Forex or (FX) is the term used for the world’s currency market. It comes from the words “Foreign Exchange”. Unlike stock exchanges like the New York Stock Exchange (NYSE), there is no physical location for the Forex market, instead it describes the “inter bank” or Over-the-counter (OTC) market for currencies. Currencies trade 24 hours a day, five days a week (Sunday night to Friday night). Forex trading is the largest market in the world, but also has the most volatility.
Currencies are always traded in pairs; you must trade one currency vs another. For example, if we bought USD/EUR for 1.2 it would mean you need 1.2 US dollars for 1 Euro. Similarly the EUR/USD would be the inverse of that, or 1 over 1.2, meaning that to buy 1 USD you would need 0.8333 Euro.
Forex trading is considered very risky because most Forex trading is done with 20, 50 or even 100 times margin meaning that you are exposed to a very large amount of leverage. This means that for every dollar you put down of your own money to open a position, you are borrowing another $19, $49, or $99 from your Forex brokerage.
Brokerages will loan you this money because you are trading currencies, so the value is inherent, and all of the risk is passed on to you. For example, if you have a 50 times leveraged account, if the exchange rate falls by 1%, you can lose 50% of your initial investment! You can also have the opposite case with a winning trade, but the number one priority of all investors is capital preservation; maintaining and growing the money you invest. By exposing yourself to such a high loss, you can walk away losing almost everything very quickly.
Most professional investors use an 8x or lower margin, higher amounts are usually used by beginners with very small accounts or people with many positions and want to utilize the risk of loss for the rewards.
How To Practice Trading Currencies For Free
Trading currencies takes lots of practice to get it right! There are a few ways to practice for free:
Set up a contest on HowTheMarketWorks with a different currency
Set up a trading contest on HowTheMarketWorks, but switch your currency to something else. We have over 30 to choose from, with all prices updating at the current FX rate! Once you have practiced investing in things you are familiar in using currencies you are not, you will have a better understanding of how to work with currency pairs
Use Virtual-Stock-Exchange to practice buying and selling Currency Spot Contracts
You can practice trading currencies directly, along with trading stocks and ETFs from over 30 global exchanges, by using our Global site: Virtual-Stock-Exchange. Virtual-Stock-Exchange, or VSE, works almost the exact same as HowTheMarketWorks (create your own contest, see real-time rankings, get all kinds of quote and research tools), but instead of Mutual Funds, it has Global stocks, along with currencies and some commodities (like Gold and Oil) in the form of “Spot Contracts”.
Spots are like Forex, but without the margin and leverage, so it is perfect for beginners looking to practice trading currencies.
Comparing Forex Brokers
If you want to trade forex for real, it is important not to just get practice first, but also to choose the right broker for you. There are many ways to compare forex brokers, but Australian investors have an awesome comparison tool available at https://www.compareforexbrokers.com.au.