What is Forex trading and how does it work? How to invest in the currency market or Forex market? In this section you will find all the information you need to negotiate currency pairs.
Forex is also commonly known as the Foreign Exchange Market and represents the largest market in the world, where one currency is exchanged for another. It is an OTC market, or an over-the-counter market, that is, a market without headquarters (as is the stock market instead), in which traders from all over the world can participate thanks to access via the Internet. To participate in the Forex market it is necessary to register with one of the many Forex brokers, in order to have access to a trading platform and thus have the opportunity to invest in Forex.
How does Forex trading work?
The Forex market is the most liquid financial market in the world, where exchanges worth over 5 trillion dollars a day take place: this is an impressive figure, which can easily make it clear how many private traders and even institutional investors take part in the market of Forex daily. Here currencies are bought and sold. Each of them in the Forex market is abbreviated to three digits (for example USD indicates the US dollar; EUR indicates the euro; the GBP the British pound; the JPY the Japanese yen; and so on).
These currencies in the Forex market are always listed in pairs: for example, one of the best known currency pairs is the EUR / USD, or the euro / US dollar exchange rate. The mechanism for buying and selling currency pairs in Forex is simpler than you think: it is always about buying and selling a currency pair simultaneously. That is, you buy one currency of the pair (like the EUR), to simultaneously sell the other currency of the pair (in our case USD).
Obviously the value of a currency pair varies according to various factors, such as economic and political news regarding the countries of the two currencies included in the pair, but also macro economic data, data relating to the industrial sectors of the two countries, and so on.
The mechanism follows the logic of the market, that is, the logic of supply and demand. The more demand there is for a currency, the more appreciated it is. Conversely, the more there is an offer for a currency, the more it depreciates.
In currency pairs that are antagonistic to each other, when one currency strengthens the other loses value: therefore if in the EUR / USD pair the Euro strengthens due to positive financial news from some European states, then the US dollar weakens losing value.
In other words, the value of a currency represents the views of the market and investors on the state of health of the economy in the nation of the currency.
To facilitate your work, you could evaluate the use of free Forex Signals, which represent precise indications reported by a broker or an analyst (reliable source), or specific indications regarding a certain trend movements.
In our case we would be sent some information to follow on the trend of the EUR / USD currency pair.
Simultaneously with the Forex signals, you can deepen the topic regarding the Forex – Currency exchange charts. In the specific case, we can distinguish the live Forex Charts (daily changes in real time) on the main exchange rates, which you can find for free on our blog together with a detailed explanation on how to read the Forex charts and useful tips on how to interpret Forex charts in technical analysis.
Forex trading: what the long and short positions are
In Forex trading, as well as in stock trading, traders can open long or short positions to invest according to their forecasts. Knowing the meaning of these terms is essential if you want to operate in the stock market, so let’s explain them in detail.
Long position: opening a long position means investing upwards, therefore with bullish forecasts in the value of a currency pair. That is, the value of the base currency is expected to increase, so that it can be resold at a higher price once the position is closed. Therefore, we will buy the base currency of a pair, to sell the listed currency at the same time.
Short position: opening a short position means investing downwards, therefore with bearish forecasts in the value of a currency pair. That is, the value of the base currency is expected to drop, so that it can be bought back at a lower price once the position is closed. Therefore, we will sell the base currency of a pair, to buy the listed currency at the same time.
Forex trading: the currencies
As we said, traders buy and sell in the Forex market. As we mentioned in the previous pages, there are eight currencies that are most traded in the Forex market:
New Zealand Dollar
Forex trading always takes place with currency pairs, because when you open a position you buy one currency and sell another currency (or vice versa: you sell one currency and buy another one). So when you hear the term “trading with EUR / USD”, it means that traders buy one of the two currencies (EUR or USD) and sell the other (or vice versa).
If I want to open a long position with the EUR / USD (because I think there will be a rise in the exchange rate of this pair), it means that I will go to buy the euro while simultaneously selling the same quantity (compared to the current exchange rate) of US dollars.
Forex trading: prices bid and ask, what they are
Each currency pair has a demand / offer rate which is also called a “Bid / Ask rate“; it is the value at which you can buy and the value at which you can sell that currency pair at a given time.
|Currency pair||Bid (Offer)||Ask (Demand)|
The “Bid” price represents the maximum price that buyers of a particular currency pair want to pay to buy it.
The “Ask” price represents the minimum price with which the sellers of a given currency pair want to be paid to sell it.
This means that:
A trader can buy 1 EUR and sell $1.1167 (at the demand price).
A trader can sell 1 EUR and buy $1.1168 (at the offer price).
The difference (called spread) between the bid rate and the ask rate indicates the liquidity level of the currency pair being exchanged. Usually, the smaller the spread, the better the liquidity (i.e. the greater the number of transactions in progress).
Asian session : from 11 pm to 10 am Central Europe time
European session: from 9 am to 6 pm
American session: from 2 pm to 11 pm
Is it possible to earn with Forex trading?
With online Forex trading all traders can start to reap their profits even after a few minutes, precisely because the currencies move quickly within the Forex market, called OTC (over-the-counter market or not tied to a real own exchange) or off-exchange, thus obtaining profits when you close your operations positively. The time for each open position varies from several minutes to several months, depending on the type of trading you choose.
Obviously, as profits are made, losses can be suffered. So pay close attention and be aware of those who tell you that it is all roses and flowers.
In any case, keep in mind that, since it’s the largest financial market in the world, there are around $ 1.5 trillion in currency traded every day. So it is not difficult to be able to earn, but especially if you follow the guides on Meteofinanza.com, you will become professional traders.
Inside the Forex Guide for beginners that you will find in our blog, you can find a valid guide to choose not only the forex brokers, but also the best basic Forex strategies, useful to make you understand the difference between the various trading strategies, but above all they will help you understand what the right Forex strategies are for making money with trading.
We consider it useful to advise you also to invest with the intraday Forex technique because, apart from being one of the trading styles most used by traders, it is also preferred by those who love to carry out short-term investment operations. Basically, those who trade intraday open and close positions within one day.
Forex Trading guide for beginners
If you landed on this page, it is because you are looking for useful information to know to start trading Forex. Below you will find definitions that every Forex trader worthy of respect must know well and always keep in mind if he wants to close his profits positively.
Market Mover is a term used by all Forex traders, referring to the major currency pairs, such as The Majors. The majors represent the most liquid currency pairs on the market and are often exchanged offering profit opportunities through a speculation operation carried out by traders.
Time zones and liquidity in the Forex trading
While it is possible to trade with stocks, bonds, currencies etc., but only during the working hours of the exchange, with Forex trading the traders can operate 24 hours a day for 5 days out of 7 as the currencies are free of hourly restrictions.
In the Forex market, traders operate with the hope of generating profits by speculating on the value of one currency compared to another, as we have seen. Recall that currencies are always traded in pairs, with many combinations and offer opportunities to profit from exchange rates based on different global currencies.
Quote indicating 2 prices, called Bid and Ask.
It is commonly defined as a PIP the smallest whole increase in each pair of Forex currency, necessary and very important to understand and calculate the value of a commercial potential.
Margin and leverage are largely misunderstood; so make sure you know well what they mean before making a trade. Working with leverage involves risks, as it allows you to carry out transactions with an amount greater than the one held. If, on one side, it amplifies the gains, on the other hand it also amplifies the losses. We also remember that in addition to some basic terms, the different Forex opinions of the different traders must be kept in mind. With this, we advise you to follow the Forex opinions, where you can find useful tips to avoid traps and common mistakes made in Forex trading.
One of the best known and used online trading and Forex trading platforms is MetaTrader: in addition to offering a series of technical indicators, it allows you to analyze market trends, apply trading systems, and many other advantages. Before continuing further, please read the following notice.
Automatic Forex Trading and Forex Trading Algorithms
When it comes to Forex trading, the famous robots for Forex trading are often mentioned. Forex trading robots are nothing more than software that implements an algorithm based on a Forex trading strategy. Therefore each robot uses a different trading strategy for its operation. But how exactly does a robot for automatic Forex trading work? A robot analyzes the financial graphs of certain assets and searches for possible trading signals. This analysis is carried out automatically by the robot, once you have downloaded and installed it on your computer (that’s why we talk about “automatic Forex trading”). You only need to download the software and connect it to your Forex broker’s trading platform (which is often a MetaTrader).
We want to specify that the Forex robots are also called EA, that is Expert Advisor. The Forex robots, or EA, can be:
- bought (and then downloaded and installed)
- programmed, based on your own trading strategies
Obviously in the second case it is possible to program them only if you know the programming code of the Expert Advisors for MetaTrader; otherwise, it is always possible to pay a developer to have the robot programmed according to your trading strategies. In both cases, when you use a robot, it will be this robot that will analyze the financial charts for you, and provide you with the related trading signals (i.e. in which direction to invest, whether upwards or downwards).
In this case, it is up to you to choose whether to invest following the trading signals received by the robot, or if you prefer not to follow them. Other robots, on the other hand, besides analyzing the graphs and providing you with the trading signals, will also invest on your behalf. This means that you can select the number of transactions that can be opened on a daily basis, in addition to the tax to be invested for each individual open transaction.
These are therefore two different types of robots: on the one hand those that only provide trading signals, on the other the robots that not only limit themselves to that, but also invest on your behalf (completely automating the trading process). Obviously, in both cases the robots will always follow a trading strategy: that’s why it is essential to make sure that the strategy that your robot will use, is a valid and reliable one.
Best regulated Forex Broker
We recommend trying the Forex Trading Demo with a free demo account offered by the best EU authorized Forex brokers (Cysec).
Test your favorite Forex trading System on regulated brokers, we recommend trying and practicing before starting with a real account. In our opinion, it’s better to leave automatic Forex trading aside, as it is not reliable. We report the Advisory Commission against Forex Fraud: http://www.cftc.gov/
eToro: Forex trading on the social platform
eToro is a very famous broker at an international level, thanks to its social trading platform and other interesting functions, like Social Trading.
What is social trading? On the eToro platform, traders can communicate with each other, exchange opinions and strategies. In this way users can grow together and benefit from the advice of the most experienced ones.
Another very popular feature on the eToro platform is copytrading. Traders can in fact copy other people’s operations and obtain profits if the copied person obtains a return. On the other hand, obviously both would suffer a loss.
Are you curious to test the eToro social trading platform? The broker offers a free demo account! In this way you can trade online on Forex and other markets without risk!
Trading on IQ Option: Forex, CFD, ETF
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All you have to do is to find the right tools for your financial goals!
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Forex Broker AvaTrade
AvaTrade is a Forex broker that allows you to operate with many currencies pairs and financial assets.
You can do trading on Forex both with CFD and binary options, which in this case will be called Forex options.
The broker is multi-regulated and can operate in various jurisdictions, including Europe. By opening an account on AvaTrade you are sure to operate with a serious and reliable broker that offers different trading solutions.
How to start? Click below and fill out the form!