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The foreign exchange market is the currency market, also known as the Forex or foreign exchange market.

Every one of us who has traveled abroad is familiar with the foreign exchange market: in this market one currency is exchanged for another: dollar for euro, Swiss franc for euro, Japanese yen for the dollar, and so on.

Forex Broker: Traders Prefer the Foreign Exchange Market

Apart from exchanging currency for tourist reasons, the forex currency market can be used to speculate on currency exchange rate fluctuations.

The Forex market is often referred to as an online investment, as forex traders bet on different currency pairs in order to make money online through trading.

In this article, we will do a forex explanation, the definition of the foreign exchange market, the functioning of exchange rates, and online forex trading.

Foreign Exchange Market

What is the currency market? The currency market is a stock market where currency pairs are traded. Also called "Forex Exchange", the currency market brings together players who wish to exchange one currency for another according to their needs.

In the currency market, currencies are exchanged according to market prices: IDB and ASK (supply and demand). Quotations are Over-The-Counter or OTC.

Currency pairs are quoted in pairs: on the foreign exchange market one currency is converted into another.

For example, the euro-dollar rate of 1.0850 means that to buy one euro you have to pay 1.0850 dollars. The price of the exchange rate always means the same thing: how many units of the second currency you have to pay to buy one unit of the first currency:

Exchange rate USDJPY 111.211 - to buy one dollar you have to pay 111.211 Japanese yen.

Exchange rate GBPUSD 1.25043 - to buy one pound sterling you have to pay 1.25043 US dollars.

forex trading: Currency Market Traders

The players in the foreign exchange market are:

Central Banks
investment funds
Forex Brokers
Banks
individuals
large multinationals

forex market: the advantages of the foreign exchange market

To speculate in forex or to hedge in the foreign exchange market, it is best to first understand its characteristics and specifics.

The foreign exchange market is the largest market in the world, with the highest liquidity. The currency exchange trades in real time any kind of world currency. Exchange rates are variable for most currencies, which generates interest from investors.

Forex liquidity and large volumes in the foreign exchange market

In the international economy, millions of transactions involving currencies take place every day.

When a European exporter buys raw materials denominated in dollars, he has to convert euros to pay the bill.

Most central banks regulate the exchange rates of their currencies: for example, the SNB closely monitors the exchange rate of the Swiss franc. To do this, it intervenes in the money and forex markets.

This is because there are a large number of players in the current money market, which results in large transaction volumes.

If you are looking for a market to speculate on the exchange rate, forex is the solution to your investment strategy. The functioning of the foreign exchange market allows trading on a large number of exchange rates.

Here are the 8 most liquid and traded currencies in the world:

US Dollars (USD),
The Euro (EUR)
The pound sterling (GBP)
Japanese Yen (JPY)
The Swiss franc (CHF)
The Australian Dollar (AUD)
The Canadian dollar (CAD)
The New Zealand Dollar (NZD)

Forex explanation - Variable exchange rates and volatility

During the day, the value of one currency relative to another can vary according to supply and demand, influenced by economic, social, or political factors.

In general, the exchange rate reflects the economic conditions in both countries. Frequent currency fluctuations are given in the foreign exchange market and represent the potential profit for a foreign exchange trader.

The more volatile the currency pairs are, the more interesting it is to make scalping, high-frequency trading and other short-term forex trading strategies work. The interbank foreign exchange market is one of the most volatile markets in the world.

Volatility can play tricks on you, especially if you trade forex with leverage: your gains and losses are multiplied by the forex leverage.

Foreign exchange market with reduced fees

The costs on the international currency markets are quite low: for example, the spread (the difference between the purchase price and the selling price) is 1.2 points on the euro-dollar. This means that to buy a 100,000 euro contract, the trader will pay 12 US dollars.

The value of the spread, in this case, is therefore 12 USD, calculated according to the following formula: the spread value of the point.

In percentage terms, these fees are very competitive! The spread is the difference between the purchase price and the sale price and represents the cost of the transaction.

The spread is debited from your position when the order is opened. This is why forex orders are initially negative when opening the position on the current exchange rate.

Foreign Exchange Currency Exchange: Leverage, Spread and Forex Contract Size

The foreign exchange money market is the market in which the most leverage is used.

Leverage is a multiplier of gains and losses. For example leverage of 1:500 means that for every 1 euro invested, the forex broker adds 500 euros and you can invest a position 500 times larger than your initial capital.

Many traders consider very attractive leverage offered by online brokers.

Yes, leverage is a useful tool if it is used well, but you should be aware that this kind of stock market investment is risky. Profits or losses are magnified and can be considerable.

Imagine that you have just managed to close a position on the euro-dollar exchange rate with a volume of 1 lot. You gain 50 pips. Your account is in US dollars.

How much did you win? The calculation is very simple: 10 dollars is the value of the point on a euro-dollar contract * 50 pips won = your dollar win is 500 US dollars.

Most online brokers don't charge commissions on forex if the client pays spreads.

On ECN or No Dealing Desk accounts customers pay interbank spreads and for the online broker a commission.

The fee depends on the type of trading account you choose.

Forex contracts have a standard size: 100,000 units. The currency of the forex contract is the first currency of the currency pair. Here are the contract sizes:

1 lot EURUSD = 100,000
1 lot GBPUSD = 100 000 pounds sterling
1 contract USDJPY = 100,000 US dollars
1 AUDCAD contract = 100,000 Australian dollars

How to trade currencies in 3 steps:

Now that you've mastered the basics, we'll take a look at how to trade the currency market.

Choose a currency pair
Analyze the market - identify the trend in the currency market
Open the exchange rate position

You understand that the purpose of Forex trading is the conversion of one currency into another currency, in other words, you buy one currency and sell another at the same time.

Most traders prefer only the most popular pairs, but you can trade any combination of currencies if you have enough money in your account.

Market research and analysis is the basis of currency trading. Without rigorous technical or fundamental analysis, you are trading confused and emotionally influenced.

You should know that in this case, the end is not very happy.

We advise you to trade currency rates responsibly and before making a decision, take into account short and long term charts, identify trends, see what the indicators say, mathematics, understand the economic climate, check the news, and published economic indicators. Create your trading plan and follow it!

Purchase euro-dollar rate

Identify the most likely direction, the optimal point of entry into the market at the right time.

Buy EURUSD (long position):

Price: 1.3249 / 1.3250
Account balance: $500
Lever 1: 100
Volume: 0,1 lot

Without leverage you need 1.3250 x $10000 = $13250. In margin trading, all you need is $132.50 in your account (locked-in margin). 1 pip is equal to a $1 profit or loss.

Later, the price reaches 1.3300 / 1.3301 and you decide to close your position and take your gains.

The difference between opening and closing is 1.3300-1.3250 = 0.0050 or 50 points. The payout is 50 x 1 = $50 or $10,000 (1.3300-1.3250) = $50.

Account balance after the closing position is $500 + 50 = $550

Sale euro-dollar rate (short position):

Price: 1.3249 / 1.3250
Account balance: $500
Lever 1: 100
Volume: 0,1 lot

Without leverage you need 1.3249 x $10000 = $13.249. In margin trading, all you need is $132.49 in your account (locked-in margin). 1 pip is equal to a $1 profit or loss. Later, the price reaches 1.3268 / 1.3269 and you decide to close your position and take your winnings.

The difference between the opening and closing price is 1.3269-1.3249 = 0.0020 or 20 points. The resulting loss is 20 x 1 = $20 or $10,000 (1.3300-1.3250) = $20.
The account balance after the closing position becomes 500-20 = $480.

Foreign exchange risk management

As you have noticed in the example above, Forex trading can be extremely risky. As with any risky activity, the level of profit observed is directly proportional to the risk!

Fortunately, there are different methods of controlling and minimizing risk:

Identifying the price at which you exit the position if the unfavorable development
Protects your stop orders to minimize losses and take to profit orders to maximize profit
Adjust the volume so that any loss does not exceed 2-3% of your trading account.
The report assesses the risk/reward (loss/profit) and decides whether the transaction is justified:

Risk/Reward = (Entry Price - Exit Price and Stop Loss) / (Target Pursued or Take Profit - Entry Price)

You have to understand that the best traders in the world also have negative trades.

Remember, it is important to win a lot when you are right and lose as little as possible when you are wrong! To improve your foreign exchange trading skills, feel free to test your strategies on a demo account.

Forex is accessible to everyone with the possibility of opening an account from as little as €200 and thanks to the leverage effects made available to individuals who wish to trade and take advantage of opportunities in the currency market to make profits.

Forex is also a very volatile and liquid market with large movements and easy position taking thanks to high liquidity.

However, successful forex traders are still rare, which raises the question of what is their recipe for successful forex trading?

Observe good money management

It is indeed a crucial element, even in times of loss or error on your part because the human factor is always a variable to take into account.

Good money management and risk control can help you control your losses.

Example: if you always risk 10€ per trade and you keep the winning positions to have bigger gains, you can start to develop a long term winning strategy.

The risk/return ratio is equally important for the health of your account and for an effective trading strategy.

Have good management of emotions and discipline to all tests

Using good money management helps you here to stay the course and continue your trading activity even in the darkest hours.

Nevertheless, the psychology of the trader is a fundamental element of his success. You have to be disciplined!

For example, you should be able to take a new position on the forex even if the last 6 positions have been lost, in fact, you should even be enthusiastic about taking the next trade because it is most likely the next one that will be the right one.

Diversify

It is indeed necessary to know how to diversify your investments or trading strategies in order to successfully speculate on the forex.

This offers you a balanced and potentially a multiplication of your profits while making your investments more secure.

For example, You can develop a range strategy and a trend strategy to meet both market conditions and take advantage of any opportunities and balance your trading.

Follow the price action

All traders who have successfully speculated on the forex and even other markets agree that the most important thing when it comes to technical analysis is to follow the price first.

Indicators play an important role but come second to the movement of the stock price on your charts.

Consider the economic calendar

It is also important to know the underlying fundamentals that could change or strengthen market conditions.

The economic calendar then plays an important role in your understanding of the market environment and allows you to better control your risk in the face of sometimes violent economic events.

Having good trading tools

Successful forex trading is all about making the right decision at the right time and repeating the process over and over again.

To help you achieve this level of trading professionalism, here are some tools that can boost your results.

A functional and efficient trading platform that is easy to learn and use on a daily basis. In this environment, the Metatrader 4 trading platform, also known as MT4, is a must-have, both for its robustness and for the satisfying experience of countless successful traders.

Good trading support tools: Metatrader 4's trading tools

Analysis with high-performance indicators,

Risk and transaction management,

Trading account management,

Monitoring of the price action,

Monitoring of economic news flows,

Trading signals,

Test strategies in real conditions.