What is Forex Trading?
Anyone who has ever exchanged euros for a foreign currency at a bank or a bureau de change abroad has come into contact with foreign exchange trading (FOREX trading, FX trading, etc.). In doing so, you'll have experienced how favourable and less favourable exchange rates affect how many US dollars, yen, or other currency you end up with. Foreign exchange or currency trading means nothing more than using these price differences to achieve targeted profits.
Electronic Market and Currency Pairs
To do this, it is not necessary to physically acquire or sell a specific currency, as the entire market is handled electronically. In foreign exchange trading, transactions are always carried out in the form of currency pairs.
One currency is bought while another is sold simultaneously. After a certain period, the purchased currency is sold again, and the prevailing exchange rate results in either a profit or a loss for the trader.
Regulated Brokers
Compare the offerings of CFD Forex brokers according to your interests. For example, by the average spread size on the EUR/USD pair or the minimum account deposit. When choosing a broker for trading, we should pay attention to several aspects.
The most important of these is the ability to withdraw our money quickly – we classify brokers as reputable primarily based on this criterion. A good broker also offers a stable and clear trading platform with reliable price movements without time lags. Price manipulation can be a risk if you choose a disreputable broker. Finally, we should also look at the broker's customer support and history.
| Broker | Platforms | Regulation | Min. Deposit | Deposits / Withdrawals | CopyTrader | Physical Shares | Link to Website | Review |
|---|---|---|---|---|---|---|---|---|
|
xStation, mobile version | ✔️ | No minimum deposit | Credit/debit cards, Skrill, bank transfer | ❌ | ✔️ | xtb.com | Review |
|
Proprietary platform, social network + CopyTrader™ | ✔️ | 100$ | Bank transfer, credit/debit cards, Skrill, PayPal, Neteller | ✔️ | ✔️ | eToro.com | Review |
|
Proprietary platform, commission-free | ✔️ | 100 EUR | Bank transfer, credit/debit cards, Skrill, PayPal | ❌ | ✔️ | Plus500.com | Review |
Contracts for Difference (CFDs) are complex instruments and come with a high risk of losing money rapidly due to leverage. When trading CFDs, between 51% (eToro) and up to 89% of retail investor accounts lose money. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
The Principle of Forex Trading
Foreign exchange trading (Forex trading) works somewhat like a set of scales – two different currencies are always bought and sold simultaneously in every transaction. The whole thing works in principle as follows.
The Euro and Foreign Exchange Trading
Contrary to popular belief, the introduction of the single European currency, the euro, did not detract from the attractiveness of foreign exchange. On the contrary, foreign exchange is more popular than ever as an investment, a hedging instrument, and a speculative vehicle.
Development and Democratisation of the Forex Markets
The most important developments here are the opening and democratisation of the foreign exchange markets for private and small retail investors, the narrowing of spreads, and the significant improvement in trading conditions for smaller traders.
Trading euros, dollars, and other currencies is not reserved for large banks, specialised foreign exchange dealers, or experienced financial geniuses. This world is open to any interested individual, starting with a minimal initial deposit. Trading is done via trading software or a web trader, depending on the broker. This is used to handle transactions and to follow important market events.
The unique feature of the foreign exchange market compared to, for example, the stock market, is that leverage can be used to move large amounts with a small starting capital. This allows the trader to use a multiple of their stake to execute transactions. Otherwise, the profits from fluctuations in the exchange rate of a few tenths or even hundredths of a cent (a so-called PIP) would be very small indeed.
The Basics of Foreign Exchange Trading
Foreign exchange market transactions are part of almost all investments. Whether in the stock or bond market, with futures and options, or in any other market, the foreign exchange market is almost always involved.
In international trade, the import-export business, or numerous other business areas, it is virtually impossible to avoid some form of foreign exchange market transaction. It is not surprising, therefore, that the foreign exchange market is by far the largest market in the world. It is about 32.5 times larger than all the world's stock markets combined.
How Transactions and Costs Work
EUR/USD = 1.3100 means that you receive $1.3100 for €1. You can bet on rising (LONG) or falling (SHORT) prices at any time. If you click "LONG" (or BUY, "up arrow", etc.) at the current rate after setting your position size and any other parameters, a position for, say, €10,000 is opened. This means your broker buys €10,000 and sells $13,100 for it.
Since both positions are worth exactly the same, no one has gained or lost anything. Your LONG position is now open. Now, the EUR/USD exchange rate rises to $1.3180. You close your position - meaning the broker does the exact opposite:
The €10,000 are now sold, and in return, you receive $13,180. After deducting the outstanding $13,100, this results in a surplus of $80, which you exchange back into €, yielding a profit of €60.70.
The rise just described from 1.3100 to 1.3180 is an increase of 80 PIPs, which, depending on the market situation, can certainly happen within half an hour. However, you do not need to have €10,000 in your account for such a trade - in FOREX trading, leverage is always used.
Depending on the leverage level, a maximum of €25 to €100 is needed in the account as "margin" to open such positions. Of course, your broker doesn't do this for charitable reasons; they are usually financed by the so-called spread. In short, 1-3 PIPs are "added" to the rates. In the example above, the price when closing the position would not be 1.3180, but actually 1.3182 USD - your broker collects the 2 PIPs as a commission. Realistically, you should barely notice such a spread.
Of course, you can bet not only on rising but also on falling prices. With a SHORT position, the exact opposite is done - at the beginning, €10,000 are sold, and $13,100 are bought in return. Then EUR/USD falls, for example, from 1.3100 to, say, 1.3008. You close the position (or "square up," as it's called in trading jargon), the $13,100 are sold and voila: you receive approximately €10,070.73 for it, which, when offset against the €10,000 borrowed from your broker, results in a profit of €70.73.
Risks and Opportunities of the Forex Market
Trading currencies offers several advantages. However, first, an important note: Unlike stock trading or similar activities, there is always a chance of "wiping out" your entire trading account. This can happen, for example, by not setting stop-loss orders, setting them too far away, or opening excessively large positions etc. Currency trading is fair, as everyone has the same opportunities.
The secret of successful traders lies in having more meaningful information, the discipline to engage with the market regularly, and the ability to derive analyses from the available information or to rely on good third-party analyses. Currencies can be traded around the clock on weekdays.
Various factors affect the specific quotes of the respective currency pairs. These include economic, political, social, and statistical aspects. If they are consistently considered, correctly interpreted, and translated into transactions, trading the various currencies will generate profits.
Advantages of Forex Trading Compared to Other Investment Options
With most brokers, the foreign exchange market is open 24 hours a day from Sunday evening to Friday evening! This is ideal for people who are not full-time traders or millionaires and who can't sit in front of the computer all the time anyway.
Forex trading works for both the short and long term. Besides the full-time traders, there are market participants who practice scalping - keeping their positions open for only a few minutes and thus trading for, say, only 45 minutes a day. Then there are traders who prefer longer time frames for their trading - for them, it is sufficient to check on their positions briefly in the evening. So, you can choose the time frame that suits you individually.
In contrast to stock trading, large sums can be moved even with a very small deposit. Because of this, it is technically easier to make a €30 profit with a €100 deposit - try finding a stock where this is possible without holding it for several years or even decades...Woman showing thumbs up
