyone make any money from it and why is it a big deal?
Forex is not just a big deal: it is the biggest deal. The largest amounts of money traded in the world today are not for goods, or services; not for stocks or shares, but for currency. Forex is buying money with money.
There's also a new Forex book from Dummies Publishing called Currency Trading for Dummies. This is a great book to learn everything about the forex trading business, how it works and what tools and strategies are used. It's less that $20 so if you're new to this business, we strongly recommend you get this book to learn more.
Forex Market Hours?
Forex is a 24 hour market. It's open all hours from Sunday night to late Friday afternoon EST. The forex market is not traded on a regulated exchange such as the New Your Stock Exchange for trading stocks and commodities. The forex market consists of a network of financial institutions and brokerages, each having their own hours of operation. Depending on your timezone, you will find the best hours for your trading schedule. The market times below are in EST (Eastern Standard Time) and are the times the market sessions open and close. Please adjust the time for your time zone:
So how can anyone make money from buying and selling money?
Imagine you have a dollar bill and you need change for something urgently. You need to make a phone call from a public phone, or you need a mars bar from a coin-only vending machine because you're a diabetic. There is no one around. You ask the first person to come by if they can make change and they say: “sure, I'll give you 90 cents in dimes.”
You have what you need: coins, and he has what he wants: a 10% profit.
With forex your not buying dimes with dollar bills, or dollar bills with dimes. You're buying yen with dollars, or Euros with pounds, but the basic principle is the same:
Someone with yen wants your dollars. If they offer you a price you like, you sell them your dollars for their yen. Then you want euros, so you buy someone's euros using your yen. Etc. There are some fuller examples below.
There is a fair amount of jargon, rules, and so forth and when you're more advanced there are some very profitable techniques that you can learn, but in its simplest form forex is buying and selling different currencies to make a profit.
That's the simplistic example. This is a more realistic example of a forex trade. It includes numbers and rates. If you are completely new to the forex arena, this may be a little hard, but stick with us, you'll get it eventually!
Any jargon words will appear as a link. Clicking on that word will take you to our forex glossary of terms, where you can get a simple explanation of the word's meaning. Then just click your back button on your web browser to come right back here where you left off. Now, on to the example.
The Euro/ USD is trading at 1.10. That means you get 1.10 Euro for each dollar.
You decide to buy $100,000 worth of Euro (you don't need $100,000 to do this. We'll get to that later). $100,000 becomes €110,000.
The next day the dollar falls against the Euro – this also means that the Euro rises against the dollar. In any pair of currencies that are compared: USD/ EUR, or GBP/YEN, or any comparison between 2 currencies where one side rises, the other side falls.
Picture the USD on one side of a see-saw and Euro on the other side. If the dollar side goes up, the Euro side goes down, and if the Euro side goes up, the dollar side goes down.
Back to the example: the next day, as we said, you hear on the news that the dollar has fallen to 1.05 against the Euro. From our see-saw analogy we also know that this means that the Euro has gone up against the dollar. And if you own Euro - which we do since we bought €110,000 - this is good news.
The exchange rate is 1.05, so 1 dollar only buys you 1.05 Euro – but that is the exchange rate for changing dollars into Euro. We want to change our 110,000 Euro back into dollars.
For that we need the other side of the exchange rate. In simple terms it is 1 divided by the dollar to Euro rate. In reality there is a slight mismatch, but more on that later.
1 / 1.05 = 0.95238
That means that 1 Euro will buy you just over 95 cents, USD. How much over 95 cents? 0.238 of a cent more than 95 cents.
You don't have to work these rates out for yourself, but it's important to understand that they are two different sides of the same exchange. USD to EUR and EUR to USD
So, to find out what the 110,000 Euro we bought is now worth, we multiply it by 0.95238 to find out what it is now worth in Dollars.
110,000 x 0.95238 = 104,761.8
If we traded our Euro back into dollars today we would get $104,761.8
That's a profit of $4,761 thru forex trading.
As you progress and learn about forex, through forexboost.com we'll show you fuller examples of trading forex, building on what you know until you're ready to go on to the hardcore forex trading strategies, like those you would find on our Forex Trading Strategies page, but for now you're not ready for that. Especially if you don't know the answer to the next important question:
I DON'T HAVE $100,000 – how can I make that kind of forex trade?
You can make that kind of trade if you have an F/X brokerage account. We'll go into more detail about brokerage accounts on the intermediate page, but for now we'll deal with the mystery of the $100,000 trade.
When you open an F/X trading account with a forex broker you have to deposit some money in your account.
Say for example you opened an account with a forex broker of your choice.
You transfer $2,500 from your checking account into your new easy-forex account. This amount is called your margin deposit.
When those funds have cleared – i.e. easy-forex confirm that they have that money from your bank (which happens in minutes if you use a credit card), they will allow you to to use your margin account to start trading 'on margin'. On margin basically means 'on loan'. See the forex glossary for further details of any jargon words.
Your forex broker will allow you to use your margin deposit (the $2,500) as 'margin gearing'. Typically you get a gearing rate of 1%. What that means in English is that if you have a gearing rate of 1%, you can make trades up to 100 times bigger than the amount you deposited. **
So with a forex trading, account if you deposit $2,500 you can make trades as big as $250,000. You can open an account with as little as $50 with easy-forex, and start trading, but if you want to give your trades some breathing room, we recommend you start with at least $250. Easy-forex is also a very simple trading platform to use and has some great online tutorials that walk you thru step-by-step. As you start getting more comfortable trading, you can start looking for brokers that better fit your trading style.
But a $5,000 deposit with easy-forex means you can make Million Dollar trades.**
In the next section of forexboost (which is geared towards people who know the basics of forex that you are learning here) we talk more extensively about opening your first forex account and making trades. For now, here is some more background.
Making a Forex Trade
Making a trade is sometimes called “taking a position [in something]”. The normal words of “buy” and “sell” can easily become confusing. You can, for example, sell something you don't have. That's not the way things work normally.
If you sell something that you physically have, like a car, once the trade is done, and you have sold your car, that's it. The deal is complete.
The same is true for currency you physically have: if you physically have 2,000,000 yen, and you sell them, that's it. Your forex deal is complete.
But if you sell 2,000,000 yen and you do not physically have them your trade is not complete. At some point you have to deliver those yen. Until you do your 'position' (in the Yen) is 'open' (not complete).
How can you sell something you don't have?
Follow these steps mentally:
Imagine you want to buy 2,000,000 yen.
You want to buy it at today's price.
I think it will be cheaper to buy 2,000,000 yen tomorrow.
I sell you 2,000,000 yen – meaning that my brokerage firm physically sells you the 2,000,000 yen.
I can pay the brokerage back the 2,000,000 yen later.
How much later? As much later as I like really.
In the mean time I have to pay my brokerage interest on the 2,000,000 yen. It's a few dollars a day.
In a week's time the yen does get cheaper, as I suspected.
It is now cheaper for me to buy the yen than it was when I sold them to you.
The difference between the buying price (today) and the selling price (last week) is my profit.
Costs of Trading Forex
The broker makes its money from the spread between the bid and the ask prices and some brokers may charge a commission as well.
Remember in our first example? When we were converting back into dollars from Euro and the USD/ EUR rate was 1.05, we said that the other side of the see-saw was 1/1.05? That was a simplification.
If the see-saw relationship was that direct, it would be a fully reciprocal relationship. It is not. Instead, there is a built in difference in every pair of exchange rates; in every trade.
Kid in a Forex Candy Store
Imagine an indecisive kid in a forex-like “candy broker”. There is a sign on the wall that says: “The candy man will sell a box of 100 gum balls for $1.05.” The sign also says (because it's a forex-like candy store) “The candy man will buy a box of 100 gum balls for $1.01”
The indecisive kid looks at the sign and says: “Here's $1.05. I'd like a box of gum balls please.”
The candy man hands them over, but as soon as he does the kid starts to look pensive.
“I've changed my mind,” says the kid. “I'd like my money back.”
“Certainly sir,” the candy man replies. He takes back the box of gum balls and gives the kid back $1.01.
Within forex trading there is a small discrepancy (much smaller than in this example) between the rate to convert to any currency, and the rate to convert back to the original currency. This is known as 'the spread'. And just as its gambling namesake, you have to beat the spread first before you make any money with a forex trade. A spread is like a commission you pay to your forex broker for their service. As with any broker, be it forex, stocks, etc. they are not in this business to make friends. They're in it to make money.
Introduction to the Forex Lingo
The information here may seem a little strange at first, but eventually it will all become second nature to you. Within a few weeks of starting you won't even be aware of this stuff – it's the way that forex works and it seems obvious; you take it completely in your stride.
Understanding the crazy words used in forex
Traders use special words. Simply saying “buy” and “sell” very quickly becomes confusing in a world where the sale can be the start, not the end of a trade and also because one man's “buy” is another man's “sell” (as there are two sides to each transaction, a buyer and a seller).
We realise that these new words are even more confusing for new people, but we'll show you an easy way to remember what is what.
You can find more explanations of what many of the forex jargon words mean in the glossary section.
For now we'll touch on a few here:
“Ask" rate” is the rate (of exchange) at which someone will sell to you. This is your Buy price.
“Bid” is the rate (of exchange) at which someone will buy from you. This is your Sell price.
In our above example, the candy man had:
A bid rate of $1.01. His ask rate was $1.05.
On a forex screen you might this displayed as:
GUM/ USD 1.01/05
1.01/05 is a contraction of the bid rate 1.01 and the ask rate 1.05
The bid rate – the rate at which you can sell – is always displayed first.
The rate that you must pay to buy a box of gum balls (GUM) with dollars (USD) is 1.05 ask rate.
The difference between the bid and ask price of a currency is called the spread.
The first time you go through this information it may make your brain complain. Go though this page again if it's all new to you or if you're having trouble understanding any of the concepts in here. There is no shame in it, everyone was a rookie at one time! Take advantage of our free forex training.
In a few weeks you'll be hungry for the kinds of inside forex trading strategies that give you a big edge and make your forex trades profitable 9 times out of 10, but for now there is no rush. When you feel that you understand these forex basics – even if you only “mostly” understand them – you are ready for the next step on your forex trading journey.
Want to learn more? Check out our Getting Started section.