Forex Trading | Making Money With Money (Very Hard, But Possible)
Forex trading for beginners. The biggest marketplace in the world? It‘s not a stock exchange like the one on Wall Street in New York. Nor is it a gigantic port hub Shanghai, where thousands of containers are handled daily.
The world's largest trading center is wherever there is a computer with internet access. Only one commodity is traded: money, or rather, currencies. Currencies are one of the most traded day trading assets. The reason for this is that the security deposits within a brokerage account and minimum account sizes are very small.
For a long time, money was an unsuitable commodity because the value or exchange rate was fixed and the states had stopped the currency trade. For the merchants this had the advantage that they could accurately calculate their prices in international trade.
The currencies of the major trading nations were tied to the gold reserves of the respective country. These were a kind of security in terms of monetary value.
Only with the abolition of the fixed gold price in the early 1970s, first in the US, did the various currencies become volatile and thus tradeable. Initially currency trading remained a matter among states, banks, investment or insurance companies.
There were special currency exchanges. With the advent of the internet foreign exchange trading has shifted to the World Wide Web and everyone may participate through brokers. Forex is the magic word, short for Foreign Exchange Market.
How trading in foreign exchange works and what you should look out for when entering the Forex market, you will find out in this article.
What is Forex?
Each currency has a value. This value depends on many factors. Economic power and foreign trade are crucial. However, the value of a currency always pertains to another currency because one cannot compare more than two currencies. However, global currency trading has key currencies towards which other currencies are oriented or even linked.
The leading key currency currently is the US dollar, followed by the Euro. The two states behind the currencies, the US and the European Union, are responsible for a large part of world trade and accordingly shift their currencies to all countries of the world.
Due to their stable value, these are also currencies that are often used by other countries as foreign exchange reserves. Due to their equally strong economic power, the two currencies are comparatively balanced. Nevertheless, fluctuations cause the exchange rate to vary by the second.
These exchange rate fluctuations are noticeable only in the 4th or 5th decimal point. It may take some time for the exchange rate to change even by just one cent. Of course, that's relative.
For the average consumer, about 1 cent fluctuation in one day is not relevant. During this period, however, the two currencies have fluctuated countless times in the third, fourth, and fifth places behind the comma.
As a Forex trader you can use this for buying or selling one or the other currency on the platform of your broker. The broker will provide you with leverage that will ultimately determine your profit or loss.
That’s appropriate, because fluctuations in the third decimal point cannot achieve any notable profits, if they are realized 1: 1. However, if the lever is around 1: 100, the results are quite visible.
Any change in the third decimal point will then equal one Euro gain or loss.
Of course, you can be active in the minute trade, using the short-term swings of a currency. But you can also bet on a currency falling or rising over an extended period of time.
Learning Forex trading
It’s quite easy actually. The broker with whom you have an account provides you with a website interface where you can trade in different currency combinations, like "EURUSD", this abbreviation representing the currency pair Euro / US dollar.
Here the first currency is the base currency, the second is the currency of exchange. For this purpose, charts are usually displayed with different time intervals.
In these charts, you can see how the Euro has performed recently compared to the US dollar, either for the time range of a minute or an hour, a day or a week. Hereby you may deduce a trend indicating where the respective currency is heading.
In order to participate in the trade, you can buy or sell positions for example for Euro / US Dollar. If you click on Buy, you acquire a position in Euro in the hope that the Euro will rise in relation to the US Dollar.
If you click on Sell, you assume that the Euro will fall in value against the US Dollar.
The accounts are organized in a way that purchases and sales can be realized with one or two clicks. For example, suppose you triggered an order in which you buy Euros, that is, you bet on a rising Euro.
Then you have to wait and see. First, the purchase amount of your capital will be deducted. At the same time you’ll notice a shortfall because the purchase amount is at first a loss.
If the price moves up, the minus amount decreases and if the current price exceeds the price on which you have ordered the Euro amount, it moves into the profit zone.
This can take quite some time, depending on how volatile the currency pair is at the moment. A not insignificant factor is the respective time of day.
Often these are currency pairs located on different continents with very different time zones. As an example the east coast of the USA has a time difference of 5 hours to Central Europe, during summer 6 hours.
So when first cup of coffee is drunk on Wall Street at 9 a.m., it is already 3 p.m. in Central Europe and thus lunch time. The trading activities are therefore very different, which affects the foreign exchange rate.
There is a whole host of tools around Forex trading to assist you. For example you can set an upper and lower limit for each purchase and sale. If the exchange rate reaches one of these limits, a resolution of the position is automatically triggered.
Thus you can limit losses or make profits before the price falls again. There are far more complex tools, such as the Expert Advisor, a software program that can independently analyze trends and also buy and sell. But more on that later.
First of all, you’ll need training, because Forex trading without any prior knowledge is just as likely to succeed as the jump of a non-swimmer into the deep end of the pool.
Demo accounts for Forex trading
When researching this article, it was noted that many providers of Forex trading offer demo accounts, but usually only in connection with the opening of a real money account.
Ultimately, a few providers where found providing demo accounts without the necessity of having to open a real money account.
When looking for a demo account a factor important for beginners was taken into consideration, namely the experiences of other users with the respective Forex providers.
On the web there are various forums providing opinions on each provider, evaluating the advantages and disadvantages of different Forex trading platforms, obligatory reading for every beginner.
After the opening of a training account, one can exercise as much as necessary. The platform provides play money for investing in the various currency pairs.
A great way to get to know each tool, but above all to get a sense of how the currency pairs perform. Just as for where the limits are, which order sizes are possible with the capital under consideration and of course, whether Forex trading suits you.
What is an Expert Advisor?
Previously, the tool was called Expert Advisor. This is software that, in simple terms, is linked to your Forex account and then opens or closes positions according to a defined strategy. But not only that.
The EA can be set to use peaks in price trajectories to make a profit. When you open your own positions for the first time, you will find that sometimes it can take a long time for a currency to move in the desired direction.
On the other hand, sudden price movements may occur that you miss, because viewing the chart over a longer period of time is simply boring.
After surfing for just 10 minutes on Facebook you might find you were in the profit zone with your position without noticing.
By switching on an EA, such errors can be avoided. Besides, the EA allows you to 24-hour trading and you can set it so that the position is resolved at preset thresholds.
This minimizes your risk considerably. But again, it is important to find the right EA. Fortunately, Expert Advisors can be tested on demo accounts as well as on real money accounts.
Does it take lots of money to get started in Forex trading?
One might argue about the money. Opinions about how much money is needed to get started in Forex trading vary considerably. In theory the entry is possible with 20 Euros. Various providers of Forex accounts allow trading in the cent range.
But with 20 Euro entry the daily profits will be cents at best. With 100 Euros prospects are better. Experienced traders maintain that it takes 1000 Euros to earn decent daily profits.
In addition, some Expert Advisors work only with account balances of 1000 € and above. In any case one may enter with small amounts into a market that was the exclusive domain of a small circle decades ago.
Maybe Forex trading should initially be considered just a pastime. Incidentally, a quite common "sport" in Asia.
Conclusion on Forex trading
Even the smallest trade redeems itself with more than labor. This wisdom by an unknown author can very well be applied to Forex trading.
Getting started in foreign exchange trading can prove onerous and one should have several weeks of training with the demo account before starting to invest real own capital. This time can be utilized well to look for the right account and to test different tools.
Forex trading also lends itself very well to automated trading using Expert Advisor software. Apart from price swings based on unusual events, money trading is characterized by recurring trends.
These can be calculated and there is a very high probability of their repeated occurrence.
As a trader, you have to pay close attention to signs of unusual activity. Therefore following the events in politics and the economy carefully is also a part of Forex trading.
If all the important points in the selection of the account are considered and sufficient training is done, Forex trading may well turn out to be a lucrative sideline or even the main source of income.
Further reading: Buying stocks - It is easier than you think
Forex trading – making money with money | via @DAYTRADINGz