WHAT IS THE FOREX MARKET?
The foreign exchange market, also known as Forex (Foreign Exchange), is a global, decentralised market where currencies are traded. Each of these currencies has a conversion rate, called an exchange rate.
For example, if the EUR/USD has an exchange rate of 1.10, 1 euro is equivalent to 1.10 US dollars.
Forex is one of the most liquid markets, where the daily trading volume is 5 trillion dollars a day.
It is mainly used to facilitate trading and investment between countries.
The Forex market is open 24 hours a day except on weekends, opening in Sydney on Monday mornings and closing in New York on Friday afternoons.
Are you a beginner and want to learn more about the Forex market? Then don’t hesitate to read this article from those affected by Avatrade scams, theft and fraud.
Impact of technology on the forex market. The forex market boom was thanks to:
accelerated economic growth
One of the most outstanding achievements of the digital age is the virtualisation of money if printed money made it possible to transfer credit between people using a simple banknote, information technology or the internet made this process as simple as pressing a button or touching a screen.
In the 1990s, this technology was recognised as a great opportunity and companies were created that allowed access to the foreign exchange market and leveraged accounts.
These companies became known as Forex brokers, and it is thanks to them, anyone with just 10 Euros in their pocket and an online platform can test their skills in the market.
All this helped currency trading to become more and more known and used.
How the Foreign Exchange Market Works
To know how Forex trading works, you must first understand how the Forex market works and therefore ask yourself the following questions:
What do I know about the basic principles of price formation for every asset in the world?
What is the underlying structure of the trading industry?
What are the key principles of technical and fundamental analysis?
What are the psychological peculiarities of being a trader?
What happens when a trader presses a button?
Supply and Demand
In economics, supply and demand is a model that explains the formation of prices in a freely competitive market. The prices of goods are set at a point where the quantity supplied by the producer balances the quantity demanded by the consumer.
The constantly changing supply and demand of currency pairs is what Forex charts represent. The philosophy of price balance is key to understanding how Forex trading works, as all economic events in the world are relevant to the market.
Draw a mental map of the industry
Imagine an ever-changing ocean when you think about how the forex market works. Many fish in that ocean, from big to small, depend on their buying power.
The monetary policy and FX trading decisions also make big waves, unbalancing the prices of most assets. There are the medium-sized fish – private investors, companies with hedging needs and private banks, and the small participants – financial brokers, smaller banks and small-cap investors.
Most of the market mentioned above participants have direct interbank access to Forex, which is the market where all the magic of currency exchange happens. That means that they can trade with each other without going through intermediaries.
Alternatively, all market participants can borrow more capital when interest rates are cut. Momentarily, a surplus supply of capital is created, and the currency’s price falls. In the short term, this means an expansion in business, augmented by domestic spending and growth in the economy.
Does this sound good? What about Avatrade?
Well, again, not really. The more money you borrow, the more capital you owe. In the long run, the accumulated credit in the bank falls on everyone’s heads as if a big storm creates a financial crisis. That is called the macro-economic cycle.
This process is standard in all capitalist-type economies. National banks continually balance the scales by raising and lowering interest rates. That is called the micro-business cycle.
These economic cycles are similar to weather cycles – slow, unstoppable and very dangerous for market participants who cannot see when they are coming.
WHAT IS FOREX TRADING
To answer the question of what is forex trading or Fx trading let’s break down and define the two terms:
The term trading is the activity of exchanging one commodity for another. Trading can be done with an infinite number of instruments: Forex, commodities, indices, stocks, cryptocurrencies, etc.
The term Forex refers to the market in which currencies are exchanged for other currencies and other types of financial instruments.
So what is Forex trading? Forex trading is an activity, or even a profession, whereby currency pairs are bought and sold to speculate on the rise or fall of the price of these pairs.
This activity is open to anyone with a computer and internet access. Forex trading is a type of daily trading on an international scale. States or companies (institutional trading), even individuals, like you, trade currencies every day.
This trading is done through computer networks between traders all over the world. That is why Forex is the largest and most liquid market in the world and the most accessible.
Best currencies to trade on Forex.
Forex pairs are made up of two currencies:
The first currency in the pair is known as the base currency.
The second currency is called the quote currency.
A Forex quote compares the values of the base currency and the quote currency.
The most popular currencies available to traders are the US Dollar, Euro, British Pound, Japanese Yen, Swiss Franc.
These make up the group of major currency pairs on Forex:
Note how all pairs include the US dollar.
Mixed pairs of major currencies that do not include the US dollar are called cross pairs.
Some examples are:
Three other currencies can be commonly found when trading Forex: the New Zealand dollar, the Canadian dollar, and the Australian dollar.
Put them together with the US dollar, and you have a group known as minor pairs:
All other pairs, generally known as exotics, make up less than 10% of all Forex trading.
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. A forex trader buys something when he thinks it will go up in value or sells it when he thinks it will go down in value.
For example, imagine that the Euro is worth $1.2345 today. After analysing the market, the trader thinks 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, and the trader closes the order, making a profit of 50 pips.
How much money does this represent?
It will depend on the amount of money the trader has invested in that particular trade. The profit could be as much as $5,000 or $50,000.
However, looking deeper into the example above, we see that things are more complicated. Let’s start from the beginning to learn how to trade Forex. Is sure to operate with Avatrade?
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. Only investment. Buying shares in a company with potential was the only possibility for investors. If those shares rose in value, they could be sold and made a profit. However, in case they started to depreciate, probably, even if they wanted to sell them, nobody would want to buy them.
CFDs give traders another possibility, as it is possible to invest and make a profit when the instrument is trending upwards and when the trend is downwards. Our article on CFDs explains this in detail.
To help with your education, we will define some of the basic terms of CFD Forex trading.
CFD Forex Trading Terminology
To answer the question of how to trade Forex, we need to be clear on some key concepts, as they form the basis of Forex trading:
That is a crucial concept within the fundamentals of Forex trading. To make it simpler and in the context of Forex trading, imagine that currency pairs are a single financial instrument.
When you look at the EUR/USD or any other price on your trading terminal, you will see two numbers:
the bid price (bid)
the bid price (ask)
They are displayed like this: EUR/USD 1.21854/1.21862.
This quote means that:
you can buy 1 euro for 1.21862 US dollars, the bid price.
You can sell 1 euro for 1.21854 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, i.e. the Euro increased in value compared to the dollar or the dollar depreciated compared to the Euro. At this point, your broker sells you the euros that are appreciated in exchange for dollars that are now worthless.
There are two things to keep in mind about Forex trading:
firstly, traders sell currencies that they do not own.
Secondly, there is a buy and a sell; the two sides of the currency. That is why it is a currency exchange.
These are the basics of Forex trading about the mechanical side.
Buy Order in Avatrade broker.
In Forex trading, when a buy order is placed on, for example, the EUR/USD pair, a portion of the trader’s account funds are used to buy the base currency of the pair, in this case, the EUR, and sell the quote currency of the pair, the USD. The price is expected to rise and thus make a profit.
The broker carries out this transaction, which is called placing a buy order. The order is placed either with the broker (market maker), or by communicating it directly to the interbank Forex market (ECN execution), where the prominent market participants are located.
When the trader is satisfied with the profit, they will close the order, and the broker will carry out the opposite transaction, i.e. sell euros and buy dollars.
order buy forex trading
Source: EURUSD, H4 Chart, MT5 Admiral Markets. Please note that past performance is not a reliable indicator of future results.
This is called trading short; the trader will first open a sell order. The reason for this is that the trader, having analysed the market, believes that the price of the instrument will fall, so he places a sell order first, and once he has accumulated the profit he wants, he closes the position with a buy order.
Avatrade forex trading sell order
Pip or point
It is the smallest unit of change in price and simultaneously one of the most popular terms in Forex trading fundamentals.
When the selling price of the EUR/USD pair moves from 1.1234 to 1.1235, it means it moved 1 pip.
Pips are the simple way for traders to calculate profit or loss, as their value depends on the volume of the trade.
The size of a position within the market and is measured in lots. When the trade size corresponds to 1 lot (100 000 units of the base currency), 1 pip is equal to 10 units of the quoted currency. For example, when trading 1 lot of EUR/USD, 1 pip equals 10 USD.
The spread is the difference between the bid and ask prices. As you read above, a quote is the comparison between these two prices. The bid price will always be higher than the ask price.
forex trading spread
The spread is why there is always a tiny negative balance when placing an order. It is also one of the most important concepts to consider when trading Forex, as it will influence the profit or loss that the trader can have.
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? 1250 dollars.
If the trader has 2000 dollars in his account, this 1250 dollars will be taken from his account. That is known as margin. This margin is retained until the position is closed.
*Note: Free margin is the result of subtracting 2000-1250= 750.
That is another critical term for understanding Forex trading. Leverage is a money multiplier. For example, a leverage of 1:100 can turn a 100 Euro account into one that controls 10,000 Euros of a currency pair, making even the most minor fluctuations in price profitable.
However, keep in mind that leverage is an opportunity that also brings its risks, as the amount of margin available has a directly proportional relationship with changes in currency prices. Therefore, if the market moves against you, it will affect the margin available in your account in real-time, and if you do not have sufficient funds, the broker will liquidate your position, as it will not be able to keep it open.
Based on our example above, if the trader’s leverage is now 1:100, the trader puts in 100 times less, so the margin on the same trade would be $12.5.
The difference between the account balance and the sum of the margins of the open positions.
It is the (equity/margin) *100. When the level is 100%, equity and margin are equal. So the trader has no free margin to trade (open more trades). That is called a margin call. When trading Forex, it is very important to watch this indicator to prevent you from opening new trades. You can monitor it on your MT4 or an MT5 platform.
Let’s assume an account with a balance of 10 000 euros, with a margin of 1000 euros. If this position accumulates 9000 euros of losses, your margin is equal to your balance, i.e. 1000 euros. That is the margin call.
Finally, we have the Stop Out, the minimum margin level at which the broker starts to close your open positions.
The account offered by the broker to the Forex trader for trading.
Software offered by the broker to the trader to access the market and trade.
STEPS TO TRADE FOREX
How to trade Forex in Avatrade platform?
Once you have compared various brokers and their types of trading accounts, you will need to open a trading account and deposit into it.
You will need to have downloaded the MetaTrader trading platform.
Now, you have several financial instruments at your disposal to start trading Forex online.
Acting in haste is not recommended, although it might be interesting for certain trading styles or market situations. But for this, you will need to be experienced.
The analysis is key and can cover as many aspects as the trader sees fit, but the most basic would be:
the exact conditions for entering the market with an order
estimated time to take a trade
volatility forecast for the period in question
the proximity of relevant economic events
and, most importantly, the conditions for exiting the trade.
All of this should be analysed before making any trade. Again, analysis is the key to Forex trading. Analysing things is suitable for both the emotional side of the trader and the account balance.
The ability to find, analyse, synthesise and apply information increases success in Forex. Performing these actions makes the difference between success and failure in trading.
After all this analysis or preparation, the actual trading is carried out at the click of a mouse, using specially developed software, commonly known as a trading terminal or trading platform. Clicking is the least important part of trading. The critical part has been done before so that we will go into more detail on this subject.
The analysis is the key to Forex trading.
The analysis is not only the key to successful trading, it is what makes Forex trading work.
The two main types of market analysis are fundamental analysis and technical analysis:
Fundamental analysis is an evolved form of financial auditing, only on a national or global scale. That is the oldest form of forecasting price direction by looking at various elements of the economy, i.e. its current state in the cycle, relevant events, future forecasts and the possible impact on the market. Are Avapartners helpfull?
Fundamental analysis by Avatrade affiliate are not corrent in:
a country’s GDP
Technical analysis is a more modern market analysis that deals with only two variables – time and price. Both are strictly quantifiable, accounted for by the market, and are undeniable facts. That is why, for many, Forex trading works best when studying charts rather than making economic enquiries.
Whether you are charting support and resistance lines, identifying key levels, applying technical indicators or comparing candlestick formations – you are trying to figure out how Forex trading works without actually looking at the causes of supply and demand.
To rely on the results of technical analysis, one must keep in mind the notion that past price formations could affect future price formations, which many fundamentalists consider ridiculous.
In short, fundamental analysts are economic detectives with an element of predicting the future, while technical analysts are visual archaeologists of time and price while combining it with statistics.
Fortune favours the prepared.
Lack of preparation is a significant reason why many aspiring traders fail before discovering how Forex trading works.
Numerous books have been written on trader psychology and avoiding the pitfalls that the trader’s mind can play. Again, the problem is the approach, and it is easy to get confused when everything is new.
Some Forex brokers, due to the nature of their business, often use a marketing strategy whereby beginners with little or no training expect to create fortunes in Forex trading with as little as 10 Euros and a few clicks. They enter the market full of hope, and the market spits them out, disappointed and empty-handed.
Most Forex traders lose money, and their broker’s business model is well adjusted to this trend. That is neither good nor bad – this is why the market exists. Every time you close with a profit, someone on the other side is closing with a loss.
Going back to our point about being prepared, nothing will prepare you better than a demo trading account – a risk-free way to trade the forex market in real-time conditions to get a better feel for the market. It is highly recommended that you dive into demo trading first and then get into live trading. The results will speak for themselves.
WHY TRADE FOREX
Next, we will examine the various reasons why, in less than 20 years, the Forex market has become one of the most fashionable markets. These reasons make Forex trading a great choice for beginners and experienced traders alike.
Ease of access
Unlike other markets where you have to deposit large amounts of money, you can trade with a shallow deposit in the foreign exchange market.
Is this what makes Forex trading so unique?
Not really. Ease of access makes Forex trading popular, but the other characteristics indicate why this activity is so widespread.
The mechanics behind trading are elementary: you buy an asset at a favourable price and then sell it. How do we relate the concept of volatility to the market? The more volatile the market, the more opportunities there are to buy and sell assets.
Supply and demand
When trading Forex, you can expect almost immediate demand for any currency, regardless of its volume.
As long as normal market conditions exist, you can be sure that your orders will be executed in a matter of seconds, as there is high liquidity of supply and demand in this market.
For this reason, the Forex market is considered to be the most liquid market in the world.
Technological advancement is an excellent feature of Forex trading and makes it unique.
Why is the Forex market so technologically advanced?
The number of Forex brokers is very high, and the competition in the market is severe. That makes the Forex market so competitive, forcing brokers to provide the best possible conditions for their clients.
While brokers have to suffer various costs to lower their margins, different trading platforms help them gain a larger share of the market to increase their revenue.
To this end, some brokers prefer to invest in developing their trading platforms. At the same time, Admiral Markets offers them the most up-to-date version of the most common trading software, our MetaTrader Supreme Edition.
In addition to providing this leading Forex trading platform, Admiral Markets also allows its clients to trade via MetaTrader applications for iOS and Android devices.
When you try Forex trading, you will see that the developments in the software are an apparent reason why this market is excellent to trade.
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.
That led to the birth of many Forex trading forums with a considerable number of active contributors, and information about Forex trading can be found in almost any language. As the market operates 24 hours a day, 5 days a week, there are Forex traders from all over the world.
Forex traders can find a variety of new ways and means of communication. Although there are various Facebook groups on 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 is more to it than that. Forex trading has evolved beyond pure communication to action. Forex is an exciting market because it has given rise to what is known as social trading.
Trading FX on margin
As we have already explained, CFD trading makes trading on margin and leverage. That differentiates CFD Forex trading from other markets with considerable capital to trade large volumes.
Possibility to learn with demo accounts
If you want to test this market and see if Forex trading is suitable for you, you can learn on a free demo account.
You can open a trading account with fictitious money and start practising in a few minutes. This kind of account does not require any deposits or other commitments on your part. All you have to do is register for a demo account with Admiral Markets, and you will instantly receive the login details for your account in your email.
The conditions on the demo account are similar to those on live accounts, so you can improve your trading skills with virtual money without making a deposit. For this reason, it is elementary to start trading on the foreign exchange market.
Regulation on the Forex market
There is strict control over Forex trading, and many brokers are regulated by more than one regulatory authority. That means that even though it is a decentralised market, it is still a safe market to trade. However, this point applies only to brokers that are genuinely regulated.
Don’t let Forex currency trading scare you. Instead, try to remember that success in Forex is based on good training and lots of practice (without risk). But with Avatrade you can lose all your money