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What is Forex Trading?

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Put simply, forex markets provide a decentralized system where currencies trade. Forex is an exchange between two currencies, known as pairs.

The most liquid and largest market in the world, the average daily volume exceeds $5 trillion. Unbelievably, this total is greater than the world’s stock markets combined.

Commissions
$10 value per pip
Account Minimum
$0
Get started securely through IG Group’s website
Commissions
$10 value per pip
Account Minimum
$0
1 Minute Review

IG is a comprehensive forex broker that offers full access to the currency market and support for over 80 currency pairs. The broker only offers forex trading to its U.S.-based customers, the brokerage does it spectacularly well. Novice traders will love IG’s intuitive mobile and desktop platforms, while advanced traders will revel in the platform’s selection of indicators and charting tools. Though IG could work on its customer service and fees, the broker is an asset to new forex traders and those who prefer a more streamlined interface.  

Best For
  • New forex traders who are still learning the ropes
  • Traders who prefer a simple, clean interface
  • Forex traders who trade primarily on a tablet
Pros
  • Easy-to-navigate platform is easy for beginners to master
  • Mobile and tablet platforms offer full functionality of the desktop version
  • Margin rates are easy to understand and affordable
  • Access to over 80 currency pairs
Cons
  • U.S. traders can currently only trade forex
  • Customer service options are lacking
  • No 2-factor authentication on mobile
Account Minimum
100 of your selected base currency
Pairs Offered
80+
Get started securely through FOREX.com’s website
Account Minimum
100 of your selected base currency
Pairs Offered
80+
1 Minute Review

FOREX.com is a one-stop-shop for forex traders. With a massive range of tradable currencies, low account minimums and an impressive trading platform, FOREX.com is an excellent choice for brokers searching for a home base for their currency trading. New traders and seasoned veterans alike will love FOREX.com’s extensive education and research center that provides free, informative forex trading courses at multiple skill levels. While FOREX.com is impressive, remember that it isn’t a standard broker. You can’t invest in the stock or bond market through your FOREX.com and you cannot open an account with tax advantages. The confusing pricing and margin structures may also be overwhelming for new forex traders.

Best For
  • MetaTrader 4 users
  • Beginner forex traders
  • Active forex traders
Pros
  • Impressive, easy-to-navigate platform
  • Wide range of education and research tools
  • Access to over 80 currencies to buy and sell
  • Leverage available up to 50:1
Cons
  • Cannot buy and sell other securities (like stocks and bonds)
  • Confusing margin requirements that vary by currency
  • Limited customer support options
  • Cannot open an IRA or other retirement account
Account Minimum
$50 USD
Pairs Offered
47
Get started securely through eToro’s website
Account Minimum
$50 USD
Pairs Offered
47
1 Minute Review

Though Australian and British traders might know eToro for its easy stock and mobile trading, the broker is now expanding into the United States with cryptocurrency trading. U.S. traders can begin buying and selling both major cryptocurrencies (like Bitcoin and Ethereum) as well as smaller names (like Tron Coin and Stellar Lumens).

eToro offers traders the opportunity to invest their assets into premade portfolios or cryptocurrencies, similar to services offered by robo-advisors through traditional brokers. Though eToro isn’t a one-stop-shop for everything an investor needs, its easy-to-use platform and low spreads is a great way to enter the cryptocurrency market.

Best For
  • International Forex/CFD Traders
  • New cryptocurrency traders looking for an easy-to-use platform
  • Traders who want to buy and sell cryptocurrencies on-the-go
Pros
  • Simple platform that is easy to master
  • CopyTrader feature that allows new traders to copy the same strategies used by professionals
  • Virtual dummy account that gives you $100,000 to practice trades
Cons
  • U.S. traders currently limited to cryptocurrencies
  • Only 15 major coins available to trade
Account Minimum
$100 USD (or equivalent)
Pairs Offered
69
Get started securely through HYCM’s website
Account Minimum
$100 USD (or equivalent)
Pairs Offered
69
1 Minute Review

HYCM is 1 of the world’s leading forex brokers, offering investors access to over 69 unique currency pairs. However, forex isn’t the only thing the broker offers — HYCM also offers high rates of leverage, stock and ETF trading, commodity investing and much more. Getting started with HYCM is quick and easy, and most investors can open an account in as little as 10 minutes.

HYCM offers a varying fee structure, which allows investors to choose the spread option that’s best for them. A wide range of educational and investing tools are available, which can be equally beneficial to both experienced and novice traders. Though HYCM isn’t currently available in the United States, it can be a great choice for residents of the other 140 countries where it offers service. 

Best For
  • Investors who want a customizable fee schedule
  • Traders comfortable using the MetaTrader platform
  • Islamic traders who need swap-free accounts that don’t build interest
Pros
  • Wide range of currency pairs available
  • Excellent selection of educational tools
  • $0 deposit and withdrawal fees
Cons
  • Not currently available to traders based in the U.S.
Account Minimum
100 EURO
Pairs Offered
50+
Get started securely through AvaTrade’s website
Account Minimum
100 EURO
Pairs Offered
50+
1 Minute Review

A fully regulated broker with a presence in Europe, South Africa, the Middle East, British Virgin Islands, Australia and Japan, Avatrade deals with mainly forex and CFDs on stocks, commodities, indexes, forex, cryptocurrencies, etc. This brokerage is headquartered in Dublin, Ireland and began offering its services in 2006. It offers multiple trading platforms and earns mainly through spreads.

Best For
  • Beginners
  • Advanced traders
  • Traders looking for a well-diversified portfolio
Pros
  • Controlled by regulatory agencies of multiple countries
  • Choice offered in terms of trading platforms
  • Support available in 14 languages and trading platforms in 20 languages
  • Practice/demo account available for trying out
  • Breadth of trading assets
Cons
  • Does not accept customers from the U.S. as it isn’t regulated in the U.S.
  • Transferring funds to the account may take up to five days; withdrawals could take up to 10 days

Who Trades Forex?

Several players in the forex market buy and sell currencies.

Commercial banks

When businesses want to buy or sell products or services with companies in other countries, they rely on banks to help them complete the transaction.

For example, if a farmer wants to sell his soybeans to China, the farmer will sell in U.S. dollars and the buyer will pay in Chinese yuan. In the foreign exchange market:

  • The bank will sell U.S. dollars and buy Chinese yuan if it doesn’t have yuan on hand.
  • Another bank will sell the first bank’s Chinese yuan at the current exchange rate.
  • The selling bank’s profits will be the difference between the bid and the ask.

Large banks will also trade for themselves as well as for clients’ portfolios.  

Commodity buyers, sellers, and traders

When a producer sells barrels of oil, the producer may have clients in several countries. In order to complete the transactions, these sellers or buyers need to be able to trade in a common currency.  

Depending on the terms of sale, the buyers, sellers, or even banks will go into the forex market to exchange currencies for the following reasons:

  • To complete transactions with buyers or sellers in other countries.
  • To hedge risk of production in another country.
  • To pay expenses in other currencies such as labor or permitting.

Investment and hedge funds

Behind the banks, portfolio managers trade in the forex market. This collection of players trade for pension funds, high-net-worth clients (often for hedge funds). Managers who hold stocks exposed to international risks may use currencies to offset fluctuations in returns.

Traders

Based on their own analysis of the markets or governmental actions, individuals trade forex for many of the same reasons as large banks. Just like large funds, they trade currencies to offset the risk of international stock holdings.

Pros and Cons of Forex Trading

Trading foreign currencies present its own unique sets of benefits and drawbacks.

Pros of trading forex:

  • Leverage: currency markets allow traders to control large amounts of money with very little capital. This allows traders to profit from small movements in currency pairs.
  • Liquidity: Forex markets provide the highest liquidity of any market, virtually guaranteeing a counterparty for your trades.
  • Continuous trading: The forex market operates 24 hours a day and is closed during the weekends from 5 p.m. EST on Friday until 5 p.m. EST on Sunday. Since it’s a global market, it also operates through most major U.S. holidays.

Cons of trading forex

  • No volume shown: Unlike most markets, the forex market does not show volume traded. This limits some forms of analysis investors use such as order flow, point of control and other types of technical indications.
  • Volatility from events: Just like when a company’s stock moves during earnings, currencies may move rapidly due to interest rate announcements or other geopolitical events
  • Less regulatory protection: Unlike the stock market, forex markets operate over-the-counter and brokerages are subject to less regulation. This leads to more problems with forex brokerage firms that are otherwise found with equity firms.
  • Less residual return options: Outside of some select strategies such as carried interest, forex trading doesn’t provide for continuous returns in the way that stock dividends and share buybacks increase shareholder returns.

How to Analyze the Forex Market for Beginners

Do a quick search in Google and you’ll see high-net-worth claim to show you how to profit from forex trading. If you browse through enough material you’ll notice that most investors fall into two camps:

Fundamental analysts

Analysts who study the fundamentals of a foreign exchange market look at economic and geopolitical factors to evaluate price movements.

They look to central banks for interest rate guidance, governments for policy decisions and economic and trade data for economic output. Fundamental analysts focus on how these relationships interact with one another and their influence on currency supply and demand.

Technical analysts

Technical analysts rely on using mathematical interpretations and chart depictions of a currency’s movement over time to predict where price will go. They believe past price movements forecast the future.

By looking at price action, these analysts study market behavior like game theory. Traders don’t need to stick with one type of analysis exclusively.  Many traders often look to both fundamental and technical analysis to develop their own trading styles.

Final Thoughts

The stock market and forex market are fundamentally very different. If success eludes you when you trade stocks, you may do well-trading forex. Conversely, don’t assume you’ll be successful trading forex just because you successfully trade stocks.

Becoming a profitable forex trader requires study and practice.  Even if you start out by copying someone else, the more time you spend with the forex market, you’ll discover your own trading style.  

If you want to start trading forex, check out some of our picks for the 2018 Best Forex Brokers in the USA. Here are a few quick picks.

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