What is Forex Trading?
Also referred to as foreign exchange or FX trading, Forex trading is how one currency is traded for another for financial advantage. Most Forex trading occurs on the spot market, more commonly known as the Forex market, where currencies are bought and sold according to the current price. There are no centralized exchanges as with the stock market. The Forex market is run by a global network of banks and financial institutions.
Forex is typically traded as a currency pair—buying one currency while simultaneously buying another. The most frequently traded pairs are the euro versus the U.S. dollar (EUR/USD) and the British pound versus the U.S. dollar. Most traders speculating on Forex prices do not take delivery of the currency but, instead, predict the direction of exchange rates to take advantage of price movements. They do that by trading derivatives, which allows them to speculate on a currency's price movement without taking possession of the currency.
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Ask – the minimum price for which someone is willing to sell a currency.
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Bid – the maximum price for which someone is willing to buy a currency.
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Bear market – when the general outlook is that the currency (or other asset) will fall.
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Bull market – when the general outlook is that the currency (or other asset) will rise.
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CFD – a Contract for Difference is a way to trade without owning the underlying asset, where you buy or sell the difference between the current price and a later price.
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Leverage – money you borrow from the broker to place trades.
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Lot size – a lot is a measurement used to trade currency, usually equivalent to 100,000 currency units (mini lots are 10,000 units, and micro lots are 1,000).
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Margin – the amount of money you keep in your account.
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Pip – a measurement of price movements, where 1 pip = 0.0001.
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Spread – the difference between the bid price and the ask price.
What is Spread in Forex?
The bid/ask spread (or buy/sell spread) is the difference between the bid price, which is the maximum someone is willing to pay for a currency, and the ask price, which is the minimum someone is willing to accept to sell the currency.
Different Types of Traders
Before we focus on fundamental trading, here's a review of the main types of equity trading:
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Scalping: A scalper is an individual who makes dozens or hundreds of trades per day in an attempt to "scalp" a small profit from each trade by exploiting the bid-ask spread.
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Momentum Trading: Momentum traders seek stocks that are moving significantly in one direction in high volume. These traders attempt to ride the momentum to the desired profit.
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Technical Trading: Technical traders focus on charts and graphs. They analyze lines on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals.
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Fundamental Trading: Fundamentalists trade companies based on fundamental analysis, which examines corporate events, particularly actual or anticipated earnings reports, stock splits, reorganizations, or acquisitions.
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Swing Trading: Swing traders are fundamental traders who hold their positions longer than a single day. Most fundamentalists are really swing trading since changes in corporate fundamentals typically require several days or even weeks to produce a price movement sufficient for the trader to claim a reasonable profit.