To answer the question of what is currency trading or Fx trading, we are going to break down and define both terms:
The term trading is the activity through which one product is exchanged for another. You can trade with countless instruments: forex, commodities, indices, stocks, cryptocurrencies, etc.
The term Forex refers to the market in which some currencies are exchanged for others, as well as other types of financial instruments.
So, what is Forex trading? Forex trading is an activity, or even a profession, through which currency pairs are bought and sold to speculate on the rise or fall of the price of said pairs.
This activity is open to anyone who has a computer and internet access. Forex trading is a type of daily and international trading. States or companies (institutional trading), even individuals, like you, operate with currencies every day.
This trading is carried out through computer networks between traders around the world. This is the main reason why Forex is the largest and most liquid market in the world and the most accessible.
How Forex Trading works
The general logic is simple. Everyone who starts trading has the following question in mind: how to make money in Forex. The trader or operator of this market buys something when he believes it will go up in value, or sells it short when he thinks it will go down in value.
For example, let's imagine that the euro today is worth 1.2345 dollars. Once the market has been analyzed, the trader thinks that this value will increase in the next 24 hours. He opens a buy trade today and waits. The next day the euro is worth 1.2395 dollars and the trader closes the order, making a profit of 50 pips.
How much money does this represent?
It will depend on the volume of money that the trader has invested in that specific operation. The profit could be either $5,000 or $50,000.
However, delving deeper into the previous example, we see that things are a little more complicated. Let's start from the beginning to learn how to trade Forex.
How to Trade Forex with CFDs
CFDs are the product that has transformed the financial market into what it is today.
In the old days of Charles Dow there was no such trading. Investment only. Buying shares of a company with potential was the only possibility investors had. Should those shares rise in value, they could be sold and a profit would be realized. However, if they started to depreciate, probably, even if they wanted to sell them, no one would want to buy them.
To help your training, we are going to define some of the basic terms of Forex Trading with CFDs.
Terminology of Forex Trading with CFDs
To solve the question of how to operate Forex we need to be clear about some key concepts, since they constitute the basis of this activity:
currency pair
It is a key concept within the fundamentals of trading Forex. To make it simpler and within the context of Forex trading, imagine that currency pairs are a single financial instrument.
When looking at the EUR/USD pair or any other quote on your trading terminal, you will see two numbers:
The sale price (bid)
The purchase price (ask)
Which are shown this way: EUR/USD 1.05154/1.05162.
This quote implies that:
You can buy 1 euro with 1.05162 US dollars, the purchase price.
You can sell 1 euro for 1.05154 US dollars, the selling price.
Trading in the foreign exchange market works as follows. Imagine you want to buy euros and sell US dollars. When you press the buy button, your broker borrows a portion of the funds in your trading account as insurance for the transaction.
After a while, you close the order, assuming that the market moved in the direction you expected, that is, the euro increased its value compared to the dollar or the latter depreciated compared to the euro. At this point, your broker sells you the euros that appreciated in exchange for dollars that are now worth less.
There are two things you should keep in mind about Forex trading: first, traders sell currencies that they do not actually own; second, in each transaction a purchase and a sale take place; the two sides of the coin. For that reason it is a currency exchange.
These are the fundamentals of trading Forex in relation to the mechanical part.
Purchase order
In Forex trading, when a buy order is placed on, for example, the EUR/USD pair, a portion of the funds in the trader's account are used to purchase the base currency of the pair, in this case the EUR, and sell the pair's quoted currency, the USD. The price is expected to increase and thus make profits.
The broker carries out this transaction, which is called placing a purchase order. The order is placed either with the broker (market maker) or by communicating it directly to the Forex interbank market (ECN execution), which is where the large market participants are located.
When the profit satisfies the trader, he will close the order and the broker will carry out the opposite transaction, that is, he will sell euros and buy dollars.
Sale order
The reverse process, this is called short trading, the trader will first open a sell order. The reason is that the trader, once analyzing the market, considers that the price of the instrument is going to decrease, so he first places a sell order, and once the desired profit has been accumulated, he closes the position with a buy order. .
It is the minimum unit of change in price and simultaneously one of the most popular terms within the fundamentals of Forex trading.
When the selling price of the EUR/USD pair goes from 1.1234 to 1.1235, it means that it moved 1 pip.
Pips are the simple way for traders to calculate profits or losses, since their value depends on the volume of the operation.
Operation volume
It is the size of a position within the market and is measured in lots. When the transaction volume corresponds to 1 lot (100,000 units of the base currency), 1 pip is equivalent to 10 units of the quoted currency. For example, when trading 1 lot of the EUR/USD pair, 1 pip is equivalent to 10 USD.
Spread
The spread is the difference between the buying and selling prices. As you read above, a quote is the comparison between these two prices. The purchase price will always be higher than the sale price.
The spread is the reason why there is always a small negative balance when placing an order. In addition, it is one of the concepts to take into account when trading Forex, since it will influence the profits or losses that the trader may have.
Margin
Simply put, it is the amount of money the trader invests in a position. A retail Forex trader is not likely to have enough margin to trade the market directly, as the minimum limit is 100,000 currency units. That is why leverage is used.
In an example without leverage, if a trader wants to open a position of 1000 EUR and the current EUR/USD exchange rate is 1.250, how much money does the trader trade with? with 1250 dollars. If the trader has 2000 dollars in his account, this 1250 dollars will be taken from his account, this is known as margin. This margin is retained until the position is closed. *Note: the free margin is the result of subtracting 2000-1250= 750.
Leverage
It is another essential term to understand Forex trading. Leverage is a money multiplier. For example, a leverage of 1:100 can turn a €100 account into one that controls €10,000 of a currency pair, making even the smallest fluctuations in price profitable.
However, keep in mind that leverage is an opportunity that also comes with risks, since the amount of margin available has a directly proportional relationship with currency price variations. Therefore, if the market moves against you, it will affect the available margin in your account in real time and, if you do not have enough funds, the broker will liquidate your position, since it will not be able to keep it open.
Based on our previous example, if the trader's leverage is now 1:100, this implies that the trader contributes 100 times less, so the margin for the same trade would be $12.5.
Free margin
It is the difference between the account balance and the sum of the margins of the open positions.
Margin level
It is the (equity/margin) *100. When the level is 100% it means that equity and margin are equal. Therefore, the trader does not have free margin to operate (open more operations). This is called a margin call. When you trade Forex it is very important to observe this indicator, since it can prevent you from opening new operations. You can monitor it on your trading platform.
We assume an account with a balance of 10,000 euros, with a margin of 1,000 euros. If this position accumulates 9000 euros of losses then your margin is equal to your balance, that is, 1000. This is the margin call.
Stop Out
The Stop Out is the minimum margin level from which the broker begins to close your open positions.
Trading account
Account offered by the broker to the Forex trader to operate.
Trading Platform
Software offered by the broker to the trader so that he can access the market and operate.
Do you want to know more about Forex trading? You can see all this terminology related to currency trading in more detail in the following YouTube tutorial:
As Forex trading emerged and grew with the development of the Internet, so did retail traders seeking additional information to excel in their trading potential.
This led to the birth of a large number of forums on Forex Trading that have a considerable number of active contributors, being able to find information about this market in almost any language. Since the market operates 24 hours a day and 5 days a week, there are Forex traders from all over the world.
In addition to the aforementioned forums, Forex traders can find various media and different new ways to communicate. Although there are a wide variety of Facebook groups about Forex trading, this market has evolved into something bigger, as there are many social networks designed especially for traders.
Is this why Forex is so social?
Not really. There's still more. Forex trading has evolved beyond pure communication to action. Forex is a very interesting market because it gave rise to what is known as social trading.
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1.This is a marketing communication. The content is published for informational purposes only and should not be construed in any way as investment advice or recommendations. It has not been prepared in accordance with legal requirements intended to promote the independence of investment reports and is not subject to any prohibition on trading prior to the dissemination of investment reports.
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3.To ensure that clients' interests are protected and the objectivity of the Analysis is not affected, Admirals has established relevant internal procedures for the prevention and management of conflicts of interest.
4.The Analysis is prepared by an independent analyst based on his personal estimates.
5.While every reasonable effort is made to ensure that all sources of the Analysis are reliable and that all information is presented, to the extent possible, in an understandable, timely, accurate and complete manner, Admirals does not guarantee the accuracy nor the integrity of any information contained in the Analysis.
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