"Forex", short for foreign currency exchange, is a term that refers to the market in which the currencies of various countries are traded. Investors trade forex for the same reasons as all other markets: they believe that the value of some currencies will go up or down over time. Remember, currencies are commodities like any other. On some days they go up in value, on others they go down. You can trade in the currency market to take advantage of the price fluctuations of foreign currencies and make a profit.
Steps
Part 1 of 3: Learn the Basic Principles of Forex
Step 1. Learn how currencies are traded in forex
This market is the global exchange of currencies and financial instruments based on them (contracts for the future purchase and sale of currencies). Everyone participates in it, from the largest banks and financial institutions to individual private investors. Currencies are traded directly for other market currencies. As a result, they have prices expressed in other currencies, for example euro per US dollar or yen per British pound. By evaluating price differences and the expected increase or decrease in value, investors can make (in some cases huge) profits from transactions.
Step 2. Learn to understand currency quotes
In forex, prices are expressed in terms of other currencies. This is because there is no measure of value that is not another currency. However, the US dollar is used as a base currency to determine the value of other currencies.
- For example, the price of the euro is shown as USD / EUR.
- Currency quotes are expressed to four decimal places.
- It is easy to understand currency quotes once you know them. For example, the Yen / Dollar exchange rate can be 0, 0087 JPY / USD. This value indicates that "it takes $ 0.0087 to buy one yen".
Step 3. Learn what arbitrage is
In simple terms, it is about exploiting the difference in prices between two markets. Investors can buy a financial instrument in one market with the hope of selling it at a higher price in another market. Within forex, arbitrages are used to make profits from the differences between the quotes of currencies. However, these differences do not occur between just two currencies, so the investor must resort to "triangular arbitrage", which involves three different exchanges that allow you to generate a profit from the difference in prices.
- For example, imagine you notice the following quotes: 20.00 USD / MXN, 0, 2000 MXN / BRL and 0, 1500 BRL / USD (between US dollar, Mexican peso and Brazilian real). To see if potential arbitrage is possible, start with a theoretical value of $ 10,000. With your $ 10,000 you could buy 200,000 pesos (10,000 * 20.00 USD / MXN). At that point, with 200,000 pesos, you could buy 80,000 real (200,000 * 0, 2000 MXN / BRL). Finally, with the 80,000 Real, you could buy $ 12,000 (80,000 * 0, 1500 BRL / USD). Thanks to the exchanges mentioned, you would earn $ 2,000 ($ 12,000 - $ 10,000).
- In reality, arbitrages offer very low margins and are corrected almost immediately. To exploit them you need very fast trading systems and large investments.
- Trading in the currency market is done in lots. A standard lot is 100,000 units of currency, a mini-lot of 10,000 units and a micro-lot of 1,000 units.
Step 4. Learn about leveraged trading
Investors, even the very skilled ones, can often take advantage of only a few percentage points of arbitrage differences or profits on currency exchanges. To still make big profits despite these low percentages, they have to trade large amounts of money. To increase the available capital, they often use financial levers, i.e. exchanges with loaned money. When compared to other types of trading, trading on the forex markets can be carried out with very high levers; trading services typically offer leverage of 100: 1.
- A leverage of 100: 1 means that you only have to deposit one hundredth of what you invest in the currency. The deposit is known as margin and protects you from future losses.
- Leveraged trades amplify both profits and potential losses, so be careful.
Part 2 of 3: Finding the Right Forex Broker
Step 1. Make sure the broker complies with applicable laws
The company offering trading services must be registered with the National Commission for Companies and the Stock Exchange (CONSOB) to operate with Italian investors. Usually, you can check if the broker is in good standing by visiting the information section of the website, where the subscription to the commission is indicated.
- CONSOB establishes rules that protect investors on the financial markets.
- CONSOB "verifies the transparency and correctness of the behavior of operators in order to safeguard the trust and competitiveness of the financial system, protect investors, comply with financial regulations".
Step 2. Make sure the forex trades you are interested in are offered by the platform
You may be planning to trade a specific currency pair (for example, US dollars and Swiss francs). Double check that the service you are considering allows that transaction.
Step 3. Read the reviews
If you think you have found a great trading service, search the internet for reviews and check that other users have had a positive experience. If you find that the vast majority of people complain, choose a different service.
Step 4. Look at the trading platform
Make sure it is designed in a way that is easy to use. You can usually find pictures of the service interface on the internet. You may also find videos on YouTube that directly show the platform you are using. Make sure you can use it well.
Step 5. Pay attention to fees
You will have to pay every time you make a trade. Make sure commission prices are competitive.
Part 3 of 3: Trading Forex Successfully
Step 1. Use a trial account
As with all areas of life, it takes practice to improve in forex. Fortunately, almost all major trading platforms offer so-called trial accounts that you can use to trade currencies without spending your hard-earned cash. Use this opportunity so that you don't waste money while you are still learning.
When you make mistakes in practice sessions (and they will), it's important to learn so you don't have to repeat them in the future. Trying to trade won't help you if you don't learn something from experience
Step 2. Start small
Once you have completed the "training" and feel ready to start trading for real money, it is always a good idea to start small. If you risk a significant amount on the first transaction, you may be afraid of losing money and being dominated by emotions. You may forget what you learned when you practiced and react on impulse. This is why it is better to start with small amounts and increase investments over time.
Step 3. Write a diary
Record profitable and loss-making transactions in a journal that you can re-read later. This way, you will remember the lessons of the past.
Step 4. Look for and take advantage of arbitrage opportunities
Potential arbitrages pop up and go away many times a day, so it's up to you to spot them and make your move. Searching for them manually is almost impossible; by the time you have calculated that there is a possible arbitrage, the quotation error will have already been corrected. Fortunately, many internet trading platforms and other websites offer arbitrage calculators that can help you spot these opportunities quickly enough that you can take advantage of them. Search the internet for these tools.
Step 5. Become an economist
If you want to be successful in forex trading, you need to understand the basics of the economy, because macroeconomic conditions within a country affect the value of its currency. Pay particular attention to economic indicators such as the unemployment rate, inflation, gross domestic product and the availability of money. It is even more important to pay attention to the trends of those indicators, so that you have an idea of the direction they will take in the future.
- If a nation is about to enter a period of inflation, it means that its currency is about to drop. In that case, you shouldn't buy that coin.
- Beware of nations with sector-dominated economies. For example, the Canadian dollar follows the same trends as crude oil. If the price of that commodity rises, the Canadian dollar is likely to rise as well. As a result, if you believe the price of crude oil will rise in the short term, it may be a good idea to buy the Canadian currency.
- Track a nation's trade surplus or trade deficit. If a state has a good export surplus, this means that whoever buys products made in that country will first have to convert their currency into the corresponding currency. This causes an increase in demand for the currency and its price. If you think a nation's exports will improve, it might be a good idea to buy that state's currency.
Step 6. Remember the mantra of "ceteris paribus" (all other circumstances being equal)
In the above steps you can find many valid forex trading principles. However, the economic conditions described do not exist in a bubble. You need to consider the full economic picture before buying a state's currency.
For example, a state may have an export surplus, which causes the price of its currency to rise. At the same time, however, it could be a nation linked to the performance of a sector, with a currency that follows the price of crude oil. If crude oil falls at the same time as exports rise, the currency may not appreciate
Step 7. Learn to read charts like the pros
Technical analysis is another way to make money in forex. If you look at the historical charts of a specific currency, you may notice repeating patterns. Some of them offer predictions on the future trend of the currency.
- The Head and Shoulders pattern indicates that a currency is about to exit its quotation range. It is a technical indicator used by many forex investors.
- The triangle pattern indicates that the high-low spread of a currency is tightening. It also indicates that the currency may move out of its current price, based on the general direction of the triangle.
- The so-called engulfing pattern is visible on candlestick charts. In this case the body of a candle completely contains the body of the previous one. Under those conditions, the currency will likely move in the direction of the larger candle. It is an excellent trading indicator used by many forex investors.
Warnings
- Forex trading, like all forms of trading, involves some risk. There is always the risk of sudden changes in the market which can result in the failure of a transaction and the loss of money.
- Leveraged trades amplify risks, as well as potential losses. This can lead to you losing more money than you initially invested. In that case, you should cover the losses with your savings.
- You should never trade with money you need, such as a superannuation fund. Trade in foreign currency only for amounts that you can afford to lose.
- Trading forex is risky for inexperienced investors who are unable to keep up with the rapidly changing market prices. What seems like a profitable trade in a moment can cause you to lose money after a few seconds.
