What Is Forex Trading & How Does It Work?

Currency trading, better known as forex trading, is one of the most accessible and popular forms of investing, with about $5 trillion in currency changing hands every day.

This trading occurs on a decentralised global market that retail traders can access through foreign exchange brokers.

While it is possible to trade forex spot markets, you can also access currency trading through contracts for difference (CFDs), which track underlying currency pairs. These derivatives allow you to trade forex pairs without actually having to purchase and hold a specific currency.

Here is a closer look at the details of forex trading.

What is forex trading, and how does it work?

What is forex?

During international travel, you engage in a foreign exchange transaction when you change your home currency for the money used in your host country. Service providers typically display the current exchange rates on a digital board. These rates fluctuate based on the global market’s supply and demand for the currency.

In forex trading, you can take advantage of these supply and demand fluctuations on either spot or CFD markets.

Currency pairs

How does forex trading work? Each trade involves two currencies, known as a forex pair. The two currencies are written as follows: AUD/USD (Australian dollar/US dollar).

  • The first currency in this pair is known as the base currency, and the second is the quote currency.
  • The base currency is the one you purchase, while the quote currency is the one you sell to obtain the base currency.
  • The price is the amount of base currency you can buy with one unit of the quote currency.

The whole forex pair listing might look like this: AUD/USD 0.67. In this scenario, AUD is the base currency and USD is the quote currency. In other words, you can purchase $1 AUS with $0.67 US.

Reasons to try forex trading


Is forex CFD a good option for you? Forex trading can deliver the average trader:

Liquidity

Currency markets are very active, so you can almost always find someone to take the other side of a trade, especially if you trade major currency pairs like AUD/USD, USD/JPY, and EUR/USD.

Convenience

You can access forex markets electronically via an online broker, allowing you to trade with a laptop or mobile device.

Leverage

Traders can use leverage to increase their position without sizeable capital. This feature makes forex trading attractive to novice traders or traders with limited capital.

Technical Analysis

Currency trading relies on price action analysis, technical indicators, and chart patterns. You can base your strategies on these elements and have a chance of success even if you do not understand the economic factors that drive FX rates.

Choosing a broker for forex trading

There are many things to consider when selecting a broker for forex trading, from security to market range. TMGM is a regulated CFD broker offering 50+ forex pairs. We provide:

  • Secure access to the forex market
  • Access to two of the most powerful trading platforms for CFDs, MetaTrader 4 and IRESS.
  • Tight bid/ask spreads with transparent pricing

Visit TMGM to open an account and begin your forex trading career, or take advantage of our 24/7 customer support to contact us with questions or concerns.

Frequently Ask Question

The first step to getting started in forex trading is to find a reputable broker like TMGM. You should take steps to learn how to assess the market and manage trades before risking real money. You can do this by opening a demo account before depositing real money and opening a real CFD position

When you start trading, it is a good idea to limit your use of leverage until you are confident in your strategies and able to properly employ risk management tools.

Because of leverage, you do not need a lot of capital to trade currency CFDs. For TMGM, the minimum is $100. You may need to meet margin requirements if you wish to use leverage, but as long as you meet the minimum deposit requirement, you can start your trading career.

Prices can be affected by the economic situation in both countries in a currency pair. International conflicts, trade deals, tax law changes, and other factors can also affect markets, as can government or central bank policies and interest rate changes.

Forex trading involves currencies, while the stock market is for trading shares issued by companies and funds that contain multiple stocks. Currency markets are global, while stocks are usually limited to their home country. However, the most popular brokers offer stocks and currency CFDs.

Many countries consider forex trading a legitimate way to earn an income. As such, any profits you make from spot or CFD markets are subject to income taxes. Calculate your profits and losses for the year. If you had a profitable year (if the difference between your profits and losses is greater than $0), you will pay taxes on your total annual profits.

Equity in forex trading is the amount of capital you have in your account. If you are not engaged in any trading, then your equity is the same as the balance in your account.

The concept is slightly more complicated if you have open positions. In these cases, the equity is the balance plus the profit or minus the loss of your current trades. Therefore, your equity can change minute by minute.

Free margin is the amount of money that you have available in your account for trading at a given moment. Think of it as the total amount you can withdraw from your account. Brokers have a margin requirement, which is the amount of capital you must contribute to a leveraged trade.

If you use leverage with a 1:10 margin requirement and have an open position worth $10,000, you must keep $1,000 in your account. If you have $5,000 in your account, you have $4,000 in free margin. If you close the $10,000 position, the $1,000 will become part of the free margin total.

The forex market is the busiest financial market in the world. Approximately $5 trillion change hands every day. Depending on world events, market news, and other factors, the total can be slightly higher or lower.

The most traded pairs on the market include EUR/USD, USD/JPY, GBP/USD, and AUD/USD.

Contracts for difference (CFDs) track spot forex pairs. However, CFDs do not require purchasing and holding the currency. This trait makes CFDs more convenient than spot trading for retail traders.

A buy limit is a set price at which a trader wants to execute a trade. The trader sets a buy limit order and waits for the market to reach that price. If it does, the position will open automatically.
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