What is Forex like?
The word Forex is a blend formed by combining the initial parts of the two English words: foreign and exchange. The word for word translation of this phrase means exchange of foreign currencies. The practice of exchanging one currency for another gave birth to an international currency market.
Forex is a global decentralized market for trading national currencies where market participants or traders buy and sell currency pairs. The daily trade volume on Forex exceeds $6 trillion. The international currency market is open 24 hours a day, five days a week, except on national holidays.
This financial market offers great trading opportunities, including the mechanism of trading with leveraged funds, the possibility of trading small volumes, and even high volatility. Now let’s get an insight into the ins and outs of the global financial market called Forex.
How does Forex work
Before you venture into earning on fluctuations of forex rates, it is not enough to understand what Forex is like. It is essential to grasp the principles of its operation.
Banks and investment funds
Dealing centers
Brokerage firms
Small firms and retail traders
Banks and investment funds
Dealing centers
Brokerage firms
Small firms and retail traders
Forex is a global financial market united by the common communication network. Its participants are large banks, investment funds, and individual traders who also make an impact on exchange rates. Small firms and retail traders are not financially sound to enter the currency market on their own. Nevertheless, they can afford to gain access through a third party such as a brokerage firm or dealing center.
Trading on Forex appeals to individual traders because the currency market is an easily available source of income. To confirm this statement, InstaForex suggests different types of trading accounts. Each of them stipulates its own size of a start-up deposit and a kit of particular services. All in all, Forex is the right market for traders who can spare even a modest amount to get started. A retail investor or trader alone can hardly change market sentiment on Forex. Nevertheless, a multitude of private traders is one of the crucial forces to influence exchange rates of assets alongside large market players.
What assets are traded
90%
major currency pairs and cross currency pairs
10%
exotic currency pairs
Trading instruments of Forex are currency pairs. Major currency pairs are those that include the US dollar and an actively traded currency of another country, for example, the euro, the Japanese yen, the Swiss franc, and the pound sterling. They are designated as EUR/USD, USD/JPY, USD/CHF, and GBP/USD. Cross currency pairs do not contain the US dollar. In forex crosses, any currency can be traded against each other. Such currency pairs rank second in terms of popularity in the forex market. Exotic currency pairs consist of thinly traded and very illiquid currencies. They account for at least 10% of all transactions on Forex.
The full list of currency pairs offered for trading with InstaForex is provided on the appropriate web page. Besides, any forex instrument is also available for CFD trading under beneficial conditions.
What are exchange rates and market quotes on Forex
The price of any asset in a financial market fluctuates constantly. A currency pair trades at a price quote of the exchange rate for the base currency to the quoted currency. Such a price quote is marked by a point in a technical chart. Any point is automatically connected to a previous asset’s quote. This is the principle of how forex charts are plotted online for a particular trading instrument.
The screen of a trading platform presents two values of an asset’s quote. The lower value is called the bid price, the upper one is the ask price. Speaking about the chart of the EUR/USD pair, the bid value is the price at which the euro is sold and a certain amount of bucks are bought. Conversely, the ask value is the price to buy the euro and sell some US dollars.
Bid
Cost of sell
1.1918
EUR / USD
1.1918
1.1920
Ask
Cost of buying
1.1920
An exchange rate in the currency market depends on a variety of factors. Let’s find out the most significant ones:
1. Money issuance.
If a government actively prints out banknotes, this expands supply of its national currency. At some point, supply exceeds demand that drags down the forex rate of this national currency.
2. Foreign trade balance.
A country with robust exports ensures high demand for its national currency. On the contrary, imports account for currency supply, so an increase in imports makes a national currency fall in value.
3. Currency reliability.
If people want to safeguard their capital from potential risks, they convert their savings into a particular currency. Needless to say, demand for this currency goes up. Apart from that, a currency receives support when large companies choose it to set out financial clauses in a contract.
Moreover, exchange rates of currency pairs are sensitive to a number of factors such as natural disasters, verbal interventions of influential policymakers, macroeconomic data, and others. To predict a further trajectory of a financial instrument, a trader should be well aware of the particular factors which make an impact on the asset picked for trading.
Is it possible to earn on Forex
There are tons of negative comments about Forex on the Internet. Basically, these people term the currency market a scam and insist that it is hardly possible to earn in this marketplace. Such comments mainly come from those who embarked on forex in the hope of hitting a jackpot, who did not bother to grasp basic things about Forex, and who did not spare enough time for learning.
In fact, anyone is capable of earning in the currency market. The key to making steady profits is nonstop learning. It is no good for a trader to click at random buttons on a trading platform. A trader should gain essential skills to make market reviews and accurate forecasts of a further market situation. The inability to predict market developments is the main reason why beginners lose 3-4 times bigger money than they actually earn. To make highly accurate forecasts that will bring profits, a trader should bear in mind a great deal of factors that could act as market catalysts.
Conditions for making profit
Support from reliable licensed broker
Regular learning
Attention to theory
Risk factors
Political and economic situation in the world and in particular countries
Geopolitics, news, rumors
Rhetoric and policy of influential central banks, lending institutions, and top companies
To maximize your trading efficiency on Forex, place a high priority on learning the theory. A special educational section available on InstaForex website will develop your understanding of the matter.
Before investing a real deposit, a trader should grasp the following key concepts:
1. The principles of how the international currency market operates.
With this knowledge, a trader understands what is going on in an exchange floor.
2. Methods of fundamental and technical analysis.
These methods greatly improve the accuracy of forecasts for any asset.
3. Special features of different assets and derivative financial instruments.
This knowledge will help trader to choose correctly a trading instrument, time to work and the best strategy for this.
This knowledge simplifies a choice of a suitable trading instrument, the right trading session, and an appropriate trading strategy. To practice trading skills, a good solution is a demo account. Every client can open this type of account without any risks to his/her savings. This is a free-of-charge training account that enables a trader to find out how a trading platform suggested by the broker operates, to employ theory in practice, and to check a preferable trading strategy for efficiency.
What strategy to choose not to incur losses
Trading Code
(set of rules)
Rules of money management
Managing stop orders
Take Profit and other terms.
Trading Code
(set of rules)
Rules of money management
Managing stop orders
Take Profit and other terms.
To trade at a profit on Forex, it is no good to make rash decisions and enter the market with erratic trades. The key to success of every efficient trader is one’s own highly elaborate and time-tested strategy. In terms of Forex, a strategy is a set of rules according to which a trader speculates in the market. This code sets out in detail conditions that should be fulfilled to make a deal. Besides, a strategy includes the rules of money management, setting a stop loss/take profit, and other conditions.
Forex analytics is of great help to you to design an effective trading strategy. However, as a beginner, you may lack any algorithm for a while. So, take into account the following rules of trading in a currency market.
This is a bad idea to trade with big leverage, especially for novice traders.
It is common knowledge that market quotes on Forex fluctuate with different volatility. During the same trading day, an asset’s price could make minor fluctuations of a few decimal points of a percent. At the same time, a price change could be more than 5-10%. To boost would-be profits, InstaForex offers its clients the opportunity to trade with leverage that means virtual borrowed funds. In essence, a trader’s deposit is not credited with real money. However, a trader can manage a deal which is a few times bigger than his own investment.
Importantly, trading with leveraged funds increases both profits and risks. If you make the right forecast of a price change, you will yield an extra profit proportionate to your leverage. Otherwise, if your forecast fails, you will incur losses in the appropriate proportion. To minimize risks and maximize would-be profits, novice traders are not recommended to open positions with leverage more than 1:5 – 1:15.
How leverage works
You have $100
The broker provides you with leverage of 1:10
You can open a trade worth $1000
You have $100
The broker provides you with leverage of 1:10
You can open a trade worth $1000
Impose some limitations on your deposit. Do not deposit your account with all your savings.
The global currency market is hard to predict with 100% accuracy. Thus, do not downplay the scenario that you might drain your deposit. Successful trading means that a percentage of winning trades is higher than a percentage of losing ones. Unfortunately, trading is always accompanied by losses and no one is insured against this. Another advantage with InstaForex is that the broker does not allow its clients to end up in the red. Hence, all losing trades will be closed automatically.
In other words, a trader will never lose more money than the amount available on his/her deposit. If a trader invests part of his/her savings, s/he will not go broke if a deposit is lost in the end. Another tip is to restrict investment per each trade. One of the money management rules reads that no more than 1-5% of the deposit size should be invested per trade with a view to curbing risks.
Stop loss is must-do!
A stop loss is a special limit order which allows a trader to cut losses on positions. Placing a stop loss, a speculator will never lose the whole deposit in a single trade. Setting a stop loss, a trader specifies a price at which a position will be automatically closed once this level is reached. For example, a trader wants a position to be closed automatically when a loss stands at 100 currency units. Initially, there were 1,000 currency units in his deposit. If a stop loss is activated, the trader will not lose the whole deposit and 900 units will be left.
For some reasons, a trader may be unwilling to trade on one’s own. However, s/he wants to take the opportunity of earning decent money that the currency market opens up. It makes sense to try a popular and convenient strategy of mirror trading. This service called ForexCopy with InstaForex allows traders to copy positions of successful investors and execute the same trades in almost real time.
How it works
Pick one of
5 top traders from the monitoring list
Click Button
Copy trades
Exploit service
Gain profit
Must-do steps before you begin trading on Forex
Let’s assume that you have learned the complete theory about the currency market with utmost diligence. You are aware of all its specifics and principles of operation. Besides, you are able to handle tools of fundamental and technical analysis. Thus, you are ready to apply the knowledge acquired during the tuition to real market conditions.
Some details should not escape your attention:
1. License.
A regulator's license is a guarantee of safety and reliability of a brokerage company. Trading at financial markets with InstaForex you can be sure in transparency of cooperation conditions and high quality of deals execution. Independent and reputable regulators monitor it.
2. Training.
A reliable broker offers free training for beginners. There are many articles, useful advices, recommendations and free tools for beginners.
3. Trading platform.
It is essential to turn your hand to a trading platform. First, you should understand how to install it, how to adjust it, and then how to manage trades on it. A sheer advantage of a broker is a mobile version of a trading platform.
4. Demo account.
With a demo account, traders can test their knowledge in practice, get to know a trading platform, and check a preferable trading strategy for efficiency.
5. Technical support.
A broker must specify various ways of contacting customer support. Managers must respond instantly to questions which clients ask not only by phone but also by email, online chats or by another messenger. A broker of an international scale must ensure support in several languages which are widely spoken in those regions where a broker is present.
6. Size of minimum start-up deposit.
A broker must not constrain its clients, setting an elevated threshold for their entry to the market. They should have a choice of trading accounts to suit the needs of traders with a different size of wallet.
In theory, you are able to predict accurately moves of currency pairs, but in practice, you find it complicated to foresee further market behavior. Trading on a demo account gives you confidence so that you can select a trading strategy to suit you fine. Then, welcome to trade under real market conditions! You need to open a live account and deposit it with some money. Do not forget there are a few types of accounts with InstaForex to choose from. You decide on that one which is tailor-made for you in terms of trading conditions and the size of a start-up deposit.
If you are a rookie trader, make your first steps on Forex with a deposit which you are not afraid to lose. Let us warn you that a strategy which has been tested on a demo account might turn out to be not as efficient as expected. The real market always brings about revision of any algorithm. In this case, you will have to spend more time and money to fine-tune your strategy and develop your own trading style. To curb risks, it would be a good idea to use not just one but two-three strategies in parallel.
Conclusion
Most beginners are wondering whether it is simple to trade on Forex. The straightforward answer is no. Trading in the global currency market has nothing in common with gambling at a casino. In fact, this activity implies grueling work and nonstop self-development. However, if the underlying reason for your venture is easy money, you should be braced for a losing streak. On the other hand, if you consider the currency market a source of your regular income, make sure you learn, train, adopt someone’s successful experience, and sharpen your strategy.
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