Forex trading – what is it and how to start
If you’ve ever heard about Forex trading, but you’re not sure what’s going on, you’ve come to the right place. In this text, you will find a simple explanation and where to learn more and how to start trading.
Forex – what is it?
Forex is one of the names that define the international currency exchange market. This is a place where one currency is exchanged for another at a fixed price. It is the largest market globally, with a daily turnover of more than $5 trillion.
It is worth noting that it is not dependent on a single entity, and the exchange does not hold in one place, such as the London or New York stock exchange. The Forex market is an interbank market, and trading is done through computer networks that connect its participants.
Initially, the role of the Forex market was to facilitate currency exchange for international trading. Due to features such as volatility (price fluctuations) and liquidity (no obstacles to trading) quickly attracted speculators. Currently, they are responsible for over 90% of transactions concluded on the Forex market.
A quick look at the currency market
The Forex market is open 24 hours a day, 5 days a week. Trading starts at 22:00 Polish time on Sunday and ends on Friday at 22:00. Every day we distinguish 3 trading sessions:
- Asian (11 p.m. to 8 a.m. GMT)
- European (7 a.m. to 4 p.m. GMT)
- American (noon to 8 p.m. GMT)
The opening and closing times for sessions in Europe and America are moved forward by 1 on the switch to wintertime.
The most popular trading pairs where Forex trading takes place are:
- EUR/USD – euro to US dollar
- GBP/USD – pound sterling to US dollar
- USD/CAD – Canadian dollar versus US dollar
- USD/JPY – US dollar vs. Japanese yen
- USD/CHF – US dollar to Swiss franc
The first currency in a pair is the so-called base currency and the other quote currency. The price shows how many units of the first currency you have to pay to buy one unit of the second currency.
Forex, CFDs and Leveraged Trading
The easiest way to make money in the Forex market is to buy a currency and expect its price to rise. Even if we are right, the profits will usually not be spectacular with this type of investing. So, to increase their income, forex speculators turn to derivatives. These are financial products whose value is based on the value of the underlying asset. Among them, the most popular are CFDs (“contracts for difference”). The expansion of the abbreviation largely explains the principle of their operation.
CFDs are contracts for difference that are a contract between their provider and the investor. Both parties are obligated to pay each other the exchange rate difference between the opening price and the closing price of the position. These amounts would not be large if it were not for the common leverage in this market. The so-called “lever” is a double-edged sword that can multiply profits and losses many times over. It consists in playing with the use of borrowed money. High leverage means a quick reset of the account that secures this loan if there is a loss. Thanks to it, however, you can open positions worth EUR 100,000 with 30 times less in your account, or EUR 3,333. This translates into much higher profits if the rate goes in the right direction.
How to start?
First, you need to choose the right broker from among reliable and honest companies. We can find many dishonest brokers in the network who only pretend to be companies offering access to the market. For this reason, you should pay special attention to whether the broker is licensed in any of the European countries. The next step is to check customer feedback. On the Internet, you can find many reviews written on behalf of or provided by the companies themselves. In the ForexRev’s ranking, we verify each entry, asking for confirmation of the email address and checking the IP.
However, the key issue at the outset is education. Let’s start with a demo account with one of the licensed brokers. You can find the ranking of reliable brokers HERE.
The correct order is crucial. Start with the basics and gain knowledge before you invest your money. If you skip this stage, there is a very high probability that you will join over 80% of people who lose in the Forex market (according to various estimates, it is from 70% to 90% of traders).