Although Forex has a reputation of being for short-term, high-risk speculators, there are trading styles suitable for both short term and long term traders: More conservative active traders use longer-term holding periods and specific methods and instruments to reduce risk. Long-term investors know how to: Ride stable, proven, long-term Forex trends for capital gains. Earn steady income from different kinds of currency trades or from investing in bonds, dividend stocks, and other income vehicles. For those willing and able to handle more risk, and understand why Forex has become so easily implemented, the availability of leverage, or borrowed funds to control large blocks of currencies allows greater gains and losses.

Using leverage creates unmatched profit potential for those with limited trading capital only if they learn how to control the downside risk. For example, with leverage, a 1 percent move means percent profit. It also means a percent loss. If not for this ability, why trade Forex? If you know how to manage the risk of high leverage, you can grow your principal with leverage far faster than in other markets.

And that is why Forex has taken center stage to all other investment vehicles. A Forex trader can profit just as easily in a falling market as in a rising one. During times when markets are in strong downtrends and the easiest profits and least risky trades come by betting that stocks or commodities will go down in price, regulators will impose restrictions that make betting on downtrends harder or impossible.

Stock markets will see uptick rules or outright bans on short selling.

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Commodity markets will raise margin requirements so that such trades are more expensive and less profitable. There are always ways to profit regardless of the trend. Once the reasons become clear, many are eager to jump on the bandwagon. Why trade Forex? To make money, of course, would have to be one of the main reasons! In this lesson, we will show the difference between trading Forex and other exchange-based markets, and why trading Forex through a broker can be very profitable.

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Additional Reading about More Reasons to Trade Forex There is one more reason why Forex is so popular of late: it has low start-up requirements and relatively inexpensive account costs. Trading starts with as little as a few hundred dollars, sometimes less. Forex brokers typically provide free full-featured trading platforms and data feeds, and the better brokers offer extensive archives of free training materials and market analysis. With online stock brokers, traders typically need to maintain significant minimum balances or minimum average monthly trading volumes to get similar service.

Brokers typically provide full-featured practice or demo accounts that allow smart beginners to simulate most of the trading experience and practice with play money until they feel ready to risk their capital. Most Forex brokers charge no fees, commissions, or hidden charges.

They earn their money on the difference, called the spread, between the buy and sell price, typically a few ten-thousandths, called pips, of the price. In general transaction costs are very competitive compared to those of online stock brokers. We are continuing to outline why people choose to trade Forex. Forex expertise makes you a better trader and investor. Forex markets often reflect changes in sentiment before other markets, and so offer profitable clues of where other markets are going. Another reason why we trade Forex is flexible hours.

Forex markets trade in a seamless hour session, 5. EST until Friday P. We trade Forex markets because they offer the best liquidity. A liquid market is one that has many buyers and sellers. The more buyers and sellers at any given moment, the more likely you are to get a fair market price when you buy or sell. The more liquid a market is, the less likely it is that a few big players can manipulate prices to their advantage.

Indeed, unlike in stock markets, even the biggest players will have trouble manipulating the price action in major currency pairs beyond a matter of hours. We trade Forex because there is no centralized exchange with specialists holding monopoly power to regulate prices. In most stock markets, the specialist is a single entity that serves as a buyer and seller of last resort and controls the spread, which is the difference between the buy and sells price for a given stock. Though in theory they are regulated and supervised to prevent their abusing that power to manipulate prices at the expense of the trading public, specialists are experts at knowing when they can get away with a degree of this and force you to buy higher or sell lower.

With Forex trading, no single specialist regulates the prices of individual currency pairs.

Rather, multiple exchanges and brokers are competing for your business. Another reason for trading Forex is that there is high liquidity and decentralized markets which means less slippage.

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Slippage is the difference between the stated price on your screen and the actual price you pay or receive. The less liquid the market, the more often slippage happens because fewer traders are present to take the other side of your trade. Forex markets are less prone to slippage because they are: Usually Highly Liquid--typically running at full speed in at least one if not two continents 24 hours a day, over five days a week and trading at such larger volumes than equities, They have no specialists influencing prices.

What does it mean when we talk about "currency pairs"? The concept of Forex trading can be a little tricky to grasp. The price of one currency in a currency pair is measured against another currency.

You are selling your dollar and buying a euro or a part of a euro. This lesson will go into more detail regarding the currency pairs list. Additional Reading about Trading Currency Pairs There are many official currency pairs used all over the world, but only a handful are traded actively in the Forex market.

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In Forex trading, only the most economically or politically stable and liquid currencies are demanded in sufficient quantities. The American dollar is the world's most actively traded currency because of its strength and size. The eight most traded currency pairs today are the U. Mathematically, there are 27 different currency pairs that can be derived from those eight currencies alone. However, there are about 18 currency pairs that are conventionally quoted by Forex market makers as a result of their overall liquidity.

The total amount of currency trading involving these 18 pairs represents the majority of the trading volume in the FX market. The price of the currency is a direct reflection of what the market thinks about the current and future health of the economy of that particular country compared to other countries' economies. When the price of the pound changes in relation to another currency and you have correctly predicted the direction, you have made a profit. Your soccer ball has lost value and if you want to make a profit on your sale, you need to pump up the asking price.

The symbols used with currency pairs are always listed as three letters, where the first two letters identify the name of the country and the third letter identifies the name of that country's currency. USD stands for United States dollars. NZD stands for the New Zealand dollar. Those currency pairs that are not paired vs. These two pairs can be found in the group of pairs known as the "commodity pairs". The first currency of a currency pair is referred to as the "base currency" and the second currency is called the "quote currency".

The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency. All Forex trades involve the simultaneous buying of one currency and selling of another, but the currency pair itself can be thought of as a single unit, an instrument that is bought or sold. If you buy a currency pair, you buy the base currency and sell the quote currency. The bid buy price represents how much of the quote currency is needed for you to get one unit of the base currency.

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Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. The ask sell price for the currency pair represents how much you will get in the quote currency for selling one unit of the base currency. If you sold the currency pair, you would receive 1. The answer is the interaction of supply and demand. How do supply and demand affect prices?

In this lesson, we will show how the supply and demand for the two currencies that make up a currency pair move its market price from moment to moment. Market Price Basics In earlier lessons, we have shown how Forex traders want to make money by buying before the price goes up and selling before the price goes down. Now we are going to talk about how and why the market prices of currencies move. How do Supply and Demand Work? Supply and Demand Theory The market price of anything bought and sold in a free market like Forex moves for one reason only: changes in supply and demand.

There is no other reason why the market price moves. For example, suppose the exchange rate of the Euro against the US Dollar is at 1. This means it costs 1. Let's say a bank puts order into the market to buy million Euros right away at the best market price it can get.