WHAT IS FOREX? | LEARN TO TRADE FOREX SUCCESSFULLY
The characteristics of the Forex market:
– The largest part of the financial market
– Very high liquidity and very tight spreads
– Tradable 24/5 a week
– Trading on rising and falling currencies
– Trading possible with small and large capital
– Easy access through different Forex brokers
What exactly is Forex Trading? – Many people always talk about the «biggest market in the world» or a great opportunity to make money, but how exactly does this work with currency speculation in the Foreign Exchange market? – On this page I will introduce you to valuable information you need to start trading successfully. Learn the first steps that every experienced and professional trader knows.
THE MEANING OF THE FOREX RATE (EXCHANGE RATE) EXPLAINED:
Forex rate (exchange rate) is set by the interbank market (Forex market) and official exchanges by futures contract. However, between banks of the exchange rate may well differ. The value of a currency is influenced by global traders (banks, governments, traders, algorithms) 24 hours a week. For example, if market participants believe that the Euro is a better investment than the USD, the Euro will increase in value against the USD. This will result in a change in the foreign exchange rate.
Facts about the exchange rate:
- The exchange rate is determined by the supply and demand for the foreign exchange (currencies)
- There are a lot of different participants acting on the market
- Fundamental data (interest rates) drive long-term investors
- The largest foreign exchange trading centers are New York and London
You go on vacation and change your money into another currency. At the end of the vacation, you want to exchange the same amount back. Now you suddenly get back much less of the original currency. Why? – The exchange rate or value has changed in the time on the stock market.
The entry barriers for beginners: invest in falling and rising rates.
The entry barriers for Forex trading are very low. It is in most cases a leveraged asset class, which requires a low margin (security deposit). Compared to futures (forward contracts), the margin is many times smaller with a leverage of 1:100.
FYI – Forex Margin Explained:
Margin is the security deposit you make with a Forex broker to open a position. It is a leveraged trade (more on leverage below).
Forex trading is offered at many online brokers worldwide. You can open a trading account with them in a few minutes. Moreover, it is very easy to bet on rising and falling prices. In stock trading, investing in falling prices is called a short sale. However, it cannot be compared to currency trading because there is no direct short selling. There are always 2 currencies in a currency pair. When opening a position, you invest either in one or the other currency and when closing the position, you perform a currency swap.
Low barriers to entry into Forex trading:
- Very low margin (security deposits) for a leveraged position.
- Easy to invest in falling and rising rates without additional fees
- Forex brokers allow trading 24/5 a week
- You can trade in the Forex market even with very small capital
The advantages and disadvantages of Forex trading
Every asset has advantages and disadvantages. Each trader also has his own likes and dislikes. Some traders are very fond of trading the Forex Market and some shy away from it. To get a very good feel for the markets as a beginner, you should first use a demo account (more on this below). In the table below I have transparently summarized the advantages and disadvantages for you.
Trading 24 hours a week (Mon – Fri).
Very high liquidity in contrast to other assets
Profit from interest rates of the central banks of foreign currencies
Very low cost of trading
Easy access through a Forex broker
No weekend trading (only for cryptocurrencies).
Currencies with low liquidity have higher fees
Learn Forex Trading: How is the exchange rate formed?
Price formation on the stock exchange occurs through actual buy and sell orders and is part of the important basic knowledge of every trader. The stock exchange acts as a price setter. The exchange rate must fall when there are more sell orders than buy orders in the market. In the picture below you can see a simplified representation of the price determination. You will encounter this issue with every asset on the stock exchange.
Strictly speaking, there are always «limit orders» active in the order book at different prices. Traders place these limits in the market to get an execution of the trade at one price. These «Limit Orders» are triggered by «Market Orders». This means that a trader directly buys or sells manually.
Price formation in summary:
- Supply and demand determine the price
- Limit orders are active on the different prices and are waiting to be executed.
- Market orders trigger these limit orders
- A trade is created
Basics: What factors influence the exchange rate?
On the stock exchange there are a variety of influences that change the price. Especially political decisions can change the exchange rate massively. In the past, there have been many examples due to the actions of central banks. Furthermore, economic data of the individual countries can have a great influence.
Each country has its own currency. Therefore, all news related to the country can extremely influence the exchange rate. However, it is important to remember that it is not the direct news that changes the exchange rate, but the subsequent reaction of market participants.
These factors can have an impact on the price development:
- Economic news (e.g., a country’s unemployment rate, retail demand, etc.).
- Political decisions (war, sanctions)
- Central bank decisions (interest rate changes, etc.)
- Large market orders and limit orders
The market participants in the currency market
Before starting Forex trading, it is important to know which market participants exist. This knowledge can later be used to develop appropriate strategies or methods. There are banks, institutions, hedge funds, algorithms and private traders on the exchange. Overall, this field can be divided into institutional and private traders. The funds of the institutional traders are so large that you can influence the markets. This is usually denied to the private trader. One should never forget which persons one has as an opponent. These are in most cases well educated full time traders.
THE FIRST STEPS TO SUCCESSFUL FOREX TRADING
In the following steps I will explain in great detail: how does forex trading work and what software or tools do I need to do it? With more than 7 years of experience and social media presence in the investment field, I always get the same questions from beginners, which I now answer in this comprehensive guide. It is best to follow the guide step by step to avoid mistakes.
Where can I trade Forex?
Currency trading is offered by many different brokers. The Forex broker is an intermediary between the trader and the exchange (market). Trading without a broker is not possible, because it requires appropriate licenses and capital. Nowadays it is quite easy to open an account for trading currencies. Usually, a few personal details are enough and the account must then be verified with an ID and proof of residence. This process can take only a few minutes.
Security is also an important point to consider when trading online. A Forex broker or ECN Forex broker should have appropriate licenses and be audited. On this page I recommend you my best Forex brokers, which I have independently tested. They offer the best conditions and the highest security for newcomers or advanced traders. In the following I will give you the characteristics for a good provider.
These are the criteria a good provider should meet:
- Regulation and license from a financial regulator
- User friendly trading platform
- Reasonable fees and good execution
- Correct price display and high liquidity
- Direct contact via support (phone, chat, email)
- Fast deposits and withdrawals
- Continuing education material (coaching, webinars, etc.)
Regulation and license
Before you start trading Forex and spend hours a day in front of the screens. As with CFD trading, you should check the broker’s regulation. Reputable providers have a license from the FCA (Financial Conduct Authority) or BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht). However, in addition to these licenses, there are also regulations in other countries. It is important that the license comes from an official regulatory authority.
Opening an account
As mentioned above, opening an account with most providers is very simple and straightforward. Before trading with real money, however, several steps must be followed. The Forex broker will ask you several questions about Forex trading. If you cannot answer them, the trading account will not be opened. Of course, on this page you will get the knowledge for the questions, so opening an account will not cause any problems.
Next, you verify the account with the appropriate documents. The broker must verify your person and address. To do this, simply upload a photo of an ID and proof of residence (bill, etc.). This can also be done by webcam. In less than 24 hours the trading account should be fully operational.
With which broker should one open an account?
For beginners, it is particularly difficult to find a suitable provider with good conditions. The information density is very high and you are bombarded with offers from all sides. It is especially important to always choose a regulated provider.
In the demo account you can learn Forex trading
Beginners should first get to know the trading platform and the markets with a demo account. This is an account with virtual credit that simulates real money trading. You trade without risking real money. This account is best suited for gaining the first experience. A demo account can be created at any Forex broker of your choice. In most cases it is unlimited and completely free of charge.
If you are learning Forex trading, the demo account is the first choice. I recommend it to anyone who really wants to learn Forex trading to use the demo account for several weeks to months. Gain experience in different market situations and develop a successful trading strategy.
THE DEMO ACCOUNT IS THE BEST METHOD TO GAIN INITIAL EXPERIENCE AND IMPROVE YOUR SKILLS.
Trading platforms for Forex trading presented
Overall, there are numerous different trading platforms in Forex trading. Brokers either develop their own or buy the license for an already tested and secure trading platform. In this section, I would like to briefly discuss the most commonly used trading platform, Metatrader. This is offered by about 90% of Forex brokers.
Metatrader is so popular because it is very flexible and you can configure the software independently as a trader. A large portfolio of indicators and analysis tools is offered. In addition, own tools can be inserted and also programmed. Even automatic trading works with little programming knowledge. The Metatrader is currently offered in version 4 or 5. There are very few differences between the two versions. The software is available for the browser, desktop and mobile devices. So you can access the markets very easily from any device.
Charting and analysis for traders with helpful tools.
Analysis is the most important part for successful Forex trading. There are two different approaches to this: Fundamental Analysis and Technical Analysis (more on this below). Metatrader 4 and 5 are generally limited to technical analysis only. For this, many different indicators and tools for analysis are offered. The indicators can be divided into 3 different categories. This should make an analysis very easy:
- Trend: these are indicators that predict and analyze a possible trend of a market. Trends are very common in Forex trading and often last for several days even weeks. For example, a moving average can be used to determine the price average. From this, future price movements can be predicted. Another popular indicator is the Bollinger Bands. These show the current price range and its deviations.
- Oscillators: This group of indicators shows you overbought and underbought markets. So, if the price is way too high (overbought) in relation to the past, it may fall and the indicator will show you this graphically to match. These are the most popular indicators to highlight a possible trend change.
- Drawing tools are also essential for technical analysis. Draw trend lines, horizontal lines and vertical lines on the chart. This way, important price levels can be marked and you are prepared for a possible trade. In summary, Metatrader brings all the tools you need to be a successful trader.
Instruction: Make money – How does Forex Trading with real money work?
Now I would like to introduce you to the steps for successful trading. Many beginners wonder how to look out for the market movements in order to make money with it. This requires knowledge and the will to learn. Without the desire to learn something new you will fail very quickly in Forex trading. Knowledge and analysis is the key to success of a successful trader.
Educate yourself if you want to be successful in the long run. Many brokers even offer professional training material, which as a beginner should definitely be looked at before real money trading.
In international trading there are many different currency pairs to trade. Each country has its own currency, so to speak, which can be traded against other currencies. I have had experience trading forex with a wide variety of currencies. In the currency pair, the first currency is always first and the second currency is next. For example in USDCHF the exchange rate shows you how many Swiss Francs you get for one US Dollar.
Abbreviations in the FX market:
EUR = Euro
USD = US Dollar
JPY = Japanese Yen
CHF = Swiss Franc
GBP = British Pound
CAD = Canadian dollar
AUD = Australian Dollar
Below you will get an overview of the categories of the different currency pairs:
- Major: major currency pairs, which are very liquid. These include the western industrialized nations (USD, EURO, GBP, AUD, etc.). These assets are characterized by smaller fluctuations and lower interest rates. Volatility is the lowest here. Very popular is the most traded currency pair EUR USD, because it connects the largest economic areas.
- EUR USD
- GBP USD
- USD JPY
- USD CHF
- AUD USD
- USD CAD
- Minor: This includes currency pairs from smaller industrialized nations. These currencies are stable but have lower liquidity as they are not traded as much. Volatility can therefore be higher than the majors.
- EUR GBP
- EUR CAD
- GBP JPY
- NZD CAD
- NZD USD
- NZD JPY
- and others
- Emerging markets: These currency pairs belong to emerging nations or countries in crisis. The currency is extremely volatile, has in most cases a high interest rate, which can also be interesting for own trades and investments. However, the risk is very high due to political activities and the high fluctuation.
- AUD SGD
- AUD TRY
- USD TRY
- GBP NOK
- GBP SEK
- USD PLN
- and others
Analysis of the currency pair:
- Fundamental analysis: you include economic news in your trade. Interest rate decisions are interesting, for example. Investors in most cases always want to invest in the currency pair that offers the higher interest rates (long-term). However, short-term news, such as elections, also have a significant impact on the price.
- Technical analysis: The trading platforms of the Forex brokers shown offer a range of analysis options. Most traders use technical analysis with support levels and indicators. The possibilities here are almost unlimited. Try it out yourself in the demo account. Brokers also offer professional learning material for this purpose.
How to open your first Forex trade:
The process of a trade in the Forex market always works the same. If you have a good trading idea and want to implement it, you still need to determine a stop loss and a possible take profit. These are 2 marks in Forex trading that limit the risk and the possible profit. A stop loss should never be waived, because sensible risk management is very important for the successful trader (more on this below). In addition, the position size for the trade must also be determined. This must be adjusted to the risk (stop loss) and the account size.
Sounds difficult at first glance, but after a few explanations you will find it very easy:
- Stop Loss: Price level at which the trade is automatically closed at a loss. This limits losses.
- Take Profit: Price level at which the trade is automatically closed in profit. This way you secure your profit.
As a risk calculator I can also recommend the site of myfxbook. However, with most Forex brokers it is displayed transparently on its own or there is a separate risk calculator, so you no longer have to make big calculations.
- Order types:
- There is a direct market execution and a pending order in Forex trading. With market execution, you directly open a position in the market when you click Sell or Buy. The pending order allows you to buy or sell automatically only after a certain price is reached. These orders can be optionally placed at different prices.
- Position Size (Volume):
- Positions in Forex trading are expressed in lots. 1 lot means 100,000 units of the base currency of the currency pair. 100,000 units sounds a lot at first, but you need to know that currencies fluctuate very minimally in value. This results in a certain pip value for the price scale. For example, a position of 1 lot in EURUSD means a pip value of 8.64. So if the price goes 10 pips in your desired direction, you win 86.40€. The same is true in case of loss. The position size must always be chosen in accordance with the stop loss, so you can determine the risk. You can learn more about pips and lots under «Pip and Lot».
Overall, the process of opening a position is always the same. With the following points I have written you a little guide:
- Choose a forex currency pair of more than 100
- Plan your entry into the market with various analyses
- Choose the appropriate contract size (size of the trading position)
- Set the maximum loss by stop loss
- Set a possible profit target per take profit
- Start trading with a buy or sell
These are the fees and costs you may incur
In general, Forex trading is very cheap compared to other financial products. There can be a total of 3 different fees, which vary from broker to broker. The spread is the difference between the buy and sell price (ask and bid). This can vary because the prices depend on the market situation (supply and demand). An ECN broker with a direct interbank market access passes on the current market spreads to the trader. These then start from 0.0 pips and are hardly worth mentioning in the fee calculation. The ECN broker then finances itself through a commission, which is charged at order opening and closing.
Some brokers add an additional spread to the market spread and do not pay a commission. Both models are offered and can be selected before opening an account. Another fee (financing fee) can also work out to your advantage in Forex trading! When opening a leveraged position, you are basically borrowing money from the broker. This sum must be financed overnight. Therefore, interest accrues. Here it depends on the currency pair. In some currencies, for example, there are high interest rates by the central bank. So if you invest in a currency with a high interest rate and sell a currency with a low interest rate at the same time, you profit and get an interest credit to your account every night.
- The spread (difference between bid and ask) is incurred when opening and closing a position.
- The broker may charge a commission if it does not add an additional spread.
- The financing fee of a leveraged position can be positive or negative depending on the interest.
The leverage (margin trading) with currencies explained:
Leverage is a very good tool in Forex trading to maximize one’s profit. For example, for most traders it makes very little sense to invest one Euro and wait for the currency rate to rise or fall. With a leverage of 1:100, of course, this makes more sense. Because with an investment (margin) of one euro you can already move 100€ on the market.
In my opinion, a leverage is urgently needed, because the markets move you 99% of the day under one cent. The leverage can increase your risk. But the risk can be adjusted by the position size.
Is Forex Trading Dangerous?
Profits without risk are not possible in the FX market. If you do not want to take any risk, you should stay away from this place. There is no blanket answer to this question, because the risk and dangerousness is determined by the trader himself. The trader must decide how much money he is willing to invest and possibly lose. One can trade the market with small sums or also with large sums.
The Forex market is the most traded market in the world. The volatility (movement strength) is very low, unlike other markets, so the riskiness is not so high. The daily fluctuations are usually less than 1% of the asset. However, the risk can be very increased by a leverage! Overall, each trader must answer for themselves whether currency trading is dangerous. There is no one-size-fits-all approach here.
Many small investor accounts lose money on Forex trading. Brokers offer leverage with high effects on position taking. You can have a high risk einher fast geld to earn if you use a high leverage. Often you see beginners trying to take the risk to double their money quickly. This can happen with luck, but I do not recommend risking your entire account in one trade.
Avoid painful trading mistakes: How to limit losses
Forex trading sounds very simple at first glance. However, it is very crucial to learn a possible and good strategy for trading in the first place. 3 mistakes are made again and again by traders. This can also be read in different forums. For the start it is very important to have a fixed set of rules. Learn from mistakes already made to maximize your profit.
- Time: You should definitely know the exchange opening hours! The Forex market is tradable 24 hours a week, but at night, for example, it makes very little sense to trade certain currency pairs. The price at irregular hours is largely determined only by algorithms. This can cause many losing trades.
- Risk: As a trader you should keep a sensible risk management. Many traders change their risk daily. Here it is very helpful to make a plan and never risk too much of the account. The account should grow sustainably.
- The right broker: As a trader you should choose a good Forex broker. Many traders trade at way too high fees. This only makes the broker rich and you poor! Unnecessary costs should be avoided at all costs.
Develop the right Forex trading strategy for success:
Trading strategies and a firm set of rules are the main tools for a professional trader. Every trader should know why he is opening a position before taking it. In most cases, strategies are based on a sequence of events in the market. The important thing here is to recognize a pattern that occurs over and over again. This pattern should also bring the chance of a high profit. This is how you earn money sustainably with a strategy.
On the Internet there are hundreds of different strategies for trading on the markets. Some strategies work and others do not. Many traders fail because they do not do enough testing or «research». A Forex trading strategy needs to be tested more than a hundred times before you can be sure that it will work. Make independent evaluations after watching the markets or analyzing the past.
A certain set of rules matching the trading strategy is also necessary if you want to trade profitably. This can be adapted by the trader himself.
The following questions should be asked by a Forex trader:
- What do I want to achieve with Forex trading?
- How do I act after several losses?
- How high should my risk per trade be
- Which prominent price points do I look for to open a position?
- How many markets do I want to watch?
- Which markets do I want to watch?
- Are there correlations between currency pairs?
- What economic news is important for my market?
Conclusion: My experience Learning Forex Trading
The forex market is the most popular market for private traders. It offers you many advantages, such as low fees and very high market liquidity. In addition, you can trade the markets around the clock. Furthermore, you can participate and profit already with a small stake. Through the leverage it is possible to maximize the profit and make targeted but sensible speculations. This market is also particularly suitable for beginners, as there is a low volatility.
From my experience, you can use any trading strategies for Forex trading. The choice is almost limitless. However, you must follow the trading strategy rules exactly to make money sustainably. In my opinion, the currency market is a «must» for every trader, as it offers countless opportunities to invest. React to direct market news or just take advantage of interest rates. You should continue to look into it!
Good luck with your trading.