Forex market fundamentals07 / February / 2020
The Forex world has become very popular among amateur traders in recent years. This article will acquaint you with the basic concepts related to online trading.
What is Forex?
The term Forex comes from the English FOReign EXchange, translated as "foreign exchange", and represents the most liquid market in the world, where trillions of currency trades are conducted daily.
The term Forex Trading refers to a number of activities whose purpose is to profit from buying and selling currency (definition borrowed from Forexitalia24 website). Today, high-speed internet connections and the emergence of online brokers have enabled private traders to participate in trading on a market that used to be exclusively for central banks and large investment funds. The retail market has grown and there are now millions of traders around the world who use trading platforms to make small transactions using a variety of financial instruments to speculate on markets.
Nowadays, even those who do not have a lot of capital can trade currency pairs with the help of financial intermediation of forex brokers. In the future, after we understand what Forex is, we will consider how it happens in practice. It is very important to understand the basics in order to start working with Forex correctly.
It is advisable to start with a demo account, that is, an account that allows you to trade using virtual money. In this way, you can avoid risks and practice before starting real trading.
How does Forex work?
Forex trading always works based on the concept of buying and selling currencies. Every trader can make money in the currency market by buying one currency and reselling it in relation to other currencies when the exchange rate is favorable for making a profit. This is similar to the stock market, where shares are bought in order to resell them at a favorable time to make a profit.
In Forex, currency pairs are always implied. For example, the euro/dollar pair is denoted as (EUR/USD), where the euro is the base currency. Simply put, it denotes how much dollars it takes to buy the euro.
For trading, a trader can use the trading platform, that is, the software provided by a broker a company that offers access to the financial market by registering on the site. Forex is an over-the-counter market OTC (Over the counter), and thus is not subject to external influence and all transactions are fully transparent.
Currency pairsLet's give a practical example to understand how Forex works. Let's assume that EUR/USD exchange rate is 1.1174 (EUR/USD).
The euro is the so-called base currency, while the dollar is the quoted currency. The exchange rate (1.1174) indicates how many dollars (USD) it takes to buy one unit of the base currency, i.e. 1 euro. In this case the trader will spend 1.1174 dollars.
This is the basic concept of trading. If a trader wants to sell, he will receive 1.1174 dollars for selling 1 euro.
Of course, those who are engaged in trading, do it in larger volumes and do not buy physical currency. To date, online trading is carried out using tools such as Contract For Difference (CFD), tools that accurately replicate the cost of exchanging a pair. Thanks to the Contract for Difference, a trader can profit from the price movement, instead of physically buying currency by investing capital in increasing the pair (Long) or in its depreciation (Short). Contracts for Difference are a product of financial leverage, an instrument that requires much less capital available and has a multiplier effect.
How do I learn to practice Forex?
The best way to learn how to trade Forex is to open a free demo account.
This is how you can practice and learn how to trade for free.
To make decisions, it is very useful for traders to conduct technical analysis. It is necessary to master this technique in order to increase your chances of success. Technical analysis is based on prices and charts. By studying the charts, traders are trying to identify currency trends.
In addition, moving averages are used (50 days or 200 days). When a moving average for a short period of time (50 days) intersects with a long-term moving average, it may indicate a trend change that will be reflected in prices. Therefore, traders should use other indicators to help themselves, including a variety of oscillators such as the Relative Strength Index (RSI) and MACD.
In fact, there are many such indicators, so traders must understand which ones work best. Some traders use Bollinger Bands.