Differences

Another way to define the FOREX is to look at what is actually being traded. Unlike the NYSE, what is being traded on the FOREX is not stock or share in a company, but simply currency, foreign currency, to be more specific.

A FOREX trade consists of a pair of currencies (e.g., EUR/US or JBY/GBP). The trade is made simultaneously: the buying of one currency and the selling of the other. The current value of a country’s currency is a numerical rendering of what the existing and prospective economic state of that country’s economy is valued at by the market. Thus, the exchange rate between two currencies is a reflection of the economies of those countries, as compared to each other.

Another difference between this market and other money markets, like the NYSE, is that there is no physical address for the foreign exchange market. It is defined as an Over-the-Counter (OTC) market or “Interbank market” because it is an electronic market that takes place within a banking network, 24-hours a day.

The US Dollar (USD) is the most traded currency on the FOREX, followed by the Euro (EUR), and then the Japanese Yen (JPY) and Great Britain Pound (GBP), equally. The other four most popularly traded currencies are the Australian Dollar (AUD), the Canadian Dollar (CAD), the Swiss Franc (CHF), and the New Zealand Dollar (NZD).

Currency lots come in different sizes. An example macro lot would be $1000. The next level up is a mini lot (e.g., $10,000). A larger lot would be that of $100,000. Gains and losses are determined based on pip values, which are calculated in terms of lot sizes. Different brokers determine these values in similar ways, but the important fact here is that your broker will calculate them for you.

Therefore, a broker is an essential part of the trading FOREX online process. The important thing to note here is that choosing a broker is crucial to your FOREX trading success. There are scandalous online FOREX brokers out there, who implement policies that work against your ability to make money trading FOREX, but there are also legit brokers, who adhere to good business practices and carry out the business of FOREX trading based on the regulations of regulatory organizations.

First and foremost, if you are planning on taking up FOREX trading, the most important thing you can do, alongside read up on the basics of FOREX trading on this website, is to practice. Most reputable brokers offer simulated practice trading sandboxes that you can “play” around in before you do the real thing. Let me reiterate that this is the most important thing you can do! Make sure the broker you choose has a demo account option; like I said, most reputable brokers do offer this.

It is important to get used to a broker’s order options and policies prior to jumping in headfirst without any experience with a broker’s software and trading application. If you should try out a broker’s practice program and not like it, choose another broker (carefully) and then try out their practice program. Brokers all operate under slightly different conditions (e.g., order options, minimum security margin requirements, usable margin minimums, rollover interest rates, commissions, fees, etc.) Each individual trader has his own appropriate broker match. You can find yours with our help and a little bit of research.

See our “Choosing an Online FOREX Trading Broker” set for everything you will need to look for when you choose your FOREX broker and how to interpret broker policies.

A Pair of currencies: a representation of two currencies that are being compared against each other, and essentially will be traded against each other

Base currency: the value on the left of a pair of currencies

Counter currency or quote currency: the value on the right of a pair of currencies

The aim of the game is to buy or sell a large amount of one currency against the value of another currency. The trader’s hopes are that the price of the bought currency will gain value, in comparison with another currency, so that he can make a profit on the difference, when he sells. These two currencies are represented as a pair of currencies. Currencies will always be represented in pairs because the exchange rate requires two currency values in order for an exchange rate to occur.

For example, you will see a currency pair represented as “EUR/USD.” This is the exchange rate of Euros to US Dollars. The “base currency” (Euros) is on the left; the “counter currency” or “quote currency” (US Dollars) is on the right. The exchange rate, for buyers, is how much of the quote currency you will need to purchase one unit of the base currency. The exchange rate, for sellers, is how much of the quote currency you will receive for selling one unit of the base currency. You buy the base currency and sell the quote currency if you think the base currency is going to appreciate against the quote currency. If you think the value of the base currency will go down in relation to the quote currency, you sell. These two actions are the basis for Forex trading and they are referred to as “going long” or “going short.”

The Long and Short of Going Long or Going Short

• Minimum Security Margin is the required minimum account balance your account must maintain. It is represented by a percentage of the lot of currency you will trade FOREX online with.
• Usable Margin is available money that you have to open new trades/positions or sustain losses from trades.
• Used Margin is money that is on the line for the lot(s) you are trading with. Used margin does NOT count for Usable Margin that can sustain losses.

When you trade FOREX online, your brokers is, in essence, loaning you hundreds of thousands of dollars to trade FOREX online with. What your broker will require of you, the trader, is a fractional good-faith deposit made by you, the trader. Most brokers require a minimum account balance of, for example, $1000. This balance is like collateral for the money that you are borrowing from your broker to trade with. Don’t be mistaken, though, you can lose all of this money, should you make the wrong FOREX trade.

In this example, let’s say your broker requires a minimum deposit of 1% of the amount you will be trading with, or “borrowing.” This rate is referred to as the minimum security margin. So, if you deposit the $1000, you will have access to a $100,000 lot to trade with. If your account holds $2000 in it, you will have access to $200,000 to trade FOREX online with, and so on. Each broker’s minimum security margin requirement is different.

NOTE: Make sure you are aware of the broker’s minimum security margin before you create a real-money account with them

In order to prevent your account from going into the negative bracket, due to the highly volatile FOREX market, brokers will close some or all open trades, if your account balance falls below the required usable margin; to avoid this from occurring, deposit more money into your account if it begins to get low. This action prevents you from losing more than you have deposited and minimizes the broker’s risk as well.

NOTE: Brokers have strict policies regarding margin trading. Make sure you are aware of and familiar with all of the policies your broker operates under.

You should also be aware that the usable margin percentage often increases over the weekend, so if you plan on holding your position throughout the weekend, you must be aware of possible shifts in usable margin requirements, so that your account will maintain the balance needed to support your currency holdings. Should it not, then you may be subject to an automatic close out of some or all of your trades by your broker at the close of business on Friday afternoon, which is usually 5:00 pm EST for US brokers.

Some traders believe that too much margin can be dangerous for some individuals. As long as you are familiar with the policies of the broker and aware of the risks, you can handle it.