You may have already heard about Forex as an interesting investment opportunity. But what is the Forex really? How does it work? And above all, how to invest money?
This is what we will explain here in detail with a complete and detailed presentation of this unique market in the world.
Forex definition – Forex is also called “foreign exchange market”. Its name comes from the contraction of the English terms “Foreign Exchange”, literally “currency market”. Forex is therefore, as its name indicates, the international market on which the currencies of different countries or regions of the world are exchanged.
It is for example possible to exchange euros against dollars or against yens or any other currency more or less exotic. But Forex is also an investment market that allows traders to speculate on the exchange rates of one currency over another. Traders who invest in the Forex market are called “Forex traders”.
How Forex works:
The operation of Forex is quite simple to understand. Its role is to determine the exchange rate of one currency against another, that is to say the value of a currency in foreign currency. To do this, currencies are not listed individually but in pairs, also called “currency cross”.
These pairs are expressed by abbreviations or acronyms each representing a given currency. For example, the EUR / USD cross represents the Euro / Dollar currency pair and thus expresses the exchange rate of the Euro expressed in Dollars. Thus, if the EUR / USD cross is quoted at 1.25, this means that one euro equals 1.25 dollars. Note that the first currency of the pair is called “base currency” and the second currency is called “quoted currency”.
The unit used to express this quotation is called “pip”.
To calculate this exchange rate, the Forex performs a calculation based on the difference between supply and demand. Indeed, the higher the demand for the purchase of a currency, the higher its exchange rate will be.
Trading currency pairs on Forex:
We will discuss in more detail how foreign exchange rates are calculated. But before that, we must remember what actions investors can perform on the Forex.
When trading in Forex, you can sell one currency against another. But since Forex works in currency pairs, the possible actions are:
- Buying a currency pair is equivalent to trading currencies against basic currencies. So buying EUR / USD is like trading dollars for euros. Selling a currency pair therefore corresponds to the opposite movement, since it is a question here of exchanging base currencies for quoted currencies. Selling the EUR / USD is therefore equivalent to exchanging euros for dollars.
- The calculation of the exchange rate of currency pairs therefore takes into account the exchange volume of one currency relative to the other using the system of supply and demand.
Other characteristics specific to Forex:
The foreign exchange market or Forex differs from other financial markets by several characteristics:
First, it is an international market that includes all the world’s currencies.
Forex is also a continuously quoted market for five out of seven days. This means that exchange rates continue to evolve overnight.
Finally, Forex is the largest financial market in the world in that it generates the largest daily trading volumes. It is therefore considered very liquid and very volatile.
If the Forex attracts so many investors around the world, it is not without reason. Indeed, this market has many advantages over other financial markets such as the stock market for example. We will detail here all the advantages of the foreign exchange market.
A gigantic market and quoted continuously
The main feature of Forex, and also its main advantage is the volumes traded daily. Indeed, with volumes of over $ 2 billion daily, Forex is the most liquid market in the world.
Moreover, being an international market, Forex is accessible 24 hours a day during the five working days of the week. It is therefore possible to speculate at any time of day or night, which is a very big asset for investors who work during office hours.
Another undeniable advantage of Forex is the possibility of using a leverage effect. This leverage allows you, from a minimum investment, to generate attractive profits, even when the market is changing little.
This leverage is much stronger on currencies than on other assets and can allow you to multiply your investment by 100, 200, 300 or even 400. Be careful however to use this leverage with caution because it can also make you lose more money than you expected.
Very low transaction costs:
One of the aspects of Forex that attracts investors is the level of cost of the transactions that are made there. Indeed, unlike stock markets, no commission or fees are punctured on your transactions because it is precisely here to exchange currencies and not products.
Of course, online brokers or brokers are paid differently through spreads, which is a difference between the purchase price or the selling price of a currency pair relative to its real price. These spreads are often very small and only a few pips per unit.
Another Forex trading tool particularly popular with novice traders is trading signals. Generally free for traders registered on a platform, these signals come from technical analyzes performed by professionals.
Forex trading signals simply tell you when and how it makes sense to take a position based on the market’s chances of moving in or out of the trend. They are very easy to follow and require no specific knowledge of analysis.
This is undoubtedly the most important Forex trading revolution in recent years. Social trading is somehow a new way to speculate on the currency market or on CFDs without the need for any knowledge in the field.
Traders who use it can indeed follow live positions and results of the best traders on the same platform, and decide to copy these positions. Once the trader to copy selected, you have nothing to do since your positions will be taken at the same time as those of the latter, in line of course with your investment capital.
Graphs and technical indicators:
All trading platforms of the Forex market allow you to follow the live price of the assets on which you trade. But the stock charts offered do not just show you a price history of these assets.
On the one hand, they are fully customizable and therefore perfect for learning technical analysis at their own pace, and on the other hand, they incorporate what are called technical indicators such as the supports and resistances or the level of volatility.
Register on a trading platform:
The first thing to do when you want to start trading on the Forex is of course to choose the trading platform you are going to speculate on. For this, you must take the time to compare the advantages and disadvantages of each broker on the internet to feel comfortable with your trades.
We must think about comparing the following points:
- The level of spreads
- The number of currency pairs and other assets proposed
- Accreditation by the European authorities
- Bonuses and other promotions
- The quality and ergonomics of the platform
- Be aware that most online brokers offer free, no-obligation demo accounts that let you discover their platform in real-life situations and practice speculation.
If you do not know which broker is adopted, we recommend AvaTrade, CM Trading or Markets which are serious brokers and have many advantages.
Once your broker is selected, all you have to do is register using an online form and make your first deposit. The amount of this first deposit must be considered in advance according to your financial capacities and possibly welcome bonuses to which you are entitled.
Choose your assets carefully:
Once you have registered, you will have to choose the assets on which you will invest your money. It is advisable to take your time for this step and never rush. The ideal is to seize the best market opportunities based on the latest economic news.
Beginners will be able to start by speculating on the most popular currency pairs on the market such as the EUR / USD cross, which have the advantage of being very volatile and for which there is a wealth of information online.
Subsequently, you can diversify your investments by including other currency pairs and even CFDs, another trading product offered by Forex brokers and that can invest on all kinds of stocks such as stocks, commodities or stock indexes.
Set up a trading strategy:
Although Forex is a speculative market open to all and requires no specific knowledge, making money by speculating on currency pairs is not a coincidence. It is indeed necessary to develop a simple but effective trading strategy and stick to it.
To do this, you can use an existing method or create your own trading strategy using data from the technical analysis coupled with those from the fundamental analysis. If you are scared, reassure yourself, online brokers generally offer their customers signals from technical analysis that you simply crosscut with the economic news that you find everywhere on the internet.
Other solutions also allow you to make money faster without having to worry about developing a strategy or even taking courses. These can be accounts managed by investment professionals or social trading that allows you to copy purely and simply transactions made by the most profitable traders of the platform on which you are registered.
Remember to check that the broker you choose includes these features.