The foreign exchange or forex market is traded around the globe, virtually around the clock. Find out if the forex market is right for you with this retail forex guide for beginners.
Around the globe, and virtually around the clock. That’s one way to describe the foreign exchange (“forex”) market.
It's the exchange of one nation's currency for that of another. More than $5 trillion of currency changes hands every day and, since exchange rates are based upon nations’ interest rates, economics, and geopolitical conditions, rates are always fluctuating. It's a dynamic, global market.
If you're interested in learning how to trade forex, read on for a few things to know. But be forewarned: forex trading is subject to unique risks. And not all accounts will qualify. If you're a beginner interested in forex trading, you may wish to begin with a primer on the dynamics of currencies and the marketplaces where currencies trade. Later on, we'll show you how to practice trading forex without risking a dime.
In general, retail clients have two choices in terms of trading currencies:
When trading forex, you’re not just trading one product; you’re trading two currencies against each other. The ratio of the two is what's known as a currency pair. The quote for a forex currency pair references what it costs to convert one currency into the other. For example, suppose the U.S dollar versus the Canadian dollar (USD/CAD) is trading at 1.33. That means $1 USD is equal to $1.33 CAD. And if you want to know how much it would cost you to buy a Canadian dollar, you invert it: $1/1.33 = $0.7519. So in this example, it costs a little over 75 cents to buy a Canadian dollar.
FIGURE 1: FOREIGN EXCHANGE FUTURES. Sample quote of CME Group's British pound futures (GBP/USD) on the thinkorswim®futures platform. For illustrative purposes only.
In other words, with currency pairs, it’s all relative. Here are a few more nuggets regarding forex quotes.
Forex trading involves leverage, which means you can control a large investment with a relatively small amount of money. When you buy or sell retail forex or foreign exchange futures, you don't put up the entire notional value, but rather you post an initial margin requirement—essentially a "good faith" deposit. In forex, margin requirements vary as a percentage of notional. Margin requirements are typically between 3-5% of the notional value, however certain pairs can be as low as 2%. Leverage is a double-edged sword, as it can magnify both your profits and your losses. A small amount of market movement can have a large effect—positive or negative—on the account's P/L. Adam Hickerson, Manager, Futures and Forex, TD Ameritrade, suggests," If you're a beginner who's starting out in the forex market, it's important to define your risk tolerance before you enter into a position. The leverage in the forex market can magnify profits and losses, but if you have a plan in place and define your risk tolerance, you can better manage the risks associated with leverage."
Forex rates are based on interest rate differentials between the currencies making up the pair. So when you make a trade, you’re essentially “long” one currency and “short” the other. When you carry a position from one day to the next, you earn interest on the currency you’re long and you pay interest on the currency you’re short.The differential between the two interest rates amounts to what’s called your “net financing rate.”
Before carrying a forex position from one day to the next, it's essential you learn the ins and outs of forex financing rates.
Does trading forex sound exhilarating? Daunting? A bit of both? Start with simulated forex trading on the paperMoney platform on thinkorswim. This will allow you to practice, test strategies, and learn the dynamics of this asset class without risking a dollar, pound, yen, or euro.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
The paperMoney application is for educational purposes only. Successful virtual trading during one time period does not guarantee successful investing of actual funds during a later time period, as market conditions change continuously.
Forex trading involves leverage, carries a high level of risk, and is not suitable for all investors. Please read the Forex Risk Disclosure prior to trading forex products.
Futures and futures options trading is speculative and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products.
Futures and forex accounts are not protected by the Securities Investor Protection Corporation (SIPC).
Futures and forex trading services provided by TD Ameritrade Futures & Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify. Forex accounts are not available to residents of Ohio or Arizona.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.