Forex, or the foreign exchange market, is a global decentralised market for trading with currencies. This type of trading allows traders to buy, sell and exchange currencies at current prices and thus make profit by doing so. The Forex trading market is the largest market in the world and involves huge players such as banks for example. Since it became globally available to millions of people, Forex trading has become a popular way of making money to both professional and rookie traders. Naturally, trading with foreign currencies is a risky activity, but it can be extremely profitable when it’s done right.
How Does Trading with Forex Work?
Forex is a simultaneous buying of one currency and selling of another currency. Such currencies are known as currency pairs and they can include any two currencies available on the market. For example, some of the most popular currency pairs are USD/EUR, EUR/USD, USD/GBP and GBP/EUR. For those that aren’t sure what these letters mean, the first two letters are usually representing the country, while the third is representing the currency. The sign “/” between two currencies shows how much 1 unit of the first currency is worth in the second currency. For instance, if we have a EUR/USD pair next to 1.25600 that means that 1 EUR is worth 1.25600 USD. Whether a trader buys or sells a particular currency depends on whether the trader believes the currency’s worth would go up or down. It has to be pointed out that the Forex trading market works 24 hours a day, five days a week.
What are the Most Important Criteria for a Good Forex Broker?
Anyone who plans to try Forex trading has to register with a Forex broker first. However, this is not an easy decision because you provide your personal information, enter credit card details and deposit money at such sites. Therefore, you should be aware that there are certain criteria that show whether a Forex broker is reliable or not.
Regulating bodies have very high standards that have to be met by their licensees. Therefore, whenever you sign up with a Forex broker that is approved and regulated by any of the world’s most respected organisations, you can be sure that the broker won’t fail your trust. Several licences that guarantee safety, fairness and user protection are CySEC (Cyprus), FCA (United Kingdom), ASIC (Australia) and BaFin (Germany). Some operators also tend to apply for a licence by the IFSC (Belize), but this one is not as reputable as the previously mentioned ones.
Popular Forex trading operators have in their possession a large amount of funds that belong to their customers. Traders rarely use the total amount of cash they invested and therefore they have to be sure that their money is safely stored by the broker. One of the easiest ways to find out whether the Forex trading company does everything in its power to keep customers’ money safe is to check it’s terms and conditions page. If there’s a section which explains how the broker keeps clients’ money in separate bank accounts in reputable banking institutions, you can trust that particular broker with your investment. Additionally, as a trader you’ll be asked to verify your identity by providing personal information and give financial data when making a deposit. Thus, always check what the broker’s privacy policy is, whether it shares such info with third parties, whether it uses the latest encryption technology and etc.
Naturally, Forex brokers exist because they make profit by providing traders with the possibility to trade using their platform. Thus, each broker has its own fees and costs. Sticking with the Forex operator that has the lowest fees is not always the best idea, especially if it’s not a licensed one. However, trying to find better offers is always recommended. Pay attention to the minimum deposit amount that can vary from $1 to $500 and the minimum contract amount (between 0.1 and 0.001). Also, check the leverage which can be either fixed or starting from a particular point of pips. Usually, the leverage goes from 1.5 pips to 2 pips.
Forex trading is trading with foreign currencies and that was already explained. However, the reason this is mentioned again is to highlight the importance of having a good variety of currency pairs to choose from. Understandably, each broker has its own offer that not always counts the same number of pairs featured at other operators. This number sometimes can be better and often can be worse in comparison to other Forex trading sites’ offer. Generally speaking, there is no an average amount of currency pairs that can be considered the best because some brokers feature less than 30 currency pairs and top brokers offer over 300 pairs. Nevertheless, it can be said that anything over 150 is a good selection of trading options. Naturally, it’s not only important how many currency pairs a broker features, but also what pairs. If the most popular pairs like USD/EUR and EUR/GBP are not available, you might want to move on to the next Forex broker.
Obviously, you can’t trade with foreign currencies unless you have the appropriate equipment for that i.e. you need Forex trading software. There are various types of Forex trading platforms and each of them comes with positive and negative aspects. Generally, what’s most important about trading software is stability and reliability. Nobody wants to deal with software crashes because they can affect the trades in a negative way and even result with void winnings. Some commonly found types of platforms are MetaTrader, Mirror Trader, MTX, Viking Trader, Swordfish and Power Trader. Another thing that shouldn’t be ignored is availability on mobile devices. Mobile Forex trading is very popular since it makes it possible for traders to keep an eye on trading opportunities anytime and anywhere. Thus, software that supports iOS, Android, Windows and Blackberry smartphones and tablets should always be preferred than software that doesn’t.
Just like the name demo account suggests, this is in fact an account that exists for practising purposes only. Demo accounts have all the features of real money accounts and let traders get familiar with Forex trading and the platform. So, if someone wonders why demo accounts are an important feature, the answer is simple: they provide you the practice you need before starting to invest real money in Forex trading. Therefore, brokers that let you test and try their software prior to requiring deposits are a much better option than sites that don’t have this feature. Additionally, it’s smart to stick with Forex brokers that keep their customers well informed and educated by providing learning materials and tools. Anything from basic getting started guides to complex webinars about Forex is welcomed to both rookie and experienced traders. Some other types of preferred learning materials include e-books, step by step instructions, Forex glossary and etc.
Those that are new in Forex trading might have heard Market Maker, ECN and STP many times, but they are probably not aware what these words mean. Well, all three are different types of brokers and hence an important factor for choosing a Forex trading operator. Market Maker or also known as Dealing Desk is an artificial type of a broker that simply quotes prices. Straight Thought Processing (STP) is a broker that is a hybrid between Market Maker and ECN that routes some or all your orders directly to the market. Electronic Communications Network (ECN) is the closest type of a broker to traditional brokers that allows traders access to the market. Naturally, all these types of Forex trading brokers have its main pros and cons. Prior to registering with an operator, you should be well aware what type of a broker suits your needs and make sure that site offers it.
Finally, the last criteria for choosing a good Forex broker is the customer support service. Many traders fail to acknowledge the importance of a professional support team that is always there to help with any issues or questions. Therefore, it’s highly recommended to join Forex trading sites that provide a support team that works 24 hours a day, seven day a week. If that’s not an option, at least make sure your chosen broker’s representatives can be contacted every day and throughout most of the day. Also, don’t forget to pay attention to the variety of contact options such as live chat, phone, e-mail, Skype and etc.
Which Currency You Should Prefer to Trade?
Once you’ve selected a Forex broker and used the educational materials featured at the site, you’ll be able to start opening trades. However, this action comes alongside several important questions and one of those is which currency pairs you should prefer to trade. This is a bit tricky part of Forex trading because requires traders to understand how the market works.
On one hand, there are the most popular currencies such as EUR, USD and GBP that offer high trading volume, but also small spreads. On the other hand, there are less popular currencies that have high spreads, but also low volume and move too slow. Thus, if you are looking for high volatility and constant action it’s the best to trade pairs like GBP/USD, USD/JPY or USD/EUR. However, if you’re not into tight spreads and don’t mind slow movements you can go for some less popular pairs such as AUD/USD, NZD/USD or USD/MXN. Major currency pairs can be a real trap to all traders because even when traders are right, they might lose. Hence, it’s important to find the most optimal pair regardless the fact that sometimes that pair might be GBP/USD and other times it might be GBP/CAD.
Overview of the Most Used Methods for Chart Analysis
There are several different methods that traders use for chart analysis when it comes to Forex trading. For example, traders can use fundamental analysis, technical analysis, sentiment analysis and etc. However, the first two on this list are by far the most commonly used ones and therefore they deserve your attention. Fundamental analysis is used to analyse changes in the market by monitoring factors like unemployment rates, interest rates, GDP and similar economic releases.
Technical analysis is either automated or manual and uses past price movement in order to determine whether the price of a currency would go up or down. Manual technical analysis involves tracking technical indicators and deciding whether to buy or sell, while automated technical analysis requires the trader to set signals of interest and teach the software how to interpret them. One thing that by some traders is seen as a pro and by others as a con of automated technical trading analysis is the removal of the human factor. Anyone wondering which method is the best, there’s not really a simple answer to that. Everything depends on the type of a trader, the time s/he has, the access to information and etc. Thus, it’s the best to test and see which one works the best for you.
The History of Forex
Forex trading is very interesting because it’s actually something that has been around for centuries. Even in ancient times there were people who were helping others to change money and took commission for their services. These people are, in fact, the first Forex traders. Trading with foreign currencies survived the medieval times and was present in early modern times as well. Back in 1880 the US company Alex. Brown & Sons traded foreign currencies, while during the 1920s the Kleinwort family were leaders in this field. However, Forex as we know it today marked its point of constant growth in 1973. After that year many countries such as USA, China and European countries started regulating foreign currencies exchange and it became available to the wider public. One important event for the rise of Forex was the creation of the gold standard monetary system in 1875.