What Is Forex? Find Your Answers on AtoZMarkets

What is Forex? In this article, we will explain what FX means and how to succeed in the foreign exchange market. 

June 11, 2021 | AtoZ Markets – Some adore him. Others don't believe in him. Some expect gifts from him. Others consider it a fairy tale ... No, I'm not about Santa Claus. I'm talking about the Forex market.

It is rare to meet a person who has never heard of Forex. There are many myths about the international currency market. Someone thinks that you can become rich on Forex in a few months. Others also believe that this market is a pure scam. This article will help clarify the situation. It contains the whole truth about Forex.

In this article, you'll learn as much detail as possible everything about the meaning of Forex and all the necessary basics that most traders will only learn after a year of trading due to laziness and a blind desire to make quick money.

By the time you finish reading this article, we hope, what you have learned will help you to see and realize your real goal - to become a pro, and not to cut down tons of green pieces of paper quickly.  

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What you'll learn in this article:

  • What is Forex?
  • What do you need to start Forex trading?
  • How to trade Forex?
  • Can you make money by trading Forex?
  • How to start Forex trading?
  • Three strategies Forex traders apply to reduce losses
  • How to avoid Forex scam
  • What if a forex broker violates your rights?

What is Forex?

Forex means the exchange of foreign currency. These two words form the basis of the abbreviation Forex or FX. For example, if you travel to another country and exchange the US dollar for local currency, you have taken part in Forex!

By its nature, the Forex market which was founded in 1976, is the largest and fastest-growing market in the world, operating literally 24 hours a day. 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 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 brokers.

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

Forex brokers 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 a lot of money or special equipment. It is enough to have access to the Internet and trading software 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 broker 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 broker can use the quotes of currencies of international currency exchanges, banks, local and foreign brokers, news agencies, and other reliable sources.

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 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 to trade Forex?

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.

You have selected a currency pair - Euro and Dollar. The dollar is the base currency, the euro is the quoted currency. For example, you expect the euro to rise against the dollar.

The euro is now worth $1.213. You open a deal to "buy" euros in the amount of $100. In reality, euros do not come to your bank account but are reflected in the internal register of forex dealer transactions and on your balance in the program.

Suppose, in a day, the price of the euro really rises to $1,223. You think that it won't grow anymore, and you close the deal. Thus, you take profit: $(1.223 - 1.213) x 100 = $1. The forex dealer will credit this money to your real bank account - your deposit will be replenished. If the euro falls to $1.113, your loss will be: $(1.213 - 1.113) x 100 = $10. And the forex dealer, on the contrary, will write off this money from your bank account.

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 by trading Forex?

We will never tire of repeating this: in every investment, there is a risk of losing money.

But back to the main question: is Forex trading a way to make real money?

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

Also, by using a secure trading platform, you will learn about the principles of currency trading, ponder your decisions and analyze the foreign exchange market. However, the actual profit figures depend on many political and economic factors, the behavior of the world's largest banks, funds, and companies. Even news and rumors influence currency rates.

Experts say that the most common and expected returns are in the 10-15% range, and even professional traders do not get such good results, because even very experienced traders cannot predict everything and exchange rates can fluctuate in unexpected ways, so losses are inevitable. According to statistics, forex traders lose 3-4 times more money on Forex than they earn.

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

  • Learn how the forex 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. After all, transactions with forex dealers are derivatives contracts for currencies or currency pairs;
  • Read articles on the stock exchange and investments. Many forex trading books have also been written to guide you.

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

How to start Forex trading?

After studying the theory, you can proceed to the next stages.

1. Choose a reliable forex broker

Most importantly, he must have a license from top-tier financial authorities such as CFTC, FCA, ASIC, CySEC, ESMA, and MAS.

If there is no license or authorization, the risk is not justified by anything. These are either outright scammers with whom you will definitely lose money or foreign companies that operate illegally in our country. And in case of problems, you will have to sue them in the country where they are registered.

In addition to the license, it is worth clarifying a few more points:

  • Translation speed, convenience, and premiums.One of the most important points is the ease with which deposits and withdrawals are made. In most cases, all transfers are made through regular banks, so for your convenience, check if you can use a bank where you already have your cards.
  • Customer service quality.If you are a novice dealer, you will inevitably get in touch with support from time to time. The broker must be available to you on an ongoing basis by telephone and must be adequate and professional in providing appropriate guidance and advice.
  • Ease of use of the trading platform.Since all Forex trading takes place on the trading platform, it is imperative that the platform provided by the broker is user-friendly. Be sure to first try to understand how the platform works, you can use the broker demo platform which allows you to test all the platform's functions.
  • Minimum deposit amount and additional costs.Be sure to make sure that the minimum deposit amount and any additional fees set by your broker are acceptable to you.

2. Practice on a demo account

A demo account will allow you to understand how and by what means you make money in Forex, and will give you the opportunity to try out different trading strategies.

It is very difficult to predict exchange rates only on the basis of open information about what is happening in different countries. Therefore, to help players, there are programs that analyze technical indicators of currency movements and help build trading strategies. But the probability of error is still great.

3. Open a real account

Have you practiced on a demo account? Have you worked out different strategies that you learned during the training, have you chosen a few that suit you? You can now open a real account.

You determine the amount on the account yourself, but a forex dealer may have their own restrictions on the size of the minimum deposit. It is better to start with a deposit that you will not be afraid to lose.

It is not a fact that your strategy, tested on a demo account, will be as successful on a real account. You will have to spend some more time and money to hone it and develop your own style. You can use several strategies at once, so you will slightly reduce your risks.

Three strategies Forex traders apply to reduce losses

If you decide to trade Forex, it is better to adhere to the following strategies to reduce losses.

Strategy 1#: Don't take on a lot of leverage, especially if you're a newbie.

In fact, the course usually does not jump much. During the day, the difference is usually hundredths of a percent. So, if you make deals only for the amount of your deposit, you won't earn much.

That is why Forex is traded with leverage. This means that a forex dealer can provide you with a virtual loan. Real money will not come to your account, but leverage will allow you to increase the transaction amount several times. And you can go beyond just the money on your deposit. By law, the maximum leverage that a forex dealer can give you is 1:50.

Let's say your deposit is $100. Forex dealer is ready to give you 1:10 leverage. That is, you can open a trade for $1000. The forex program will reflect the "purchase" of $1000 worth of currency. If you want to open a trade for $5000, then you need to take a leverage of 1:50.

You can use for a transaction not all of your deposit, but only a part of it. For example, from a $100 deposit, take only $20 and choose a leverage of 1:50. In this case, you can also make a deal for $1000. And use the remaining $80 on the account for another operation.

If you guess the course change, you can multiply your profit in this proportion. If you don't guess, you will incur losses in the same ratio.

For example, you open a deal to "buy" euros for $1000 with a leverage of 1:10. If the euro rate grows by $0.2, then you will earn not $20, but $200. But if you don't guess and the euro falls by $0.1 against the dollar, you will lose $100 - the entire amount of your deposit.

In other words, your potential winnings, but also your risk of losing money, increase in the same proportion as your leverage. Therefore, to begin with, choose a leverage within the range of 1: 5–1: 15.

Strategy 2#: limit your deposit.

After all, you can lose this amount at any time. It won't be possible to trade profitably all the time, losses are inevitable. But a forex broker will not allow you to lose more than you have on the deposit, and go into the red. He will forcefully close the deal.

Let's say your deposit is $100. As in the previous example, you decided to open a deal to “buy” the euro for $5,000. To do this, you have taken a leverage of 1:50. But the euro went down against the dollar and lost $0.1 per day.

That is, your losses could be $500. But a forex dealer will not let you lose more than your real trading account, that is, more than $100. As soon as the EUR/USD rate drops by $0.02 (your losses will amount to $100), the forex broker will immediately close the deal and reset the account.

True, losing the entire amount on the account is also not pleasant enough.

Strategy 3#: use stop-loss.

Forex trading software usually allows you to limit losses on a trade. This option is called a stop-loss. This opportunity is worth using if you do not want to lose your entire deposit at once. Stop-loss allows you to automatically close a trade when losses reach your set limit.

Let's say your deposit has grown to $1000. And you don't want to lose it all in one bad trade. Then set a stop loss - instruct the forex broker to close the trade when the loss is reached, for example, $100. This way you can keep the remaining $900 of your deposit.

Unfortunately, the stop-loss option is not available in all forex trading software. If it is not there, you will either have to risk the entire amount or each time you withdraw money from the trading account of a forex dealer and leave only a deposit there, which you are not afraid to lose.

How to avoid Forex scam

Because Forex is a very attractive market, it also attracts countless scammers and scoundrels trying to cheat people. Unfortunately, there are many people circulating on the Internet who claim to be Forex brokers and offer idyllic conditions that are really nothing more than an empty bluff: for example, they promise guaranteed profits, offer trading signals that guarantee profits, and so on.

How to spot Forex scammers

  • If it sounds too good to be true, it’s not true. This good old principle applies, especially to the Forex market. If any Forex broker offers unrealistic conditions, do not believe it, but rather choose a broker that is recognized in the market.
  • Stay away from brokers who guarantee huge profits. If a company offers guaranteed income, for example, that you will make $1,000 per week or are guaranteed a certain percentage of profit per month, then stay away from that company. No real forex broker can guarantee anything, because there is simply no guarantee for an investment.
  • Don't trust a broker who claims there are no risks. If a company ignores the existence of risks or even says that the investment is protected and completely risk-free, such a company should not be trusted. Forex, like any other form of investment, is risky.
  • Do not trust those who demand to transfer money right now. Do not trust those who press you after a five-minute conversation, threatening the police and tax authorities. Also, do not give your passport details or any banking information.

The best way to avoid being scammed is to do a little research on the company. Check out online reviews and take your time to open an account when they offer you incredibly beneficial terms.

What if a forex broker violates your rights?

In forex, there are no guarantees of income. The money that you put on a deposit with a forex broker is not insured by the government. But if you face other problems - for example, a licensed forex broker fulfills your orders not in real time, but with a delay, or does not return the deposit at your request - then contact their regulator.

If you have entered into an agreement with a company that does not have a license and violates your rights, write a statement to the police. Before that, collect all the documents that you have: contracts concluded with a fraudulent intermediary, checks for money transfers, take screenshots from the site.

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