Forex trading - what is that?

Forex trading is an upcoming trend on the internet. But what is forex and how does it work? With a daily turnover of 4 trillion dollar the forex market is by far the largest financial market in the world. Unlike with the stock exchange trading is possible here 24/5. The forex market is a booming market and forex trading is not only mentioned by all major forex brokers but also by financial experts and in newspaper articles. What does it mean, “trading the forex”? Forex is the abbreviation for “Foreign Exchange”, meaning currencies of other countries. And this is the nature of this market: Currencies are being exchanged – one currency against another. The forex market isn’t bound to a special location, it rather consists of an electronical network of banks, firms and private traders. The forex market starts every day in Sydney, heading over to Tokio, London and finally New York. Whereas the general financial product of the stock exchange (shares) is quite understandable, many beginners have problems with understanding forex trading. What is there being traded? What do you buy and sell? In comparison to the stock exchange the explanation sounds simple: If you buy a stock on the stock exchange, you buy another currency on the forex market. One currency is exchanged by another. You exchange for example ten euros against 10,20 US dollar. Your euro account is being deducted by ten euros and your dollar account is filled up with 10,20 US dollar. If you previously had 1000 euros, you now have only 990 euro, but 10,20 US dollar. The swap rate between two currencies is called exchange rate. Or even simpler: Forex trading is nothing but an exchange between two currencies – one currency is exchanged against another. In order to make profit, the trader speculates for a rise or fall oft the exchange rate. Big advantage of the forex market: Other than with the normal stock market you even make profit when the prices are falling. Thus you can make money in either way - no matter if the market goes up or down.

How do you make profit with forex trading?

If the exchange rate changes for example to 1,08 US dollar, each euro is worth only 1,08 US dollar. The trader now gets for their 10,20 US dollar more than 10 euros. If you now change back your dollar to euro, you realize a profit and your account balance amounts to more than 1000 euros.

Why can the forex market be so profitable?

To trade the forex you don’t have to have already a fortune of several thousand dollars. Thanks to the leverage effect you can trade with a small amount of money which is bulked up by the forex broker. If your broker offers for example a leverage of 1:100 you can trade 100 times your deposit - which is 10.000 dollar with just a 100 dollar deposit!

Example The EURUSD lists 1,5250. You buy 100.000 EUR which is worth 152.500 US dollar. You don’t have to pay all the 152.500 US dollar but just deposit a margin of 1% (=$1.525,00). The broker offers a leverage of 100% of your deposit. You just have to be aware of the fact that the leverage effect works the other way round, too. If now the dollar rises to 1,55 US dollar, your speculation comes true and you win 250 Pips on 100.000 euros which is a profit of 2.500 US dollars (0,0250 x 100.000). If the euro falls against your expectation to 1,50 US dollar, you suffer a loss of 250 pips (= -$2.500).

Has the penny dropped? If not, please read more about the leverage effect and see another example. By means of the leverage effect even the small private trader can make a large fortune. Another forex trading advantage compared to the stock exchange: You can make a profit even if the currency rate falls which ist called selling short. As a forex trading beginner you always should open a demo account at first and once you see how the wind blows you can start trading with real money. All our brokers offer a demo account for free.

Forex Trading - Video

This video explains very detailed the basics of forex trading as well as the function of the leverage effect.

Forex trading - a job for everyone?

If you bump into somebody who is interested in the foreign exchange market, they mostly don’t know that they have already experience in forex trading. Everyone who has spent their holidays in another country will have changed their own currency into another – and even if you just wanted to buy a newspaper at the airport. Even your exchange from US-dollar in euro was a currency trade. Once back at home, your change back in your home currency was a forex trade. As a beginner you will be puzzled by all those special terms and trading strategies but you can participate in the forex trading market by taking advantage of a forex autotrading system. With the help of these systems you can follow a certain trader who's at ease in the market and your trades are being executed simultaneously, while you are lying on the beach. Ayondo and ZuluTrade offer such a system for free.

Trading currencies - how does that work?

Back to the forex market as a financial market. Two currencies are related to one another. One of which is the anchor currency with the value of 1, the other one is – according to its value – set into relation to this currency. This is why we are talking about currency pairs, for example euro/dollar or dollar/Yen. The values related to each other are changing. Like on other markets the values are influenced by supply and demand. If the demand for your own currency rises, its value rises in the respective currency pair. If the supply of a currency is higher than the demand, the currency falls in value.

Who can trade currencies?

Briefly: everyone! You just have to register with a forex broker to get access to the forex market and then participate in the exiting world of foreign exchange. The forex market is particularly fair as everyone has equal rights and all data provided by signal providers is available for all traders at the same time – no matter if you are a small private trader or a big player. Nobody has an information advantage. There are many advantages for private traders: The risk is manageable (stop-loss), market manipulation is not possible due to the large volume of currencies traded every day and there are almost no gaps in the major currencies. Forex trading is a dynamic business. The currency rates are always moving up and down and they are influenced by several factors. This website shall help beginners and experienced forex traders to find the best forex broker and to get familiarized with the basics of forex trading.

Is forex trading more risky than stock trading?

No it isn’t – if you take advantage of the stop-loss-function and use a proper risk and money management. Forex trading enables you to trade with a high leverage and at the beginning you mustn’t choose a leverage that is too high. The higher your leverage the higher the possibility of earning much money. At the same time a high leverage increases the risk of losing all your deposit.

Is there enough movement on the forex market to make some money?

Yes. There is enough movement on the forex market to make money. Although there are times with a higher volatillity where trading is more lucrative. This is when the Wall Street and German Stock Exchange open their doors. Other than the stock market this market is open 24h on five days a week. Forex trading is popular amongst hedge funds because of its long term trend phases which are quite easy to determine and to trade. If you learn how to trade the forex market you can be your own hedge fund and make a lot of money in a quite short period of time.

How much money do I need for a minimum deposit?

Some forex brokers only require a minimum deposit of several dollars. The minimum deposit in our forex broker review is just 1 dollar. But in order to execute real and winning trades and to survive a larger draw-down phase, your account should show a deposit of $1000 at least. If you would like to do forex trading for a living you should trade with a lot more money (> $10.000) in order to survive a larger draw down. Nevertheless it can be profitable to start with little money and make more of it. If you haven't got enough money yet, just save every month 100 bucks and start with a $1000 account. In the meantime, learn to trade the forex with profit on a demo account, develop your trading strategy and you will be by far more successful in your real money account as you would be if you jump into the water with just a small deposit of $300 or even less.

No experience in stock exchange. Can I trade currencies anyway?

Forex Trading is even possible for absolute beginners. The basics of trading are identical – no matter which market is involved. Big advantage: As soon as you have learnt and understood the rules of the technical and fundamental analysis you will be by far a lot better in long term investments, for example with stocks and funds. You will be able to tell your parents, friends and realtives when it is time to buy a share and when they better sell them. You can learn the trading basics and transfer it to the stock exchange market. Some or our brokers (e.g. 4xp) have a large CFD portfolio, where you can trade not only currencies but also hundreds of common shares and the biggest market indices. Our best forex brokers offer various information videos, ebooks and tools to teach you from scratch. If you don't want to learn forex trading and waste your time with studying charts ands strategies you can choose an automated forex trading system like ayondo. How does that work? It works like a traditional managed account. Open an account with ayondo and choose a successful forex or CFD trader. There are many experienced traders on the platform and they do forex trading for a living. Once you have chosen your favorite forex trader just "follow" him or her and all his or her trades are being mirrored in realtime on your broker account. Sounds great? It is. But this is the lazy way.

How do I know if I can handle the forex market?

The best way to see if you can handle the forex market is to open a demo account with one or several forex brokers. Some of which are limited in time, others are not. Here you can trade with virtual money, but the psychological effect is missing as you know that you don’t trade (and risk) your real money you probably will have worked hard for.

What is the best forex broker for me?

Have a look at our forex broker review. We have compared all major forex brokers and set up an overview for you. There you will find all important criteria like spread, minimum deposit, leverage and software to facilitate your choice. Choose one or more broker that meets your expectations and open a free demo account. All our brokers offer english speaking support. If you don’t only want to trade currencies but (crude) oil, gold, silver and platinum, take care that your broker offers commodity trading as well. When choosing your forex broker you should pay attention to mainly these 5 criteria:

Low trading amount: Take care that your broker offers mini or micro lot trading. For beginners this is the best way to keep your money under control. Only trade money that you can afford to lose.
Spread: Choose a spread as low as possible. The lower the spread the less you have to pay your broker.
No dealing desk (NDD): No dealing desk brokers don't execute re-quotes while you're trading. Go for an ECN or STP Broker.
Training: Does your broker offer videos, charts, webinars in order to teach you? Your broker should be aware that their success is related to the success of their traders. Thus they should teach their traders as much as possible.
Leverage effect: Although you as beginner shouldn't choose a leverage that is too high your broker should offer you the possibility to trade with a high leverage. Once you are a better trader you can choose a higher leverage and thus making more money.