Many people find themselves talking about Forex (FX), online trading, buying and selling currencies and many similar terms. Every day the foreign exchange market grows with great potential, projecting itself into the future as one of the most dense and explored forms of trade worldwide.
Forex (FX): The Foreign Exchange Market
Today, many investors are depositing, moving and trading their capital in the world’s largest foreign exchange market: Forex.
This immense market is capable of providing great benefits to those entrepreneurs and trading experts who know how to operate in it, because, to know how to win, it is necessary to know in advance the financial strategies, techniques to analyze charts, and other trading instruments; as well as it will be mainly necessary to choose the right broker or the platform in which you are willing to invest and operate in the long term.
If you are reading for the first time about online trading concepts, Forex, brokers, Exchange platforms and so on, don’t worry! Little by little we will deepen in the subject so that you can understand in the best way everything related to Forex and this great market of purchase and sale of currencies.
What is Forex?
Forex is, without more or less, the largest foreign exchange market in the world! Forex represents the largest global trade where it is possible to buy and sell currencies from all countries, from the euro (EUR) to the U.S. dollar (USD). The name Forex is an abbreviation for Foregin Exchange (FX), which in Spanish means currency exchange.
This large financial market does not depend on a central exchange as is the case with popular stock markets, therefore, Forex is not centralized, allowing it to trade through a huge global network of Exchange platforms, brokers, banks, independent investors, financial companies and many more.
Forex is available to trade at any time of the day, seven days a week even in applications for different mobile platforms.
Where does Forex come from?
The Forex market (also known for practicality as FX market) has its beginnings in the 70s and was born with the need to improve the management of monetary flows resulting from international trade. Since then, Forex has greatly facilitated the buying and selling of international currencies in a reasonable price range. Simultaneously it has been adapting and innovating according to the technology and the needs of the current investor.
In view of the fact of allowing the purchase and sale of any currency in a simple way, the governments and authorities of different countries did not delay in pronouncing and introduced control measures and financial policies to these commercial activities to avoid the devaluation or revaluation of their currencies with respect to others, since, logically, the free trade of foreign currencies and similar financial transactions without any control can affect on a large scale the economy of a country or several specific countries.
What currencies can I trade on Forex?
Currently there are more than 182 currencies with which it is possible to trade in this great market, although depending on the broker you use there will be more or less currency pairs to trade. The most commonly traded currencies are the euro (EUR), dollar (USD), yen (JPY), pound sterling (GBP) and Swiss franc (CHF). On the other hand, some currencies that are not as popular can generate large profits by investing in them, however they can also leave considerable losses due to their country’s unstable economy or lack of data and information about them.
What is Forex and how does this forex market work?
This market is handled like many others: thinking and studying the behavior of currencies as well as their tendency to fall or rise in price. In Forex, the investor can decide whether to go long (buy foreign exchange) or short (sell foreign exchange), taking a position on the fluctuation of the currency and its possible trends, either high or low. Forex works in a very simple way, pay attention to the following clarifications and you will see that there is nothing complicated in terms of knowledge of the FX market.
Always, in any market or financial platform the currencies are grouped in pairs, this pair reflects the base currency (on the left) and the quoted currency (on the right of the “/” bar). For example, in the USD/CHF pair you can see that the trader is buying US dollars and at the same time selling Swiss francs that he owns in his capital – it’s that simple!
When browsing the Forex market, you will find that next to the currency pairs, you will see a number with several significant figures (four decimals generally although there are currencies that are handled with two) this is interpreted as follows: If you are interested in investing in the USD/EUR for example, and you notice that this pair dials 0.8865, this means that 1$ equals 0.8865€.
Therefore, the base currency will reflect the unit while the quoted currency will equal the value of the base in the new currency. Therefore, you will always find lists containing data of the following type: GBP/USD 1.0847; AUD/EUR 3.8951; NZD/JPY 2.8756 but now you know in detail how these values are interpreted and what action each currency performs in their respective order.
Forex trading consists of determining whether a certain currency will take a value higher than its current value with respect to its pair (if it will go up) or conversely, it will devalue with respect to the other (going down). Returning to the previous example with the USD/EUR pair as a practice, if the trader expects that the dollar will acquire a value higher than the euro then the trader will opt to buy the base currency; on the other hand if the investor believes that the dollar will devalue against the euro (taking a value lower than it) he will opt to sell the USD/EUR pair.
How Forex Works?
Now that you know in detail what Forex trading is all about, you may be wondering where the trick is. Well, you don’t pay commissions to maintain or safeguard your assets, so what keeps the Forex market active in the world of online trading? The answer is very simple: spreads.
What are spreads and Pips in Forex?
When an investor buys a currency, he pays a slightly higher amount than if he were selling it; this small spread is known as spread and is measured in Pips (Point of Percentage). Therefore, you will always find when trading Forex two values: a price for the buy and a price for the sell.
As an example, suppose now that the trader is handling the EUR/USD pair and that for the purchase it has a value of 1.1570 which is known as the Bid; this amount reflects the maximum value that investors would be willing to pay for that pair. Now, if the EUR/USD itself shows a price of 1.1579 for sale (known as Ask), that value refers to the minimum amount for which investors would sell the EUR/USD pair. As can be seen in the example, the difference between one value and another is 9, corresponding to the spread of this case.
It can therefore be concluded that the maximum difference between the purchase price of a currency and its price for sale is the spread, while a Pip is the minimum alteration in the purchase price.
Generally many currency pairs are handled on the basis of four decimals as mentioned above, so in these cases the variation can not be less than 0.0001, corresponding the Pip with the ten thousandth of the established amount: 1 Pip = 0.0001. In the previous example with the EUR/USD pair the spread resulting from the difference between the Bid and Ask values is 9 pips applying this concept.
On the other hand, there are currencies that are not handled on the basis of four decimals but two, such as the Yen (JPY). This implies that those currency pairs involving the Yen will be handled with only two decimal places and not four. In this case the Pip would correspond to the smallest variation in the order of the hundredths.
If you look at it in detail it means more profit or greater loss depending on the case, since the order of magnitude is magnified and it is no longer ten-thousandths. Spreads are also somewhat larger, as it is not the same to pay a spread in the order of hundredths rather than in the order of ten thousandths.
What is the reason for the volatility in the Forex market?
When you start trading Forex, it’s easy to see how often the prices of currency pairs change. The fluctuations are constant and incessant and this is due to several reasons:
Liquidity of the market: As it happens when trading other trading trends (binary options, CFDs, or others) the more buyers, sellers and investors in general that operate in the Forex market, then there will be greater liquidity, which decreases the investment risk and at the same time the magnitude of the spreads will also be lower.
Economic events: A number of political, social, financial or other events can occur that can directly affect investments in the foreign exchange market for fear that a currency will be devalued considerably. These events could be laws or policies that a country has decided to adopt, news, economic status and control of companies, inflation, devaluation, foreign debts, among others.
Interest rates: Interest rates could rise or fall, thus strengthening or devaluing the currency of a given country. When an interest rate turns out to be very high, it results in large loans and therefore the investment is greatly affected.
Overview and security when investing: Investors are constantly informed about the backing of the currency they are trading in as well as its legitimacy and stability. If there is a currency that turns out to be stable due to your country’s economy or host factors, then traders will invest in it with less risk. On the other hand, if knowledge about a currency is uncertain, whether due to a lack of knowledge, data, statistics or financial news, investors will make forecasts and think in more detail if it is convenient to invest in that currency or not.
Rumors and false trends: It is common to hear frequent rumors and conjectures about a coin’s tendency to go up or down. This stems from the interest of certain groups to want to grow their profits or even promote the losses of others. It is therefore advisable to rely on reliable sources that provide accurate data.
Reasons to invest in Forex – Advantages and disadvantages
Great liquidity: There are many traders that every day are added to the number of investors that operate in Forex, this makes there is greater liquidity in the market and at the same time the spreads decrease as well as the investment risks.
Independent market: The Forex market is not centralized, that is to say that it does not hang from any other stock exchange that governs it, therefore any person from different places can invest, sell and buy currencies from all over the world.
Different currency pairs: In Forex you will find a large number of currencies with which it is possible to invest, in principle there are hundreds of pairs that are relating one currency to another, for example: USD/EUR, CHG/JPY, EUR GBP, among others.
Forex market hours: In Forex it is possible to invest 24 hours a day but in principle 6 days a week. This is due to the fact that, geographically, stock market activity begins in a certain country and gradually moves as the day progresses. The day begins in New Zealand, then Australia, followed by Japan, China, Europe and America.
It has leverage: If you still don’t know what leverage is, we’ll summarize it as the ability of the market to allow you to invest in a larger factor from a small initial amount. In Forex the leverage is medium (at a ratio of 1:400) this means that we could generate up to 400 times the expected profit, although on the other hand the leverage also leads to large losses in the same proportion as the profits.
No additional cost: Trading Forex does not imply having to pay additional commissions for maintenance or safeguarding the capital, on the other hand it turns out to be very cheap. What really keeps the Forex market alive are the spreads and these in turn are acquired by the market every time transactions are made worldwide. The commissions only depend on the broker used and these refer to causes outside the Forex market such as maximum withdrawals allowed, personalized advice, access to trading data, among others.
Forex Signals: The popular Forex Signals are basically orientations and recommendations provided by an algorithmic robot as well as being generated by veterans and trading experts who depend on a particular time and price to buy or sell a currency pair. These signs or recommendations can be found for free and also for payment.
Keeps positions open: Forex is a market that allows you to maintain trends and user positions. For this reason, brokers can charge a certain commission called Tom-Next to prevent currencies from being physically delivered. Basically the broker replaces the current contract with a new one that takes place the next day and therefore must make a readjustment in terms of the interest rate.
Provides trading tools: When trading and investing in the Forex market there are specialized tools that provide ideal financial analysis to study the currency pairs and try to estimate correctly the trend to which the pair will move. These tools are usually fluctuation charts, online news, current market status, among others.
Brokers and secure platforms: Brokers are platforms that allow online trading in a safe and practical way, while offering useful tools for managing and analyzing financial investment data. Investing in the FX market is facilitated by demo accounts provided by brokers to less experienced users for free; this way beginners and trading entrepreneurs can acquire the necessary skills and knowledge before trading with real money since these demo accounts handle fictitious money while remaining as dynamic and fluctuating as the Forex market is.
How to trade Forex? – How to invest in Forex?
Before starting to invest in Forex it is necessary to ask yourself how much money are you willing to earn and how much are you willing to lose? It can be confusing to start with if you don’t have the right skills and knowledge in online trading. It is also essential when it is more feasible to invest in a particular currency and how much it is advisable to invest in it because depending on its volatility you will have certain gains if you start at the best entry point. Below you will find a series of suggestions and answers to questions you may have had about Forex.
Use safe and quality Forex brokers: The first thing to do is to create an account in a safe and reliable broker that also shows guarantee and support to the client. An ideal broker begins by being one who is regulated by qualified bodies, and who also offers good services while ensuring the independence of deposits. The broker that suits you best will be the one that does not take opposite positions to you and ends up hurting us.
Amount of money to invest in Forex: Basically it depends on the user and how much he is willing to win or lose. There are brokers where the minimum deposit to make to start Forex trading is $1 or €1, however with investments of this magnitude do not begin to see good profits in reality. It is recommended to start investing with an amount you are willing to lose in case things don’t turn out as you expected. On the other hand, if you have the right experience in online trading and you have a good knowledge of the Forex market, you can start investing between €1000 and €1500 to see fruitful profits. It should be noted that there are brokers whose minimum deposit amount is €100 and above.
When is it most convenient to start trading Forex?: It is the trader who decides specifically when to start trading Forex with real money, depending on their abilities to interpret trading charts, statistical data and concepts that have already been detailed such as spreads, leverage, pips and so on. It is a good idea to start trading Forex after the novice user has manipulated a demo account at a broker and has become largely familiar with the Forex market and how it works. In a more financial environment, it is convenient to start investing in Forex when the currency you are going to buy is under stability criteria and whose country does not present economic problems in the long term.
Using Forex signals: If you are in the middle of learning how to manage and invest in Forex, it’s good to listen to the opinions of experts and masters of Forex trading and then corroborate whether their predictions are fulfilled or not. In this way it is possible to draw up your own plans and techniques to apply in the future when you are going to invest with real money. Of course, letting yourself be carried away by what others say is not ideal, but it will serve at first to get a better picture of what the foreign exchange market is like.
What are the best currencies to invest in Forex?: There is no specific currency to invest for the first time, however there are criteria to analyze which currency pairs are more favorable to start trading in Forex. In the first place it will be necessary to analyze the current state of the market, then choose currencies whose information is not scarce or offer little data to the user, that is to say that it would be advisable to invest in currencies that do not suppose a great risk to the trader.
Distribute the investment capital: Whether in the Forex market or in any other online trading instrument, the most convenient and advisable thing is to invest the funds in different assets, that is, you should not choose to buy a single currency pair and spend 100% of your capital but rather diversify and invest in several currency pairs maintaining different positions or trends according to studies and strategies developed previously, at the same time that you have several open fronts.
Use leverage moderately: Leverage is a tool that should be used with caution mostly if the investor is a beginner in the Forex market. However, leverage must be managed with certain criteria because just as it could leave large profits from a small investment, it can also lead to failure and even lose 100% of your capital if the operations and transactions do not turn out as you have predicted previously. In short, it is recommended to beginner traders not to use a high amount of leverage, but if on the other hand you are more expert in the Forex market; it goes without saying that you should use leverage sparingly.
Keep up to date: You will need to keep up to date with financial, economic, social, political and technological news, as any phenomenon that may occur in a particular country could impact its local currency and therefore the Forex currency market. For this reason, being informed and up-to-date will greatly prevent your transactions from leading to loss or failure.
What instruments can you buy in Forex: Forwards, Warrants, Futures and more?
As it happens with the different assets that can be managed in a broker, the operator can make of currencies trading with financial instruments such as Forwards, futures contracts, warrants, among others. These instruments are financial contracts that allow you to have an asset, which can be traded in the markets; each instrument works in a different way.
When investing in Forex, it is possible to trade two types of financial instruments: the popular cash instruments which incorporate spot currencies, and derivative instruments which are options, futures contracts, warrants, forwards, swaps and ETFs.
Spot Forex: It is also known by the terms spot market, current market or spot. In this type of trading, the asset that the trader is selling or buying (in your case the currencies) is delivered instantly, being traded according to its current market value.
The price of the asset is usually fixed when the contract is made; then two business days elapse between then and the delivery of the currencies due to different time zones, as this is the largest online trading market.
Derivative instruments: These instruments have no physical value that represents them, therefore they are the product of other assets such as stocks, commodities, currencies, among others; these instruments are traded (even outside the market) and from them derive their price. The most popular derivative instruments in the Forex market are:
- Warrant: These offer the person who owns the asset the possibility of carrying out a transaction (whether buying or selling) and the other party (with whom it is being negotiated) the obligation to carry it out. There are two types of warrant: if it is a purchase warrant is called call warrant, while the sale is known as put warrant.
- Forward: This derivative instrument comprises a long-term contract established between two parties who wish to buy or sell an asset at a price previously fixed at a specified date. Forwards are contracted out of the market under the term over the counter.
- Options: Options, on the other hand, are established in a contract where the buyer has the right but not the obligation to sell or buy an asset.
- Futures contract: In this type of contract, both interested parties are obligated to buy or sell a specific quantity of active goods at a future date previously scheduled under a price established in advance.
The largest and most used Forex currency pairs
● GBP/USD ● CAD/USD ● EUR/USD ● USD/JPY ● CHF/USD ● AUD/USD ● NZD/USD
Our Forex opinions are similar to what they would be if we talked about any other financial instrument. Forex is an exciting financial asset as we are trading a currency pair, e.g. EUR/USD. That is, selling or buying a currency in the pair (speculating if its price will go up or down).
Forex, foreign exchange or FX is a very profitable but complex asset. For this reason we recommend that if you want to enter the Forex market, first, create a free Demo account in the Broker of your choice and start trading with fictitious money. In this way you will be able to familiarize yourself with this market and the trading panel of the broker of your choice.