Everybody should consider learning to trade forex because it is the most widely traded market in the world. In fact, $5.3 trillion is bought and sold every day with 80% of the forex market being composed of just 8 major currencies and 7 currency pairs. As one of those currencies, the Canadian dollar, the “loonie”, is no slouch.
With the forex exchange market being open 24 hours a day, 5 days a week, and forex trading growing around the world, there is no reason why you cannot also learn to trade forex. But where do you start?
In this article, you will find answers to frequently asked forex trading questions and information on how to trade forex as a beginner.
Summary
What is forex?
Forex is the term used for the foreign exchange market, also known as the FX market, which determines the exchange rate of all global currencies. It is the largest over-the-counter marketplace in the world and is made up of a global network of financial centers including banks, forex dealers, central banks, investment firms, retail forex dealers and investors. This can make it a powerful tool in your investment strategy.
Forex traders use the forex market to try and make a profit by speculating on the fluctuating exchange rate of currency pairs.
When you are ready to get your feet were trading forex it's quick and easy to get started.
How does forex trading work?
Forex trading works by buying one currency and immediately selling another. This is like when you sell Canadian dollars to buy US dollars before travelling to the US. The currencies that are being bought and sold at the same time are known as a currency pair.
When you start trading forex as a beginner, you want to identify specific major currency pairs that you are interested in and then buy or sell that currency pair depending on the currency’s future outlook. For example, USD/CAD is a currency pair for trading the major U.S dollar against the Canadian dollar.
In a currency pair, the currency on the left is known as the base currency and the currency on the right is known as the quote currency. The exchange rate is the term used to explain how much of the quote currency is needed to buy 1 unit of the base currency.
Using the above example, if the USD/CAD exchange rate is 1.2, it will cost C$1.20 to buy US$1.00. If the USD/CAD exchange rate rises to 1.3 it means that the base currency (USD) has risen in value compared to the quote currency (CAD). If you bought it at 1.2 and sold it at 1.3 you will have made a profit, and that is how forex trading works.
How to trade forex in Canada?
You can start forex trading in Canada simply by finding a forex broker that is right for you and opening an account. You then need to download the broker’s specific trading platform or access it via a desktop computer. Once you have deposited into your forex account you are ready to make your first trade.
Before placing your first forex trade you want to consider developing a trading plan. Several trading plans could work for you, but three good forex trading strategies good for beginners are news trading strategy, trend trading strategy and momentum trading strategy.
- News Trading Strategy is one of the most common forex trading strategies where the trader makes investment decisions on currency pairs based on news and market expectations.
- Trend Trading Strategy incorporates technical indicators and trends to identify the direction of a specific currency pairs momentum. The trader will analyze historical technical trends in order to try to predict future movements.
- Momentum Trading Strategy in forex is an investment technique where the forex trader invests in a currency pair that is currently rising and then sells it when it is at its peak.
Just like any investing, forex trading does come with considerable risk and it is important to have a plan in place while also only investing money you are prepared to lose.
What is the best forex broker in Canada?
There are many Canadian forex brokers available to choose from and each one will be regulated by the Investment Industry Regulatory Organization of Canada (IIROC). In addition to regulatory concerns, you will also want to review online brokers’ customer service reviews, account options, available currency pairs and the quality of their trading platform.
You can start trading forex online today:
By reviewing these four criteria you will have the best success when choosing the best forex broker for you and your level of expertise. To get you started, here is a list of some top forex brokers for Canadians.
- XTB
- Questrade forex
- Forex.com
- Forex factory
- Walia forex
- Everforex
- Canex forex
- Agility forex
Why trade forex?
You should start trading in forex if you are looking to diversify your investment portfolio away from solely stocks and bonds, in addition to wanting access to the largest traded market in the world. While the pros of forex trading arguably outweigh the cons of forex trading, both should be weighed to see if forex trading is right for you.
Benefits of forex trading
- Liquidity
- Long market hours
- Numerous currency pairs
- Low costs
- Volatility
- No central exchange
Risks of forex trading
- Volatility
- No central exchange
- High leverage risk
- Long market hours
Forex vs stocks
The main difference between the forex market and stock markets is the asset classes that are available to trade within each. In addition, as the forex marketplace is built on a global decentralized network of financial centers, investors can take advantage of different time zones to trade forex 24 hours a day.
Conversely, the stock market is simply a blanket term for stocks trading in a specific region while being comprised of several specific stock exchanges. Stocks, or shares of a company, have to be listed on stock exchanges to be traded.
Deciding to trade forex vs stocks comes with different considerations as they are part of two different tradable asset classes. Forex is part of the cash and cash equivalent asset class, while stocks are shares that make up the ownership of public companies and fall under the equities asset class. Each has specific pros and cons, here is why you should consider both forex trading and stocks trading.
Why trade Forex?
- Fewer options make investing easier
- 24-hour market
- Extremely low commission
- High liquidity due to huge trading volume
- Less market influence from invested parties
Why trade stocks?
- Better for long-term investors
- Easier to understand than forex
- Less capital is required
- Less leverage is used minimising losses
Is forex trading legal in Canada?
Forex trading is legal in Canada and is controlled by both local regulators and the IIROC (Investment Industry Regulatory Organization of Canada). When you are considering which forex broker in Canada is best for you, you want to confirm that they are registered with the IIROC by checking their broker licence.
What is a pip/pips in forex?
Forex exchange pairs are quoted in pips, which is a unit of measurement short for percentage in points. A pip is the smallest movement in the price of a forex exchange rate and is one-hundredth of one percent, or 0.0001.
For example, if the USD/CAD exchange rate moves from 1.2 to 1.2001 it has moved by one pip. If the exchange rate continues to increase to 1.203, the rate has increased by 30 pips.
What is a CFD account?
A forex CFD account is a Contract For Difference account which allows buyers to speculate and profit from the movement of a currency pair without owning the underlying asset. CFD accounts give investors the ability to leverage their money on trades by borrowing money from the CFD broker.
Any profit made from a specific CFD trade with borrowed money will be significantly larger than profits made by simply investing owned capital. However, any losses will also be affected by the leverage, which means that losses can be larger than your initial deposit. In such an instance, you will owe the CFD broker money.
CFDs are incredibly complex and come with a high risk of losing money due to the nature of leverage. It is estimated that 65% of retail investor accounts lose money when trading CFDs.
What is leverage in forex?
Leverage in forex means to borrow money against your initial deposit and use the total amount to invest in a currency pair. The money that you borrow comes from your forex broker.
Leverage is not too dissimilar to CFDs and they are often used interchangeably. However, while CFDs are leveraged products, leveraged products don’t have to be CFDs.
What is spread in forex?
The spread in forex refers to the difference between the bid rate and the ask rate for a specific currency pair. The spread is used by forex brokers and other service providers in place of charging commissions on trades.
When forex trading with a broker you will often see the exchange rate for a currency pair replaced by the bid price on the left and the ask rate on the right. For example, the U.S. dollar and Canadian dollar pair could be listed USD/CAD 1.200/1.2002.
When you buy a currency pair you will be paying the ask price and when you sell you will receive the bid price. The spread in forex is measured in pips and using the above example you can see that the spread for the USD/CAD currency pair is 2 pips.
When does the forex market open?
The forex market hours are special among financial markets because they are open 24 hours a day, five days a week. Specifically, the forex market is open from 6 pm EST on Sunday, to 6 pm EST on Friday (depending on daylight savings).
Forex markets have this 24-hour trading ability due to the different time zones around the world all needing to trade the same currencies. So, when one market closes, trading simply moves to the next available open market.
| Market Location | City | Open* (EST) | Close* (EST) |
|---|---|---|---|
| Europe | London | 3:00 am | 12:00 pm |
| America | New York | 8:00 am | 5:00 pm |
| Asia | Tokyo | 7:00 pm | 4:00 am |
| Pacific | Sydney | 5:00 pm | 2:00 am |
*Times change depending on daylight savings.
The forex market is open 24 hours a day, Monday to Friday.
What is margin level in forex?
The margin level in your forex trading account is a calculated percentage value of the amount of your account equity compared to your used margin. It is most commonly used to show you how much of your account funds you can put towards new trades.
The higher the margin level you have, the more free money you have available to trade. Conversely, the lower the margin level you have, the less money you have to trade. Margin level is calculated using the equation below and most forex brokerage accounts will display this for you automatically.
Margin Level=(Equity/Used Margin)×100%
Note: If your margin level is 100% or less you will most probably not be allowed to open any new trades within that forex trading platform
What is 1 lot in forex?
A lot in forex is a standardized unit of measurement and 1 lot is equal to 100,000 units of currency. When you place a trade order within your forex account, the order will be quoted in lots.
As mentioned, the standard size of 1 lot in forex is 100,000 units of currency, but there are also lot sizes of 10,000, 1,000 and 100 which are referred to as mini, micro and nano, respectively. These smaller lot sizes are used to account for smaller changes in currency value.
What is drawdown in forex?
The term drawdown in forex refers to the amount of money you have lost in your trading account and is represented as a percentage value. Specifically, it takes the highest value of your account balance and the next low point of your trading account and calculates the percentage difference between the two.
To protect your capital and your long-term investing success, you should strive to keep your drawdown as low as possible. In addition, you want to keep an eye on your drawdown to evaluate the success of your trading strategies.
What is swap in forex?
The swap in forex is the interest that you can either earn or pay by keeping a trade open overnight. There are two types of swaps in forex trading with the first being a Long Swap where you buy and hold a currency pair overnight, and the other is a Short Swap where you bet against a currency overnight.
Ready to get starting investing in the forex market? You can: