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 the stock exchange market forex trading is possible 24/5 without trading gaps. 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 a currency on the forex market. One currency is exchanged by another. If you think the Euro will rise against the US-Dollar, then click on BUY EURUSD, if you think the Euro will fall against the US-Dollar, then click on SELL EURUSD in order to make profit in either way. It's always the first part of a currency pair that indicates the structure of a chart: On USDCAD for example you have to click on BUY if you expect a rise of the US-Dollar against the Canadian-Dollar and on SELL if you expect the USD to fall against the Canadian Dollar. When trading the forex market consider other related currency pairs for your trading decision. A falling EURUSD indicates that the Euro is becoming weaker against the Dollar but it can mean that the Euro becomes weaker against other currencies as well: EURGBP, EURAUD, EURYEN etc. So be careful to trade the Euro Long in one currency pair and Short in another. The swap rate between two currencies is called exchange rate. 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 on either way - no matter if the market goes up or down. In order to learn forex trading from scratch as well as an appropriate risk and money management, please subscribe to our YouTube channel where you will get a complete step by step introduction into daytrading from the beginning to the end.
How do you make profit with forex trading?
Let's assume we have discovered a strong support level at 1,30 in the USD. So we decide to open a Long Order (buy) at 1,30 with 1 Standard Lot (100.000 entities). If we are right and the Euro moves to the upside just about 2 Cents to reach the 1,32 and we decide to sell at this point, we have made a decent profit of 2000 USD as when opening one standard lot, 1 pip equals 10 USD. Reason why many forextraders are quite wealthy. With a high leverage and only few pips movement one can make quite a lot of money (or lose a lot of money) in a short period of time. If the Euro gets weaker and loses 2 Cent against the US-Dollar, you will lose 2000 Dollars. This is why it is so important to perform a good and reasonable money management and never risk more than 1 - 2 per cent of your balance.
In contrast to stock trading on the forex market you can profit either from rising or falling prices. If you are spotting a resistance level just go Short and profit from the falling price action. If you are spotting a support level you can open a Long order and profit from the rising price. Please make always sure to use a stop level above the resistance/below the support in case you were wrong. This prevents your account from high losses.
Long and Short
When trading forex you can make money on either way - even if the price falls. It doesn't matter, you just have to predict the right direction in order to profit from the markets. This is a big advantage of the forex market as the short selling of stocks is sometimes prohibited - not only on IPOs but also in delicate political and/or economical situations. The trader goes Long at a support level or Short at a resistance level. If the price moves as predicted, the trader makes profit.
Why can the forex market be so profitable?
In order 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 (leveraged) 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! If your broker offers microlot trading (0.01 Lot) you can even start trading with 1.000 dollars. But please notice that it is far easier to trade a larger account. If you want to live from your trading you should fund your account with at least 30.000 dollars - depending on your lifestyle and monthly expenditures. Please do never quit your job until you have learned trading and know how the markets work.
Has the penny dropped? 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 is 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 - 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 social trading system. With the help of these platforms you can follow a certain trader who knows how to trade the markets and your trades are being executed simultaneously, while you are lying on the beach or in your bed. These so called Social Trading Networks are:
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 constantly. 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. The prime rate is a very important factor when trading currencies. The higher the prime rate the more money a country attracts. But the prime rate does not only affect the forex market but the stock and futures markets as well. This is why you shouldn't trade when Ben Bernanke is speaking due to the high volatility in these moments.
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 like for example when trading penny stocks. 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. As the forex markets are open 24/5 days a week you can even trade at night or learn the trading business when you have come home from work. 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.
Currencies are very good to hold overnight positions, which may not that easy with indices or even stocks, due to the large risk of being stopped out by gaps. There are hardly any gaps in the forein exchange market as the currencies are trading 24/5. The next advantage of trading the forex is that currencies mostly move in longterm trends, which means that once you have caught a good entry you can "ride the wave" quite a good long period of time whereas stocks are more volatile and strongly depend on news or insider information. In general, forex trading is a lot easier to trade than stocks or indexes as there are no gaps and the currency can hardly be manipulated exept by the central banks on a certain occasion which is in generall well known fairly before. Please make sure to have a look at our economic trading calendar each day before you open your charts. This is necessary in order for you to know the most volatile hours, when for example Janet Yellen is speaking or interest rates are beig cut by the Fed etc. Please make sure to keep away from the market in such occasions. The forex market is a quite technical market. The forex market is a special playgroud for technical analysts, whereas stock trading and indexes are rather for insiders and fundamental analysts.
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. It is very important to always use a stop loss level that shouldn't exceed 1 or 2 per cent of your trading balance in the worst case. Hide your stop strategically clever under important support levels (Long) or above important resistance levels (Short). The currency market is a quite technical market and thus easier to trade for those who prefer technical analysis to fundamental analysis.
Is there enough movement on the forex market to make some money?
Yes. There is enough movement and liquidity 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 or Janet Yellen is giving a speech. 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 manager and make a lot of money in a quite short period of time. Another advantge: Once you have learned the basics of technical analysis you can help others (parents, friends) to invest in the stock markets and tell them when the markets are about to rise or to fall, as the technical analysis applies to all markets.
How much money do I need for a minimum deposit?
Some forex brokers only demand 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 and to cash out regularly a small amount of money. 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 own 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. If you start trading with a small amount of money please make sure that your broker allows trading in micro lots. Otherwise your account will be wiped out very soon!
Lot, Minilot, Microlot
In the stock market you buy a certain amout of stocks, whereas in the forex market you buy a certain amount of Lots which are subdivided in minilots and microlots. If you trade a small account of less than $1000 please make sure that your broker enables trading microlots. One standard Lot equals 100.000 entities of a currency. If you open e. g. 1 Lot in the EURUSD currency pair and the price moves just about 1 PIP (0,0001 Cent) you will make (or lose) 10 USD. In USD/JPY 1 Pip equals 0,01 Cent. If you now trade a small account of few thousand dollars and open a standard lot, guess how far your account will be wiped out. This is why it is so important to adapt your lot size to your account size:
- 1 Lot (1,0) = 10 USD per Pip
- 1 Minilot (0,1) = 1 USD per Pip
- 1 Microlot (0,01) = 0,10 USD per Pip
As a beginner please look for a broker that offers microlots trading. These brokers are:
Raise your lot size from time to time and make sure that your lot size grows in accordance with your balance. Don't forget to reduce your lot size again when you suffer a draw down. This is how you will be able to make the most out of the powerful leverage effect.
This is how you can adjust the proper lot size in Metatrader 4.
It is very important to choose the right lot size according to your balance. With only $1000 or less you sould only trade micro lots (0.01 Lot). Please note that most brokers except from Admiral Markets do not offer microlot trading in indexes. One CFD Contract equals 1 USD/point or even more. Don't trade indexes with such a small balance.
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 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 and strategies you can choose a social trading system like ayondo or eToro. How does that work? It works like a traditional managed account. But it's the lazy way. Don't think you will be able to trade the forex market like a pro from the very first moment. Or would you dare flying a Boeing 747 without any formation or introduction? Make sure you read some valuable books about the technical analysis and practice risk free on a demo account with virtual money. Your formation might last at least 1 or 2 years and the worst enemy in the markets you will encounter is yourself and your psyche, especially greed and fear.
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. If you have developed a strategy and are not successful after, let's say one year, forex trading might not be the right job for you. It is very important to be mentally stable in this business which might not apply for everyone.
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 regulation to facilitate your choice. Choose one or more brokers that meet your expectations and open a free demo account with them. All our brokers offer english speaking support. If you don’t only want to trade currencies but (crude) oil, gold, silver and platinum etc., mind 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: Make sure 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 of trading with a high leverage. Once you are a better trader you can choose a higher leverage and thus making more money.
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