
The foreign exchange (forex) market offers a way to invest or speculate by exchanging one country's currency for another. More than $6 trillion of currency changes hands every day, and because rates are always fluctuating, forex is a very dynamic market. But while forex trading offers profit potential, it's also subject to substantial loss and other complex risks. For this reason, not all accounts qualify to trade forex.
Here are a few pointers for beginning forex traders.
Where forex trades
Retail clients generally have two ways to trade currencies:
- Futures market. A futures contract is an agreement to buy or sell a predetermined amount of a commodity or financial instrument at a certain price on a stipulated date. These contracts are traded on exchanges, and volume is typically limited to major currencies like the U.S. dollar (USD), euro (EUR), British pound (GBP), Japanese yen (JPY), and Canadian dollar (CAD).
- Forex market. Most foreign exchange trading takes place among institutional players—banks, dealers, and large intermediaries—in what's known as the interbank market. Retail forex brokers like Charles Schwab Futures and Forex use this information to post competitive bids and offers for retail traders to sell or buy currencies in specific increments.
To trade both futures and forex, a trader needs to apply for a qualified account through their brokerage account.
How forex trades are quoted
Forex trading is subject to unique risks and isn't suitable for everyone. It also takes time to understand how the product is traded and quoted. Currency trading on the forex market happens in pairs because two currencies are traded simultaneously. The quote for a forex currency pair references what it costs to convert one currency to the other.
For example, if the U.S. dollar and Canadian dollar (USD/CAD) pair is trading at 1.34, it means that $1 USD is equal to 1.34 CAD. The easiest way to understand the quote of any currency pair is to read the pair from left to right. For example, if the euro and U.S. dollar (EUR/USD) pair is trading at 1.09, that means 1 EUR is equal to $1.09 USD.
How currencies can fluctuate
Like all asset classes, currencies fluctuate for reasons like interest rates, inflation, economic growth, and future expectations. However, currency fluctuations are especially volatile because they're relative to the same dynamics in the other half of the pair. Exchange rates react to economic data, government meetings, and speeches by central bankers, as well as anything that might affect relative expectations of growth, interest rates, and inflation among countries and their currencies.
One extreme example of currency volatility happened in June 2016 when the United Kingdom voted to leave the European Union. The Brexit vote lowered growth and interest rate expectations among many investors, and the British pound (GBP) dropped from about $1.50—relative to the USD—to below $1.30 within a week. Meanwhile, the United States had begun hiking its interest rates a few months earlier. So, relatively speaking, market participants considered the U.S. dollar and dollar-based investments to have a higher return profile than its GBP counterparts, and the exchange rate adjusted accordingly.
Impact of the net financing rate
Forex traders should also understand how interest rates could impact their profit and loss (P&L) when holding positions from one trading day to the next. In forex trading, a trader holding a currency pair is essentially long one currency and short the other. A trader may earn interest on the long currency and pay interest on the short currency when holding a position from one trading day to the next. The gap between the two interest rates amounts to what's called the "net financing rate" and could result in a cash debit or credit to your account.
Trade currencies with paperMoney
Traders new to the forex market can experiment with their strategies using the paperMoney® feature on the thinkorswim® platform. This simulated trading environment allows traders to practice, test strategies, and begin to explore forex dynamics without risking a dollar, euro, pound, or yen.
Interested in trading forex?
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The information here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The securities, investment products, and investment strategies mentioned are not suitable for everyone. Each investor needs to review each transaction for their own particular situation.
Futures, and Futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement for Futures and Options prior to trading futures products.
Forex trading involves leverage, carries a substantial level of risk, and is not suitable for all investors. Please read the Risk Disclosure for Forex: https://www.schwab.com/resource/forex-risk-disclosure-statement.
Futures and forex accounts are not protected by the Securities Investor Protection Corporation (SIPC). Forex accounts do not receive a preference in any bankruptcy proceeding pursuant to Part 190 of the CFTC's regulations.
Read additional CFTC and NFA futures and forex public disclosures for Charles Schwab Futures and Forex LLC.
Futures, futures options, and forex trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify. Forex accounts are not available to residents of Ohio or Arizona.
Charles Schwab Futures and Forex LLC is the counterparty to all forex customer trades, and exclusively uses straight-through processing such that it automatically (without human intervention and without exception) enters into the identical but opposite transaction with another liquidity provider (creating an offsetting position in its own name).
Past performance is no guarantee of future results.
Investing involves risk, including loss of principal, and for some products, loss of more than your initial investment.
Currency trading is speculative, volatile and not suitable for all investors.
The paperMoney® software application is provided for educational purposes only, and allows users to engage in simulated trading with hypothetical funds using live market data. Market activity, trade executions, transaction costs, and other elements presented in paperMoney are simulations only. Simulated performance does not ensure success in a live environment.
Charles Schwab Futures and Forex LLC is a CFTC-registered Futures Commission Merchant and NFA Forex Dealer Member. Charles Schwab Futures and Forex LLC is a CFTC-registered Futures Commission Merchant and NFA Forex Dealer Member. and a subsidiary of The Charles Schwab Corporation.