Discover the basic principles and rules of Forex trading

By Staff Reporter - 13 February 2020

Expert Voices

With specialized software and assistance from a broker, anyone can test their foresight in the currency exchange market. Here are the fundamentals of Forex.

Forex Trading Guide

Forex has been around for decades, and there is hardly a person who has never heard the term. Short for “foreign exchange”, it refers to selling and buying of currencies, as well as the marketplace where it happens. Thanks to the digitized nature of monetary flows, anyone can try to harness the power of exchange rates. Here is an overview to help you get started. So, what is Forex trading exactly?

The Underlying Logic

World currencies, such as the Euro, are bought and sold just like shares on the stock market. With values in flux, a shrewd player may reap profits by executing an operation at the right time. To become a retail trader, an individual needs the right software and assistance of a reliable intermediary called a broker.

Did you know that currency exchange market is the largest in the world? Its sheer turnover is incredible. Globally, transactions for as much as 5 trillion USD occur daily. The market is accessed from many countries including the UK, so currencies are bought and sold at any given moment. Brokers also allow trading of commodities, stocks and CFDs.

Institutions and Individuals

Brokers like FXTM open access to a finance tool previously used by large-scale players only. Despite the popularity of retail trading, the biggest volumes are still generated by major institutions, such as banks and hedge funds. So, what is FX trading in its retail dimension?

Basics of Exchange

When travelling, we are often faced with the need to exchange one currency for another. The rates fluctuate all the time, and the dynamics depend on a host of factors. These range from micro- to macroeconomic changes. For example, a drop in crude oil prices usually sends the Russian rouble down. Hence, other currencies cost fewer roubles.

Secondly, currencies are traded in pairs — for example, EUR/USD. The first element before the slash is the base currency (Euros). It is followed by the quote currency (US dollars). In this example, the indicator shows the price of one Euro in US dollars. If the value is 1.09, you can purchase 1 Euro for 1 dollar 9 cents.

Another crucial aspect is the coexistence of two prices — the so-called “Ask price” (e.g., 1.0938) and “Bid price” (e.g., 1.0936). The first value (always slightly bigger) is used when a trader buys the currency, while the latter is used for selling. The difference between the two is called “spread”. Each 0.0001 is referred to as “pip”. Therefore, the spread of 0.0003 should be read as “three pips”.

How Decisions Are Made

Similarly to the trading of shares, the goal is to buy low and sell high. In this context, you will aim to purchase a currency while it is cheap and sell it back once the value has risen. This is known as “long position”. The opposite happens when a currency is sold based on the expectation of its depreciation, so more of it can be bought back. This constitutes a “short position”.

Role of Brokers

All transactions are performed remotely via a digital platform (for instance, MetaTrader4). Although the software is available for free download, it is useless without a registered account. This should be created by a reputable broker. The company will also handle money transfers and provide expert guidance and educational material.

It is essential to start with a demo account, This risk-free mode allows you to safely explore the functionality of the platform, with its multiple graphic objects, graphs, and other aids. Once you are ready for actual trading, you may easily switch to a real account.

Another useful option is copy trading, which is utilized by professionals and rookies alike. In essence, you delegate the job to an expert whose subsequent trades are copied into your account. If they gain $500 in profit by using $1,000 of your funds, you could become $450 richer, while the remaining $50 could constitute the commission.

This is one of the possible scenarios. The exact conditions depend on your broker’s policies. The relationship may always be terminated if the performance does not meet your expectations.

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