The foreign exchange market is the largest and most intriguing financial market globally. Major participants in the forex market include large banks, institutions, and traders, among others, who collectively engage in daily transactions.
In this article, we’ll discuss forex trading, how this market works, and how you can make money with forex trading.
How does the forex market work?
Unlike stock, commodity, and futures markets, which have specific physical exchanges, the forex market operates differently. It lacks a physical location and isn’t bound by rigid rules. Instead, it’s described as an “Over the Counter” (OTC) market where transactions occur electronically through authorised intermediaries.
Long and short: what does it mean?
Long and short positions are common terms in forex trading. Going “long” means buying a currency with the expectation that its value will rise, leading to a profit. Conversely, going “short” involves selling a currency with the hope that its value will fall, allowing for profit from the decline.
For example, going long on the Euro/Dollar pair means aiming to profit from the Euro’s rise against the US Dollar.
What are the best currencies for forex trading?
When it comes to the most actively traded currencies in forex, the US Dollar (USD) takes the lead, often paired with the Euro (EUR) and the Japanese Yen (JPY). The EUR/USD pair is the most popular, followed by USD/JPY and GBP/USD.
What are the advantages of forex trading?
Now, let’s explore the advantages of participating in forex trading:
- High liquidity: Forex markets offer high liquidity, enabling brokers to accept orders of varying sizes at market prices.
- Difficult manipulation: Due to its liquidity, it’s challenging to manipulate forex prices significantly.
- Low transaction costs: Costs associated with buying and selling currencies are typically low.
- Reduced capital requirements: You can start trading forex with relatively small amounts of capital.
- Long and short opportunities: Forex allows traders to profit whether a currency is rising (long) or falling (short).
- Technical analysis: Forex trading suits technical analysis methods, providing opportunities for data-driven decisions.
How to start trading forex
Getting started in forex trading is straightforward, thanks to internet accessibility. To start forex trading, you need to sign up with a forex broker – have a look at our best forex brokers article to get started.
Admiral Markets is an internationally recognised forex broker with over two decades of experience in providing access to high-quality trading platforms. It has a strong global presence, offering trading services in multiple assets, including currencies, commodities, stocks, and indices. With a constant commitment to innovation and integrity, it has earned the trust of novice and experienced traders around the world.
Why Admiral Markets is considered one of the best forex brokers:
- Regulation and safety: Admiral Markets is heavily regulated in several jurisdictions, including the UK, Australia and Cyprus. Regulation ensures that the broker operates according to strict standards and provides its customers with greater peace of mind.
- Advanced trading platforms: The broker offers access to MetaTrader 4, perhaps the most popular and advanced forex trading platform available. This allows traders to use professional tools for technical analysis, backtesting and automated trading, as highlighted in our MT4 review.
- Education and resources: Admiral Markets is committed to educating its customers, offering a wide range of educational resources, including webinars, courses, articles and seminars.
- Customer service: Customer service is known to be responsive and available in many languages. This ensures that traders receive timely and accurate assistance when they need it.
- Competitive spreads and leverage: It offers relatively low spreads on many currency pairs and allows traders to use leverage, which can increase potential profits (and potential losses).
- Easy deposit and withdrawal: Deposit and withdrawal processes are simple and fast, with multiple payment options available.
- Innovation: The company is always looking for new ways to improve its offerings, both through new products and services and through innovative technologies.
How to make money with forex?
Until a few years ago, it was possible to trade on the foreign exchange market only through extremely expensive intermediaries. Thanks to the advent of the internet and online brokers, the forex market is now accessible to everyone and you can start trading with low capital thanks to leverage.
Regrettably, many newcomers to forex trading mistakenly view it as a form of gambling, akin to sports betting. However, this couldn’t be further from the truth. The concept behind making money in online forex trading is quite straightforward: traders aim to speculate on the rise or fall of foreign currency prices and then close the position at the right time to generate a profit.
For instance, if you decide to buy EUR/USD, and its value increases from when you opened the position, you can close it at a higher price and make a profit. Similarly, if you choose to sell EUR/USD (known as going “short”), you’ll profit when the closing price is lower than the opening price. This example illustrates the essence of forex trading – profiting from the price movements of currencies.
Understanding the forex market & forex trading
When you go on holiday to another country, you need to trade currencies. For example, if you go to France, you need to buy EUR with your GBP. Let’s assume the exchange rate is 1.16 – that is, for £1, you receive €1.16 – so, you change £1,000 to €1,160.44.
Next week, you want to change another £1,000, but the rate is now 1.20, so you receive €1,200, essentially €39.56 more than the previous week. This means that you profited from the change in the exchange rate.
Making a profit from the forex market depends on how well you devise your trading strategy, so you can accurately predict future price movements and open and close your positions at the right time.
How do currencies move in forex?
Currency prices in the forex market are determined by the laws of supply and demand, which link a currency’s price fluctuations to its supply quantity. Simply put, if a currency is in high demand, its price will rise accordingly, and if there’s an increase in its supply, the price will fall.
The demand for a currency is shaped by all entities trading it at any given moment, including private traders. This means that large entities like banks, investment funds, and multinational corporations can influence currency prices significantly due to their substantial trading volumes.
What are pips?
The term ‘PIP’ stands for ‘Percentage in Point’ and signifies the smallest price movement a currency can experience. It serves as the unit of measure for price changes and is vital for calculating profits and losses in forex trading. For example, if the EUR/USD pair is quoted at 1.0458 and then rises to 1.0459, this indicates a one-pip increase.
To identify pips, you simply look at the fourth decimal place after the decimal point.
Are there correlations between currencies?
In the forex market, numerous currency pairs can be traded, and their movements may appear unrelated. However, due to economic and political connections worldwide, financial markets are becoming increasingly interconnected, resulting in what’s known as correlations.
Currency correlation is the relationship between the price movement of one currency pair and another. Some pairs move together (positive correlation), while others move in opposite directions (negative correlation), and some move independently (no correlation).
Several free online tools can provide data on current forex correlations, helping traders identify these relationships.
Best times for forex trading
The forex market operates 24 hours a day, five days a week, but not all hours are equally advantageous for trading. The best times for trading are when there is high volatility and high trading volumes, as this often leads to significant price movements and various trading opportunities.
Volatility and trading volumes increase the chances of profits but also increase the risk due to the high unpredictability of price movements.
The most favourable times for trading typically occur when the Asian, European, and American trading sessions overlap. These are:
Asian and European sessions: Between 7 a.m. and 9 a.m., both the Asian and European forex markets are active.
European and American sessions: Between 1 p.m. and 4 p.m., both the European and American markets are open.
These times are approximate and can vary slightly due to factors like daylight saving time changes.
It’s important to note that trading during low volatility hours, such as Friday afternoons and Sundays when the markets open, is generally not advisable.
Strategies in the forex market
In forex trading, different strategies can be employed depending on market conditions. Here are some of the main forex strategies, which are explored in detail in our trading guide:
- Scalping – involves making a large number of small trades to profit from minute price changes. The idea is to make many small gains throughout the day.
- Day trading – involves buying and selling currencies within the same trading day. The aim is to make a profit from short-term price movements.
- Swing trading – capture gains in a currency pair over a period of a few days to several weeks. Traders use technical analysis to find currency pairs with short-term price momentum.
Learn more about financial markets
Forex trading: summary
In conclusion, success in forex trading hinges on understanding and employing the best strategies, continuously honing your skills, and adapting to the ever-evolving market.
How do I choose the best currency pairs for forex trading?
The choice of currency pairs depends on your trading strategy and goals. Generally, it’s wise to start with major pairs like EUR/USD, USD/JPY, or GBP/USD due to their higher liquidity and lower spreads. As you gain experience, you can explore exotic or minor pairs. Assess the economic factors and geopolitical stability of the countries involved in the pair to make informed selections.
Can I trade forex with a small amount of capital?
Yes, you can start forex trading with a relatively small amount of capital, thanks to leverage offered by brokers. Leverage allows you to control a larger position size than your initial investment. However, while leverage can amplify profits, it also increases the potential for losses, so it’s crucial to use it cautiously and employ proper risk management techniques.
What are the risks associated with forex trading?
Forex trading carries several risks, including market volatility, leverage-induced losses, and the potential for unexpected news events. Additionally, emotional trading, lack of a solid strategy, and inadequate risk management can lead to substantial losses. To mitigate risks, traders should educate themselves, develop a robust trading plan, and use protective measures like stop-loss orders.