Forex represents the largest financial market in the world. Currency trading in the forex market takes place 24 hours a day, from Monday to Friday.
What is the forex market (Foreign Exchange)?
The forex currency market is the most liquid and transparent financial market, because due to the huge turnover, strong groups of investors theoretically cannot influence the quotations with their orders. Daily turnover in forex transactions exceeds three trillion dollars. Forex trading mainly involves speculative transactions, accounting for about 90% of the turnover on the forex market. The rest are hedging and intervention transactions. The forex market does not have a physical headquarters, but functions as a decentralized, global network.
Market participants
Today, the main participants in the forex market are: central banks, commercial banks, commercial brokers, commercial enterprises, hedge funds, individuals. Each of these categories of clients has a different goal of activity on forex. Each of these categories has different objectives, different financial resources and different tools. Currency speculators provide liquidity in the market. Investment deadlines depend on the preferences and goals of each investor. Investors on the forex market operating in the short term, the so-called day traders, are able to devote even whole days and weeks to trading, trying to catch the slightest changes in the exchange rate. Long-term investors, on the other hand, focus on longer trends, and a small fluctuation in the exchange rate does not matter much to them.
How does forex work?
The techniques of trading forex are different and do not differ significantly from playing on other markets. However, there are some nuances. The choice should depend on the nature of the investor and the time he can devote to analyzing the market situation. Choosing a time horizon for investing allows a trader to determine the amount of money they can commit to a single trade. In the case of long-term investors, for whom fluctuations of a few percent do not affect the final goal, the amount of funds involved should be much smaller than for short-term investors, who are focused on making more transactions, realizing smaller percentage losses, but also smaller profits.
Investment process
Real-time forex can be traded on the global currency market. Online trading platforms allow you to implement various investment strategies, tailored to the preferences of each investor, who has the ability to place different types of orders under certain conditions. You can set levels for entry and exit rates from the foreign exchange market, and trades will be executed automatically as soon as certain conditions occur. The investor can therefore manage investment risk based on signals from the market. These can be information from news services or buy and sell signals resulting from technical analysis. Platforms that enable transactions on the foreign exchange market offer ready-made order formats that allow you to manage risk and ensure a high level of user experience.
Trading on currency pairs
The subject of trading on the forex market are currency pairs, marked according to the rule: the first 3 letters are the ISO code of the base currency, the next 3 letters are the code of the quote currency, e.g. EURUSD, GBPCHF, USDPLN. Buying currency – long position. Selling currency – short position. Base currency – the currency that an investor buys or sells. Quote currency – the currency in which the purchase or sale of the base currency is settled. For example, the symbol CHFPLN means that the Swiss franc (CHF) is bought/sold for PLN (PLN). In a currency pair, the value of one currency against another increases and the other decreases at the same time.
- Quotes are given with an accuracy of 0.0001, with the exception of the most liquid pairs, e.g. EURUSD, accuracy of 0.00001.Minimum change of quote 1 pip = 0.0001. Figure = 100 pips. There are two rates in the quotations: bid and ask, e.g. 3.8504-3.8526 USDPLN.
- bid – the price at which the broker is willing to buy the currency
- Ask (Offer) – The price at which the broker is willing to sell the currency (bid < ask)
The difference between ask and bid is the spread. In the above case, the spread is 0.0022 USDPLN (22 pips). The more liquid the currency pair and the more activity in the market, the smaller the spread.
Leverage
To calculate the profit or loss, calculate the difference between the selling price and the buying price of the currency. Example: An investor anticipating the strengthening of the US dollar against the zloty takes a long position, so he buys a lot of USD 1,000,000, settling in PLN (PLN). Current USDPLN quotes: bid-ask 3.8504-3.8526 USDPLN. The purchase transaction of USD 1 million is concluded at the ask rate = 3.8526 USDPLN (transaction value PLN 3,852,600). The investor pays a deposit of 1% of the transaction value (leverage = 100:1), the amount of PLN 38,526 (the equivalent of USD 10,000). After some time, the exchange rate on the market increased to: bid-ask 3.8576-3.8598 USDPLN and the investor closed the position, selling 1 million USD at the bid=3.8576 USDPLN exchange rate (transaction value 3,857,600 PLN). Difference in exchange rates: 3.8576-3.8526=0.0050 USDPLN (50 pips). Return on investment = PLN 3,857,600 – PLN 3,852,600 = +PLN 5,000. The rate of return on investment is:(PLN 5,000/PLN 38,526) x 100% = 13%. USDPLN exchange rate increased by: 0.0050/3.8526) x 100% = 0.13%. The rate of return is 100 times higher than the change in the USDPLN exchange rate (leverage effect). The investor occupying the opposite position suffered a similar loss. High leverage means that investments on the forex market have a high potential for earning as well as incurring a severe loss. To invest in this market, you need to have a lot of knowledge, resistance to stress and be able to work a lot.
How to trade forex?
The basic idea is no different from other markets. To make money, you have to buy low and then sell higher. Forex, however, also gives you the opportunity to make money on declines, where selling transactions take place first, so you can make money practically always, regardless of whether the currency you want to sell is in your possession or not. The rules are simple, but these are only appearances. The techniques of trading forex are very different and do not differ significantly from playing on other markets. However, there are some nuances. The choice should depend on the nature of the investor and the time he can devote to analyzing the market situation.
Online forex trades are made using trading platforms that allow you to trade around the clock. Each forex broker offering the platform provides individual trading conditions. The intensity of rotation shifts from east to west with the time of day. On Friday evening, forex trading stops working, only to wake up on Sunday night when distant Asia wakes up to work.
Analysis-based forex trading
The investment period allows a trader to determine the amount of money they can commit to a single trade. In the case of long-term investors, for whom fluctuations of a few percent do not affect the final goal, the amount of funds involved should be much smaller than for short-term investors, who are focused on making more transactions, realizing smaller percentage losses, but also smaller profits.
Making investment decisions can be based on fundamental or technical analysis. Both forex trading techniques can be applied in both the short and long term. Each of these analyses has its advantages and disadvantages. Fundamental analysis looks at the situation in each of the countries whose currencies are the traded pair. The situation on the global market is also taken into account. Technical analysis of the currency market practically does not differ from technical analysis of the stock market, but the concept of bull and bear market has a different meaning here. The strengthening of one currency pair automatically weakens the other.
Advantages of investing in the forex market
The Forex market offers attractive investment conditions, thanks to which it attracts investors and is an important segment of global finance. The advantages of the forex market can be summarized in several points.
Accessibility and Opportunities: The forex market is a market that offers a low entry threshold, allowing a wide range of investors to invest, both beginners and advanced. Forex trading transactions can be made from anywhere.
High trading volume: This is the market with the highest trading volume, which provides high liquidity. It is much larger than the stock market.
Activity: This market is highly active. You can play forex around the clock. Thanks to this, the investor has a chance to take advantage of as many investment opportunities as possible. Trades are executed in a very short time, even in milliseconds, which makes it attractive to many investors and speculators.
Low transaction costs: Compared to other markets, in the forex market, the trader incurs low transaction costs, which increases the profitability of the investment.
Higher volatility: The forex market is more volatile compared to other financial markets, which creates opportunities to profit from trading.
No problems with short selling: Investing in the forex market eliminates many of the problems that can occur in the capital market, such as the difficulty of going short in the market.
Risky trading on the foreign exchange market
Investing in the financial market is associated with the possibility of incurring a loss. Also, forex is no exception. Making money on currency in forex trades is very risky – high leverage and high volatility in the market. It requires a lot of work, knowledge, and mental predispositions. Not recommended for people with an aversion to high investment risk, with health problems and with modest funds. The matter of risk management in the forex market is crucial. In order not to afford the high risk associated with a difficult market, investors use orders to limit losses. An example is a stop-loss order that automatically closes a position when the currency rate reaches a set level. Such investing in forex reduces the risk of losing a large part of your capital. There are also other types of orders that allow you to implement individual strategies. No matter what order we choose, there is always a high risk of losing money, much higher than in the stock market. In the forex market, you may encounter many fraudulent brokers. You should not use forex services offered by unknown institutions, of which there are many on the internet. It is easy to fall victim to fraud, and it is practically impossible to assert your rights.
Investing in Forex can be profitable, but it requires a solid knowledge of how the foreign exchange market works. It is the largest foreign exchange market in the world, offering attractive earning opportunities. However, it is a market that is characterized by significant risks, especially for beginner investors. Therefore, before you decide to invest, it is recommended to gain solid theoretical knowledge and possibly use a demo account with a broker that will allow you to learn how to invest without financial risk. To understand how the forex currency market works, first practice on a “forex demo” platform. It is also important that you understand the mechanisms of currency trading, the risks associated with the exchange rate, and the potential benefits and losses.
