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How does forex trading work?

For as long as there have been different currencies, people have tried to use the value of fluctuations to their own advantage. In earlier times, however, this was usually associated with a lot of effort. It was digitization that made it possible for anyone to trade in different currencies under the buzzword “Forex Trading” within a few seconds at the push of a button. But how exactly does Forex work? What should beginners in particular pay attention to and what are the dangers of foreign exchange speculation?

What is forex?

Forex, often simply referred to as FX, is short for “Foreign Exchange”. This means the process in which one currency is converted into another.

So if, for example, Ms. Müller wants to exchange her hard-earned euros for dollars because she is planning a trip to the USA, it is already forex in the broadest sense. The daily trading volume in this area of ​​more than five trillion dollars suggests that there is more to this than just changing money for the next vacation.

The majority of currency conversions today are done with the aim of generating a financial profit. A forex trade always includes a currency pair. This consists of the so-called base currency and the exchange rate currency. A three-digit code is assigned to each currency. The code EUR / USD, for example, stands for a currency pair in which the euro is to be bought and US dollars to be sold.
The majority of Forex trades are carried out in the so-called seven major currency pairs. They make up around 80 percent of the total trading volume.

How does Forex trading work?

There are two different ways to get into the business of foreign currency speculation yourself: Either using a Forex spot, binary options or via CFDs. What is behind these terms?

The so-called forex spot is classic currency trading. The actual currency is bought and sold. For example, 1,000 euros are exchanged for US dollars and then exchanged back again when the value of the US dollar has risen, as this results in a profit.

Much more often these days, however, trading is done through CFDs. The abbreviation stands for “Contracts for Difference” and describes a standardized contract that is used to map the price movements of different financial instruments. In the case of forex, this means that US dollars are not actually bought from the forex spot as in the example above, but rather that traders can only benefit from the price movements without actually owning the respective currency.

In order to trade CFDs, a contract with a so-called online broker is required. When choosing a suitable broker, it should first be ensured that it is properly regulated. Because security always comes first when trading forex. In the case of a dubious provider, in addition to the basic risk of losses from the respective trade, there is also the risk that it is a scam and that your entire commitment is stolen.

Scam is generally called fraud on the Internet. The term became known, among other things, through so-called romance and love scamming, in which those affected were brazenly ripped off by chat acquaintances via social networks.

Subsequently, it is advisable to look at the evaluation of the individual providers on independent comparison portals on the Internet. A multi-regulated online forex broker with a favorable fee model is, for example, Avatrade. In addition, there are numerous serious and inexpensive players on the market, including the following:
• IG
• Saxo Bank
• CMC Markets
• XTB
• eToro
• AvaTrade

What should beginners look for in Forex trading?

Even if many providers make trading in CFDs appealing to laypeople, these are complex financial instruments. Above all, the possible leverage effect means that the money invested can very quickly be completely lost if trading is started without the corresponding know-how.

It is therefore advisable for beginners to deal intensively with the topic theoretically before the first trade. You can find detailed instructions on how to chose a forex broker at https://1broker.org/forex-broker/.

In order to get a feel for the subject as a beginner, it is also advisable to first use the demo accounts that most providers provide for dry training. This is the quickest way to see the direct effects on the measures taken without losing a lot of money.

The most important rules for newcomers to Forex trading

Beginners are well advised to follow a few simple rules related to Forex trading. Because the success of a trader depends to a large extent on his discipline.

For example, an important rule is to set a limit for your trades. A single trade should never exceed a predetermined amount. The daily volume and the number of trades per day should also be limited accordingly before trading.

Another basic rule is never to attempt to make up for losses by increasing the stake or the number of trades. Trading currencies is highly volatile. This means that there can be large fluctuations here. Losses are therefore simply part of it. It is important to learn how to use it. The decisive factor is the ratio: if you are successful in more than half of your trades, you will be in the profit zone in most cases.

It is also important to stay true to your strategy. It does not matter whether it is an external strategy of a professional or a self-developed procedure. However, if the strategy is not successful over a longer period of time, adjustments are of course necessary in order to get into the profit zone.

The principle of hope is not a good strategy. Losses should therefore be closed as quickly as possible so that they cannot cause even greater damage. Anyone who hopes that certain positions will still turn has usually already lost. It makes more sense to accept the small loss and concentrate on the other positions.