September 20, 2021

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What is forex trading? Currency Trading Definition, Explanation, Tips

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What is Forex and what exactly is behind Forex trading?
The term forex should now be synonymous term to any trading beginners. But what exactly is meant by this and what lies behind it, may not be clear to everyone in detail. We want to take this into account and explain in this guide what exactly forex means and at the same time want to investigate the question of what the forex trading actually is and how it works.

Note: Trading is always associated with risk. Traders can lose their capital.

Basic points:
The foreign exchange market is the largest financial market in the world.
You can trade currencies.
Forex trading is booming.
Get into forex trade with a Demo account – that’s how you can learn without the risk of losing money.
The Forex market is one of the largest and most liquid financial markets.
Currency exchange takes place directly among the market participants.
The respective exchange rate depends on the offer and the demand of a currency.
The trader can speculate on both falling and rising prices against other currency.
By using leverage, high trading volumes can be traded with little capital investment.
Strong price fluctuations and the use of leverage bring high yield opportunities, but sometimes also enormous risk of loss beyond the capital investment.
Flexible trading hours and low stakes make FX trading attractive to private investors as well.

The foreign exchange market is also referred to as Forex and is the world’s largest financial market with a daily turnover of more than 4 trillion US dollars.
Development of the average turnover per trading day in the global foreign exchange market from 1995 to 2013 (in billions of US dollars.)

Foreign exchange market from 1995 to 2013

It is a global market in which foreign exchange trading takes place mainly directly between market participants (over-the-counter or OTC.) In doing so, the trading partners carry out exchange transactions with international currencies in accordance with the foreign exchange trading definition. A simple currency trading statement would call forex trading as buying and selling the currency of one country against the currency of another country.

Foreign exchange or currencies are always traded in pairs, such as $ against British pound, US Dollar against Japanese yen, US dollar against Euro, etc. The most traded currency pair is EUR/USD.

The foreign exchange rate of change in supply and demand is high, with high demand for a particular currency also increasing its price. The demand is determined, among other things, by the economic and political situation of a state, the level of interest rates of a country, and even by tourism.

A forex trader generates returns as long as the price of one currency is the same as expected in the other currency. For example, if he expects $ to rise against GBP, he will take a long position. He sets a short trade if he assumes that $ will lose against the British Pound. Thus, a trader can make profits from falling as well as rising price developments.

Forex trading can also use so-called leverage to trade. This means that with a minimum capital investment, which is deposited as collateral with the corresponding forex broker, a higher trading volume can be moved. As a result, returns are many times the capital invested – but same is true also for high losses. With a leverage of 1:100, it is enough to deposit only one percent as a margin; up to 100 percent profits or loss can occur as a result of using this much leverage.

If the capital deposited in the trading account is insufficient to cover the loss, the broker will close the trade through a margin call. Further information on the forex leverage and functionality is available on our guide pages.

Overall, the currency market is a very liquid market. Here, daily amounts of up to five trillion US dollars are implemented. On the one hand, the strong price fluctuations and leverage offer high yield opportunities, but this comes not without significant risk of loss, which can exceed the capital employed. The different exchange rates are dependent on economic, political, and social factors.

Now that the question “What is Forex?”
This has been clarified, but it is worth taking a look at the market participants in foreign exchange trading. Who actually manages this huge trading volume per day? The most important players in the Forex market are certainly big banks, but also industrial companies, trading companies, and private forex traders are providing a highly liquid market. The central banks, whose monetary policy measures can strongly influence the exchange rates between the individual currencies, also exert a significant influence on the foreign exchange market.

In the Forex market, market participants usually trade directly and off-exchange. Market participants include banks, governments, business enterprises, insurance companies, and private traders, which contribute to the high liquidity of the currency market.

Is there special forex trading hours to watch out for?
It has already been mentioned that forex trading is suitable for many traders because of the time flexibility. In contrast to the trading hours of the stock market, which usually only last until the evening, Forex participants can trade almost around the clock. From Sunday evening to late Friday evening; one can trade in foreign exchange without any kind of interruptions. This circumstance results, among other things, from the global time shift and the OTC decentralized trading, which is also not tied to any opening hours of stock exchanges due to electronic trading systems.
Basically, trading on the weekend would be also be possible, however, since many institutional market participants, such as banks, insurance companies or trading companies, stop their market activities at that time, much of the otherwise available market volume is missing so brokers don’t provide such service anymore.

Since foreign exchange trading takes place directly between all market participants worldwide, the exchange of currency is to be carried out virtually without any time interruptions. As currency trading in Australia and New Zealand begins on Sunday night, the forex market in the US is closed. Thus, the trading of foreign currency continues over all time zones and ends on Friday evening.

In contrast to securities trading, stock exchanges never played a particularly important role in foreign exchange trading, as the major part of trading is already carried out over the counter in the interbank market. Consequently, most of the still existing foreign exchange exchanges were abolished. Today, trading is almost entirely electronic, making the market accessible and highly interesting to private traders.

Forex trading is currently experiencing a boom. The Bank of England’s figures show an impressive 18% increase in sales from October 2010 to October 2011 for the UK, the largest foreign exchange market in the world, accounting for more than 37% of global trade. The highly acclaimed Triennial-Central-Bank Survey has seen an unprecedented 66 percent increase in Forex direct trading (spot FX) between 2007 and 2010. Our ECN broker comparison provides an overview of the increasingly popular ECN brokers.

There is no fixed trading center in forex. Rather, currency swaps are handled via the electronic interbank market. One of the reasons why trading with foreign exchange is popular is because the trade opens up quickly. Flexibility is also a criterion for this boom. We will enter the forex market trading hours in one of our guides and in any of the other sections of this page. Also, foreign exchange trading often requires only a small minimum capital, for example, in comparison with the trading of shares.

Forex also something for beginners?
Forex can also be traded by beginners. Nevertheless, they should use a differentiated trading strategy than experienced traders. If you do not have much experience with Forex, it is difficult to endure initial losses. Nevertheless, it should be made clear at the point, without a few losses, there are no profits. Comparable is this theory with a company foundation. If you do not invest in the company, no reasonable setup can be made. The decisive factor here is that the losses are calculated in advance and limited. Good risk management is essential here.

Most forex beginners “practice” with a demo account. Here, you trade with play money. If a change to a real trading account takes place, the majority of traders initially tend to panic. Suddenly, it’s all about real money, losses become real and do not feel so good. In order to master this panic and to limit the losses, one should prepare a suitable trading strategy right from the start. Especially recommended are strategies that are as simple as possible but with a high hit rate. Only those who understand their own strategy themselves will be able to optimize their trade in the long term. If you act according to the so-called trend sequence, you go with a clear upward trend in long. In a clearly visible downtrend, however, in short.

Forex Trading Tips for Beginners
Compare brokers and pay attention to market model
Low commissions are better in the long run than tempting deposit bonuses
Set own loss limit
Have patience
If possible, open forex account without additional funding
Try account with guaranteed stop loss
Use demo account
Split capital
Start with low leverage
Always have a trading strategy
Get lots of information and always learn

In order to have long-term success with forex trading, you should pay attention to various fundamentals. Among other things, this includes being flexible, reacting quickly to market changes, and sometimes implementing various strategies.

With a demo account, you can always take the first steps in forex trading and learn a lot. First market events can be analyzed and processes played through.

Use risk management tools
One should definitely use a risk management tool. There are two variants: programs based on the PC and via browser. For an optimal application, it is important that the stop-loss order be defined exactly. If this does not happen, the trading risk is calculated incorrectly and losses can occur. One speaks in such a case of a margin call. The trader must make money after the losses to continue to be active in the market.

Strategy development
Some brokers offer analysis tools to test strategies. With them, the desired strategies are automatically tested and, if necessary, optimized. Recurring thinking and trading mistakes can be eliminated in this way.

Do not get too emotional
Traders sometimes tend to let their emotions gain the upper hand in trading. This often leads to trader making ill-considered/wrong decisions. Especially with Forex, it is important to hide/suppress the emotions as much as possible. So you do not become greedy or restless if the strategy threatens to lose money.

Keeping a trading diary is recommended for beginners and professionals alike. In it, strategies, successes and even failures can be documented and later accurately understood. In this way you can see which strategy succeeded and which failed.

For beginners and newbies in forex trading, it is essential to learn foreign exchange trading in detail. This not only involves acquiring knowledge about literature, webinars, seminars, and tutorials, but also testing the corresponding trading platforms of the brokers without risk. However, a trial account should be chosen to do this, providing realistic quotes, spreads, execution speeds, and major currency pairs.

Furthermore, make sure that the demo account is provided free of charge. Some brokers make use of a demo account dependent on a minimum deposit amount. So before the Forex trading can be tried with a test account, the deposit of a minimum amount is required, the user can, however, again – if the platform or the broker offers – can withdraw the funds at any time. However, fees may be charged by the broker.

The demo account maturities sometimes differ considerably. Some provide their demo account with an unlimited term, so traders can test new trading strategies in parallel with a live account. However, other demo accounts are only available for a few days to a month for testing purposes. Virtual trading money ranges from a few hundred dollars to $100,000+. A trip into the world of forex trading is connected to solid testing and making of a trading strategy.

A good forex demo account is available to its users not only free of charge, but also unlimited in size and duration. Traders can continue to use the test platform for testing new trading strategies even after trying out the trading platform and trading options. With virtual assets ranging from $500 to $50,000, beginners and professionals can practice live trading without any financial risk of loss.

The Forex trading is a great income opportunity, but it is very risky too and basically accessible for beginners and professionals alike. However, especially, beginners should keep calm and not be disturbed by losses. Practice with a demo account is recommended, because it gives you a sense of the market and the different leverages. To find a suitable broker, traders should compare them and check the terms. The vendor that best matches your trading needs should be the broker of choice.

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