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What Is Forex Trading

What Is Forex Trading

16.03.2021

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Forex (short for Foreign Exchange) is currency exchange. The forex market is primarily considered the international currency market – the largest and most active financial market in the world. Its daily turnover exceeds $ 5 trillion. This is more than the turnover of all national stock markets combined.

Forex market participants are the largest banks and central banks of different countries, investment and pension funds, large companies and private investors with huge personal capital. Transactions in this market start at $ 1 million.

But forex is also called a market where the real currency is not bought or sold, but only deals are made, bets on the growth or fall of currency rates. This market was organized by specialized companies – forex dealers.

You cannot purchase currency through a forex dealer. If you need dollars, euros, pesos or yuan, you can exchange them at the bank or on the currency exchange through a broker.

Forex dealers offer ordinary people to participate in the Forex market. The bottom line is that a person tries to predict what will happen with the exchange rate of one currency in relation to another, and concludes a deal with a forex dealer. If his forecast comes true, he earns – the dealer pays him money. If not, then the dealer, on the contrary, debits a certain amount from his account.

At the same time, to start trading, as a rule, you do not need much money or special equipment. It is enough to have access to the Internet and a trading terminal – a special program on a computer. Recently, even mobile applications have appeared for access to Forex. However, this does not mean that it is easy to make money on Forex; on the contrary, the risks of losses are extremely high.

What do you need to start Forex trading?

First, you conclude an agreement with a forex dealer and install the dealer’s trading program on your computer, smartphone, or tablet. This program reflects the rates of all currencies for which transactions can be made.

A forex dealer can use the quotes of currencies of international currency exchanges, banks, Russian and foreign brokers, news agencies, and other reliable sources. A complete list of possible providers of quotes is available in the Basic Standard for Forex Dealers.

In order to conclude transactions in Forex, you must transfer a deposit to the dealer’s account. This money will guarantee that you will be able to fulfill your obligations on forex transactions.

The online program displays all your trading operations – conditional “purchases” and “sales” of currency. But the real money is credited to or debited from your account only after you close the trades. If you correctly predicted the movement of the exchange rate, the dealer credits the money to your account – your deposit increases. If you have not guessed correctly, the deposit decreases.

It is possible to withdraw the deposit from the dealer’s account only after all transactions have been closed. And you can top up your account at any time. At the same time, it is important to remember that in a bad scenario, you risk losing the entire amount of the deposit.

How are transactions made in the forex market?

Before a trade, you select two different currencies – a currency pair. One of them is basic, the second is quoted. Your task: try to predict how the quoted currency rate will change relative to the base one. If you are sure that the rate of the quoted currency will rise, you can open a deal to “buy” it. If you think that it will fall – for “sale”.

Most often, the dollar is chosen as the base currency, you can choose any other quoted one.

It should be borne in mind that a forex dealer takes a commission for his services. For example, for opening and maintaining an account, connecting to a trading program, conducting transactions, transferring money to a bank account, and other services. All tariffs must be specified in the contract.

Can you make money on Forex?

Theoretically, it is possible. 

If you can make accurate forecasts of how the situation in the foreign exchange market will change, you can make good money.

But according to statistics, players lose 3-4 times more money on Forex than they earn. The fact is that it is very difficult to predict the dynamics of exchange rates. The situation in the foreign exchange market depends on many political and economic factors, the behavior of the world’s largest banks, funds and companies. Even news and rumors influence currency rates.

If you’re willing to take the risk, it’s best to start with theory:

  • Learn how the international foreign exchange market works.
  • Get acquainted with the methods of fundamental and technical analysis – they help to predict the movement of any variables using mathematical models.
  • Understand the specifics of derivatives (derivatives, experts also call them derivatives). After all, transactions with forex dealers are derivatives contracts for currencies or currency pairs.
  • Read articles on the stock exchange and investments. Many books have been written on the topic of trading.

And before concluding an agreement with a forex dealer, you need to carefully study the documents. Particular attention should be paid to the risks of trading in the forex market, which the dealer must warn you about.

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