The term "Forex" and better known as Currency Trading, Currency Exchange or by its acronym "FX", refers to Foreign Exchange or transactions between currencies.
Today it is
considered the most traded Foreign Exchange Market in the world, exceeding 5
trillion dollars in daily transactions. All of the world's stock markets
combined don't even come close to this. But what does that mean to you? Take a
closer look at Forex Trading and you may find some interesting trading
opportunities that are not available with other investments.
The clearest
example you can notice when you make a trip to another country and exchange
your currency for the currency of the local country. Simple right? That's what
Forex investments are all about.
As for the
price of each currency, it will vary according to the demand related to the
other currencies, that is: the higher the demand, the higher its price and vice
versa.
If you are
still wondering what Forex really is, suffice it to say that it is a market
where it is possible to do operations with the main currencies of the world and
in a decentralized way. In it there are from the most important financial
entities that handle large figures, to people who carry out transactions of
small amounts of dollars, all with the same objective: to buy a currency and
then sell it for a greater amount of money or to sell a currency and then , buy
it for a cheaper figure to obtain greater benefits.
If you want
to be part of this great currency market such as Forex trading, all you will
need is a computer or mobile phone with an Internet connection and a bank account
that you will use in the respective operations. It's that easy and fast!
How does
Forex Trading work?
Currency
pair
The goal of
Forex trading is to benefit from changes in the value of one currency relative
to another. You can make a profit by buying a coin and then selling it at a
higher price, or by first selling it and then buying it again at a lower price.
To
understand how this works in practice, you need to understand what exactly a
currency pair is. Currencies are priced in relation to other currencies. If you buy
euros (EUR), the price you pay will depend on whether you are exchanging US
dollars (USD), British pounds (GBP) or another currency for those euros.
A currency
pair consists of a base currency and a counter or reference currency. The base
currency is the first currency in the quote, and the counter currency is the
second. The counter currency is the reference currency in which the base
currency is quoted.
Let's take
an example of the EUR / USD at 1.1017-1.1019. In this example, the EURO is the
base currency and the USD is the reference currency. The price of the euro is
quoted in USD.
So, you
would pay 1.1019 USD, to buy 1 euro. If you wanted to sell 1 euro, you would
receive 1.1017 USD.
For most
pairs, the most liquid currency is generally listed first. However, when the
USD is combined with the British pound, the euro, the New Zealand dollar, or
the Australian dollar, the USD trades second. If the base currency is a foreign
currency, the quote is known as the
direct quote. If the base
currency is the national currency, the quote is known as the indirect quote.
Currency
pairs are divided into three categories:
The most
traded currency pairs in the world are known as the majors . They include EUR / USD , USD / JPY ,
GBP / USD , AUD / USD , USD / CHF , NZD / USD, and USD / CAD . You will notice
that all of these pairs include the USD.
Currency
pairs that include two of the currencies listed above, but not the USD, are
known as minor currency pairs . These
pairs are also known as cross currency pairs or crosses. Examples include EUR /
GBP , AUD / JPY, and GBP / CAD .
Exotic currency pairs include one major currency and another. The
second currency is usually the currency of a developing nation such as Turkey,
Thailand, or South Africa. However, exotic currencies also include those from
fairly developed countries such as Singapore and Hong Kong.
An important
aspect of Forex trading is liquidity .
If two countries have a healthy trading relationship, the currency pair with
their two respective currencies should be very liquid. On the other hand, a
currency pair that includes the currencies of two countries that do not have
commercial relationships can be illiquid.
The major
and minor currency pairs are the most popular to trade due to high levels of
liquidity. These pairs can be traded in any time frame as the spread is narrow.
Exotic pairs can be traded, but require higher price movements to cover trading
costs. This means that you will need high levels of volatility or a longer
period of time.
Types of
Forex trading strategy
There are
several approaches to analyze when trading currencies:
The
fundamental analysis considers the difference between the economies of two
countries and how that can affect the relative strength of each currency. This
includes interest rates, money supply, and trade balances.
The
technical analysis considers the action of the price of the pair. Price
patterns, indicators, and support and resistance levels are used to identify
profitable trading opportunities.
Traders also
use news, market sentiment, and algorithms to identify potential trading
opportunities.
The scalping
strategies take advantage of the price movement in the short term that can last
seconds or minutes to generate profits.
The day
traders use technical analysis to identify the operations to maintain minutes
or hours. They close all positions at the end of the day.
The swing
traders hold positions for a few days to take advantage of higher price
changes.
The traders position
and flowers in positions trend for some years. They follow the main trends, or
price patterns to trade.
Lot sizes
and how to calculate position size
One of the
most confusing aspects of Forex trading is calculating the size of a position.
The size of a position, which is the size of your exposure to the market,
depends on the traded price, the lot size and the number of lots.
So what is a
batch? A lot is the standardized trade size for Forex. One lot equals 100,000
units of the base currency. So if you buy 1 lot of EUR / USD at 1.1019, you are
buying 100,000 euros and you will pay $ 110,190.
You have
probably noticed that if you are trading a lot size like that, your minimum
trade size would be quite large. Fortunately, you can also trade smaller lots:
Mini lots
are equivalent to 10,000 units of the base currency.
The micro
lots are equivalent to 1,000 units of the base currency.
The nano
lots are equivalent to 100 units of the base currency.
How to learn
to trade Forex?
learn to
trade Forex
Any type of
negotiation requires continuous learning. It's not like becoming a doctor,
where you learn first and then do it. In the case of trading, you must learn
and practice simultaneously.
You can
start with a demo account (which you can
create for free with Fxtm , but your learning curve will accelerate when you
have “skin in the game”. Some of the most important lessons to learn relate to
the way you react when you make money and when you lose money. Therefore, it is
a good idea to use a real account as soon as you feel safe trading with a demo
account.
To improve
your knowledge, you should read books on trading, fundamental analysis, and
technical analysis. For Forex traders it is also worth learning about economics
and monetary policy, as this is what drives the value of a currency. There are
also many great videos and blogs on these topics available on the internet for
free.
Finally, you
should keep a journal, set goals, and track your progress. The more systematic
you are about the learning process, the more efficient your learning curve will
be.
Why is Forex
the best option to invest?
Trading
foreign currencies, or simply Forex, is one of the most popular activities
among modern investors. More and more people are showing interest in currency
trading for different reasons and many of them see this activity as a source of
income for their future businesses. With the right strategy, people can
definitely benefit from this special type of negotiation.
The Forex
market has different advantages to develop online trading:
Greater
liquidity
It is the
most liquid market in the world, since its trading volume exceeds 5 trillion
dollars. In it you can open and close positions more easily than in other
markets with less liquidity.
Low
volatility
In the FOREX
market, trading between two currencies depends on fewer variables. In addition,
it is easier to predict when compared to other assets, for example: stocks.
Higher
leverage
Leverage is
closely related to the low volatility of the foreign exchange market, which is
why when operating with FOREX trading the leverage will be higher compared to
other markets.
Its quote is
incessant.
You will be
able to know the quotes in real time 5 days a week, 24 hours a day.
It is
decentralized
Being a
market based on decentralization, its access is easier and allows the trading
volume to continue expanding.
Disadvantages
and risks of Forex trading
Like any
commercial activity, Forex trading carries some risks and disadvantages.
Market risks
All trading
instruments are subject to a variety of market risks. Political, economic and
geopolitical factors can contribute to increased volatility, which can make
trading difficult.
Possibility
of suffering large losses
The use of
leverage and margin can be used to increase profits, but it can also increase
losses. Forex traders should use leverage with caution and make sure they are
aware of the potential loss on each trade.
Weekend gaps
Because
currency markets operate 24 hours a day, Forex traders do not have to worry
about overnight gaps that occur in other markets. However, the Forex markets
are closed on weekends, which can lead to gaps in prices. Forex traders should
be cautious when holding open positions over the weekend.
Liquidity
Some
currencies can go through prolonged periods of low liquidity. This can lead to
wider spreads and higher volatility. Even liquid currencies can become illiquid
in certain periods of a trading session.
Counterparty
risks
Forex is not
traded on centralized exchanges, as is the case with stocks and other
instruments. This means that there is less oversight over the way in which
trading is conducted, and traders may not be protected if a broker becomes
insolvent.
Regulatory
risks
Forex
brokers are regulated by various regulatory bodies that depend on the country
where the broker is domiciled. Traders should always ensure that their broker
is certified by an accredited regulator.
What is
"spread"?
Certainly,
many times we have heard the word related to the world of financial markets and
we wonder its exact meaning.
When you
look at most financial markets, you will see three prices: the market price,
the buy price, and the ask price.
To better
understand, the word Spread is used to indicate the difference between the
prices between the offer (or the sale) and the demand (or purchase), and is
used for any stock or derivative of the stock market.
Simply put:
a spread is the difference between the ask price and the buy price.
Price chart
In the
margin of the graph you can see the price from where you can buy the first
currency, comparing it with the second currency.
If the offer
price is around 1,300 for the EUR / USD pair, you will have to pay $ 1.30 to
buy € 1. Therefore, it would be advisable to make the purchase if you think
that the euro will present a rise in its price against the US dollar, in other
words: if you think that you can sell your € 1 for an amount greater than $
1.30, which was what you paid previously for him.
In the case
of wanting to sell, the graph shows you the price at which you can sell the
first currency for the second.
If the offer
price was 1,300 for the EUR / USD pair, you could sell one euro at that price.
Now, it is advisable to sell if you think that the price of the euro will
decrease compared to the price of the US dollar. That way you could buy the
same euro, for less than $ 1.30, the amount you paid at the beginning of the
transaction to obtain it.
What is a
"pip"?
A pip ,
short for the percentage point, is a very small measure of change in a currency
pair on the forex market. It can be measured in terms of the quote or in terms
of the underlying currency. A pip is a standardized unit and is the smallest
amount by which a price of a currency can change.
If you
observe that the price of the EUR / USD pair increases from 1.3600 to 1.3650,
it can be said that there was a rise of 50 pips, therefore, if you bought at
1.36 and then sell at 1.3650, your profit would be 50 pips ... But this is not
necessarily always the case.
The profit
you make will depend on the amount you have bought of a certain currency. If
you bought micro lots (1000 units) and assuming you trade with an account in US
dollars, the pip value is $ 0.1, so if your profit was 50 pips, you would
actually be getting $ 5. In case you have bought mini lots (a unit of 10,000),
the pip value increases to 1, so your profit would be $ 50. Similarly with the
purchase of a standard lot, which is equivalent to a unit of 100,000, the value
of the vip is $ 10, so your profit would be $ 500.
The pip
values will be applied in all pairs where the US dollar appears in the second
position of the same. In the event that it is first in the pair, the pip value
will be different. To calculate it, you must divide the normal pip value by the
current exchange rate, for example: if your currency pair is USD / CHF , you must divide $ 0.10 (value of
the micro lot) by 0.9435 (the current exchange rate for CHF) and you will get
as a result $ 0.1060 (pip value). In the event that the JPY is in the pair, as
in the case of USD / JPY , you will have
to perform the same steps and then multiply by 100.
What is leverage?
Leverage
is the ability to use something small to control something big. Specific
for currency trading, it means that you can have a small amount of capital in
your account that controls a larger amount in the market.
If, for
example, the FOREX broker offers you a leverage of 1: 100, it means that you
will be able to trade with 100 times more money than you deposited. So if you
want to invest in 100,000 EUR / USD you can do it with just € 1,000. However,
these transactions pose great risks ... In the case of 1: 100 leverage your
losses could be multiplied by 100, so do them only if you are completely sure.
Leverage Advantages:
Profits
increase
The first
and in some ways the most important benefit of trading with leverage is that it
allows you to earn more money for less effort. No matter what instrument you
are trading, no matter if you are trading a small amount or a large amount, the
key function of leverage is to increase your profit on every trade you have
available.
Increase
capital efficiency
At the same
time, increasing the amount of money you can earn per transaction naturally
increases the efficiency with which you are using your capital. To understand
the entire technical process for a moment, consider your capital as an asset
with the ability to deliver a return.
For example;
If it takes you two days to generate £ 100 with unlevered positions, the
leverage means that it takes a much shorter period of time to earn the same £
100, which means that your capital can be reinvested more times and used to
make it work for you More frequently.
They
moderate against low volatility
Another key
advantage of leverage when it comes to currency trading in particular is that
it has the effect of mitigating low volatility. Volatile exchanges are often
the ones that produce the highest degrees of profit, because markets are moving
in broader cycles than more stable instruments.
Beware of
leverage in Forex! It can make you earn a lot of money, but also lose it, use
it wisely.
What is CFD?
CFD trading
is a popular form of derivatives trading. CFD trading allows you to speculate
on the ups and downs of fast-moving financial markets (or instruments) such as
stocks, indices, commodities, currencies and other liquid assets.
Trading CFDs
on currency pairs allows you to open long or short positions. A long position
means that you are buying the base currency, and you are effectively short the
reference currency. The price will increase if the base currency strengthens or
if the counter currency weakens. You will benefit if you close the position at a
higher price.
If you open
a short position, you are selling the base currency and buying the reference
currency. The price will fall if the base currency weakens, or if the opposing
currency strengthens. You will make profit by closing the position at a lower
price.
Advantages
of CFDs:
Liquidity: CFD prices directly show what is happening in
the underlying market. This means that CFDs provide access to liquidity in the
market, in addition to the liquidity offered by the broker.
The ability
to work on different financial markets from one account - Many brokers dealing
with these instruments offer CFDs based on shares of different markets around
the world, as well as other types of financial instruments such as gold,
silver, oil, stock indices, sectors , raw materials, government bonds,
currencies, etc. This gives the trader the opportunity to diversify his
business and investment by having a broader portfolio of options.
Ability to
work at any time: Many brokers offer their clients extended hours, which means
that they can work with certain instruments or markets such as FTSE and Dow,
even after the underlying market has finished its session.
The trader
can work for any period of time: CFDs do not have a fixed expiration date.
The size of
the contract is not determined. Trader can work with any volume you want,
whether it is small or large.
CFDs are
less complicated than options and guarantees: unlike options and warrants, the
direct price and liquidity of CFDs are reflected in the underlying market.
Contracts
for Difference (CFDs) are part of the group of derivative financial products
that allow operating through leverage. This type of operation makes it possible
to operate with more money than you have, increasing your profits, but also
possible losses. That is why, trading with CFDs should be done with prior
knowledge, since your gains or losses could considerably exceed the amount
invested.
Bulls and
Bears: Long Positions vs Short Positions
Bulls and bears
The bull and
bear are used to identify the two types of investors that exist in the currency
market.
The bulls
represent the bull market . This type of
investor is optimistic and expects the price to increase, so they decide to
make money by opening a long position .
Thus, when a long position is opened ,
the FOREX investor buys a currency pair expecting its price to increase.
In
contrast, bears represent
the bear market , where investors are pessimistic and expect prices to
fall, so they open short positions .
When a short position is opened , the
FOREX investor sells a currency pair expecting its price to decrease .
How to start
trading Forex?
If you are
looking to obtain the best results through Forex trading, you should first know these key aspects:
Select the
currency pairs with which you are going to trade. Currency pairs with high
trading volume are the most recommended when starting to trade FOREX. Among the
most representative examples are the currencies of: United States, European
Union, United Kingdom, Japan or Switzerland, which represent the most powerful
economies in the world.
Know the
economic events that are to come. The macroeconomic information published
corresponding to the main economies of the world influences the values of the
currencies, as well as the economic decisions taken by the Central Banks.
Knowing them can give a clue to the strength or weakness of currencies.
Establish a
schedule to operate. The best hours for trading are those with the highest
trading volume and coincide with the opening and closing hours of the most
important currency markets, such as New York, London and Tokyo.
Use
technical analysis tools. To obtain good results in trading on FOREX, it is
essential to use technical analysis. It studies, through stock charts, the
stock trends of any security.
Employ
leverage appropriately. Knowing how to use leverage will help you limit your
losses, whenever possible. It is necessary that in each operation you set a
"stop-loss" or level of assumable loss, with it you can close the
position that did not evolve as expected and avoid further losses.
If you have
come this far it is because you have understood the concepts that we have
explained throughout the article. These will help you understand the charts and
investment possibilities to obtain potential profits depending on the
appreciation or depreciation of the currency pair with which you decide to
trade.
Then, you
will need to get your own free FOREX demo account. From there you can start
practicing choosing currency pairs and buying them if you think they will
increase in value.
You will see that little by little you will learn new strategies that will allow you to start operating with real money and will make you a great trader in one of the best positioned currency markets in the world.
Frequently
asked questions:
What does
Forex mean?
Forex is
short for "currency market" and involves exchanging any currency for
another currency.
What is
Forex and how does it work?
The terms
Forex, Forex trading, and currency trading refer to currency trading. Forex is
not traded on exchanges, as with stocks, but on "over the counter"
(OTC) markets. This means that currency transactions are carried out directly
between banks and other institutions. Forex traders can access the Forex market
through platforms provided by brokers.
How much do
you need to start Forex trading?
You can
start trading live with Fxtm with as little as $ 10. You can also open a demo
account for free to learn more about Forex trading.
Can I trade
Forex with $ 100?
Yes of
course. To generate an income, you will need a larger account, but the sooner
you start learning to trade the better.
What is the
difference between Forex and CFDs?
Forex
includes only currencies, while CFDs (contracts for difference) include other
asset classes, such as: stocks and commodities, but also currencies. Therefore,
you can trade Forex directly, or you can trade CFDs on Forex pairs.
How can I
learn Forex?
There are
many free tutorials and videos online. A good place to start is Fxtm’s free beginner course .
Is it easy
to trade Forex?
Forex
trading is easy, but profitable Forex trading takes time and effort. To be
successful, you need to find the trading style that works best for you and
develop your own approach to trading.
Why do Forex
traders fail?
Most Forex
traders fail when they try to succeed overnight and fail to manage their risk
properly. Success requires patience, discipline, and hard work.
Is Forex
Trading A Scam?
No, the
Forex market is legitimate and, in fact, the largest financial market in the
world. However, there are Forex brokers and trading schemes that are scams. You
can avoid them by making sure that anyone you deal with is regulated.
Is Forex
Trading Illegal?
No, Forex
trading is legal in almost all countries. Each country has different
regulations regarding the regulation of brokers and the amount of leverage
available to retail clients. Trading CFDs is illegal in the United States, which
means that CFDs on Forex are not available to US citizens. However, Forex
trading itself is legal in the United States.
How safe is
Forex trading?
All
negotiations carry risks. The amount you can lose depends on your own risk
management and discipline. That said, trading with unregulated brokers is not
safe, regardless of your risk management process.
How are
taxes calculated in Forex?
The way in
which taxes are set for Forex trading varies from country to country. In most
cases, earnings are subject to capital gains tax.
Why trade with
Fxtm?
Fxtm is an
international brand with a twenty-year history of operations in financial
markets and online trading. Fxtm has helped investors effectively trade stocks,
currencies, indices, commodities, gold, oil, gas, and many other financial
instruments. In addition to this, Fxtm provides first-class services to more
than 5,200,000 clients in all the continents. Fxtm has more than 150 trading
instruments available.
Forex Trading Strategy to Earn Consistent Profit.
Indicators needed:
Moving averages.
They are primarily used as
trend indicators and also to identify support and resistance (demand and
supply) levels.
The two most common moving
averages are the simple moving average(SMA),which.is the average price over a
given number of time periods and the exponential moving average(EMA) which
gives more weight to recent prices.
Moving averages are used to
guage the direction of the current trend.
In this strategy,we will be
utilizing a simple moving average with a period of 12 and Shift of 0.
Note: this should only be used on 1hr,4hrs and daily time frames on the last candle that just formed.
There are two rules
1. When 4hr or daily candle
stick(sky blue colour) closes above the moving average or when the moving
average passes through the candlestick, take a buy.
2. When 4hr or daily candle
stick(red colour) closes below the moving average or when the moving average
passes through the candlestick, take a sell.
Here are buy and sell signals
Bollinger Band Strategy.
As the name implies, Bollinger
Bands are price channels(bands) that are plotted above and below price.
They can be used to read the
strength of the trend,to time entries during ranging markets and to find
potential market tops.
They have three(3) lines: The
Upper,Middle and Lower lines.
The outer Bollinger Bands are
based on price volatility,which means that they expand when the price
fluctuates and trends strongly,and the bands contract during sideways
consolidations(ranging) and low momentum trends.
In this strategy,we utilize
the Bollinger Band with a period of 20 and Deviation of 1.000 and a Shift of 10.
Here are the rules
1. When the candlesticks are
above the blinger band lines,buy.
2. When the lines are below
the Bollinger Bands lines,sell.
Envelopes plus Bollinger Bands
Strategy
Envelopes are technical
indicators formed with two moving averages, one of which is shifted upwards and
another one that is shifted downwards.
The selection of the optimum
relative number of band margins shifting is determined by the market
volatility. The higher the latter is,the stronger the shift is.
Envelopes define the upper and
the lower margins of the price range. Sell signal appears when the price
reaches the lower margin.
Envelopes have a similar
interpretation of Bollinger Bands.
For this strategy we will be
utilizing envelopes with a period of 20,shift of 0 and Deviation of 0.100.
Here are the rules
1. When the lower envelope
line crosses the lower Bollinger Band line, buy as indicated in sky blue dots.
2) When the upper envelope
line crosses the upper Bollinger Band line,sell(indicated by red dots).
Note: Never trade if you spot the signal late.
Always secure your profit by moving stop loss to break even when you are 15pips in profit.
Don’t open multiple trades on
the same pair at a time, spread your risk.
Always use a stop loss for each trade. You can Google “stop loss in forex trading.
With this strategy you can
easily earn up to $100 per day trading forex depending on your capital.
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