FOREX

By: Moni Grieco and Ana Paola Muciño.

Forex is the global market for currency trading. It is open 24 hours a day and offers great liquidity. These characteristics make Forex a good investment option for its participants, which can be banks, large financial institutions, businesses, and even small retail investors. Forex traders are aiming to make money by buying and selling currencies.

Currency trading is not a new way to get profits, it actually emerged long ago, because currencies were traded from the first appearance of money. What is more recent is the facility to be able to negotiate on Forex from anywhere in the world via the Internet from a computer, tablet or mobile phone, and the accessibility for retail investors. Today there are many people who are earning money by trading in Forex from home either as professional full-time traders or just dedicating a few minutes a day to find trading opportunities.

What is FOREX?

Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world’s currencies trade. The forex market is currently the largest and most liquid market in the world with an average daily trading volume exceeding $5 trillion. All the world’s combined stock markets don’t even come close to this.

Trading FOREX

Forex trading is an activity, or even a profession, open to anyone who has a computer, smartphone and internet access. Forex trading is a daily and international type of trading; states, companies, even individuals, like you, operate in currency every day.  However, not everyone really knows what Forex trading is, so let us explain it to you really simple.

The term trading refers to a market where one product is changed to another. Trading can be done with countless instruments: commodities, indices or stocks.

The term Forex refers to the market in which currencies are changed by others, as well as other types of financial instruments.

What time does this market operate?

Forex is open all day and closes on weekends. You can operate anytime, anywhere. Forex trading hours are based on the operating schedules of the most important financial centers on the planet. Specifically, we are talking about Sydney, Tokyo, London, and New York. Although there are other financial centers, those mentioned above are the most representative. Each of these centers has a common operating schedule (not 24 hours), but when they all come together, they cover the entire day. Thanks to this, it’s possible to operate in Forex at all times.

However, not all hours are convenient to operate. For example, if you are an operator that deals primarily with the EUR/USD pair, you are unlikely to see good trading opportunities during the Asian session. For this reason, it’s vital for any successful currency investor to know and use the trading hours of the Forex market correctly.

What are currency pairs?

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Transactions in the foreign exchange market always imply the sale of one currency and the purchase of another. That’s why we’re talking about currency pairs. For example, the Eurodollar is known as EUR/USD. The currency on the left is known as the main currency or base, while the currency on the right is the secondary currency. In our case, the euro (EUR) is bought or sold obtaining in exchange a certain amount of secondary currency, depending on the applicable exchange rate.

In the market, we see the quotations expressed with two reference prices, for example. EUR/USD 1.1534/1.1536. The price on the left is known as the price of “bid” or monetary price and is the price at which an operator is willing to buy a pair of currencies. Conversely, the price of the right is called the price of “ask” or bid price and is the price at which an operator is willing to sell a pair of currencies. The difference between the bid price and ask price is commonly referred to as “spread”. This is the cost of commercial operation. In our example, this differential is 0.0002. To be easier this differential is indicated as 2 pips.

How do I earn money?

In Forex you can make money with the price fluctuations of different currency pairs and you can do so either when the price goes up or down. You can opt for 2 different options when opening a position:

-Go long: Open a purchase position if you think the price will go up and then close the position with a sales order.

-Short: Open a sales position if you think the price will go down and then close the position with a purchase order.

The general logic is simple. The trader or operator of this market buys something when she or he thinks that it will rise of value or sells it when it thinks that it will fall.

Suppose the euro today is quoted with respect to the dollar at a value of $1.3207, and you think (as an investor) that it will raise its parity, so you buy euros. If indeed the euro raises and closes in $1.3277, you would sell the euros and buy dollars.

Now, for the small variations you have to buy minimum 10,000 euros ($230,629.41 Mexican pesos), the variations are usually thousands of euro, and a thousand is called PIP. Finally, in the example, the euro rose 70 pips (70 thousand), and you won 70 dollars minus commissions, so it remains at 65 net dollars.

But, what do I do if I feel like it’s going down?

In this case, the best option would be to sell the euros, and when the price is lower, buy them cheaper. You could sell 10,000 euros in short (which means, as mentioned above, to sell without having the money), and for every pip that goes down, you would earn a dollar.

As Eli Amiga, CEO of IPSUM International says, “Risks are based on fundamentals where interest rates are the strength of a country’s currency, but fluctuation also depends on political, economic and social news. For the small participants, the broker gives leverage. If you start with an investment of a thousand dollars, the gains with the mechanism would be the difference between the buying and selling price multiplied even by a hundred.”

How do I know when it’s the best time to buy or sell?

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Buying cheap and selling expensive or selling expensive and buying cheap is the goal of the millions of participants in the Forex market. But, the million-dollar question is how to know when it’s the best time to buy or sell?

There are two ways to try to predict the best time to buy and sell in Forex: Technical analysis and Fundamental analysis.

Technical Analysis

It tries to predict the direction of the price by analyzing its evolution and using graphs with the different values that it has had. It looks for formations, signs of continuity or change of tendencies and use a series of indicators based on mathematical formulas or statistics.

Technical analysis may seem a little complicated at first, but it really is much easier than you think. If you want to make money by trading, you must learn technical analysis properly. If you are a serious and disciplined person you can learn how to apply it in just a few months.

You can learn technical analysis through numerous ways on the internet. Despite this, remember that the most important thing is to practice. There are several courses that you can pay but, in most cases, they will make you lose your money without having learned practically anything. The option we suggest is just to watch YouTube videos about technical analysis or enroll in free courses that many financial blogs provide.

Fundamental Analysis

This type of analysis also tries to predict the direction and future movements of the price, but it does it by analyzing the economic and political situation that can affect each one of the currency pairs.

The fundamental analysis is often used by investors operating in Forex generally in the long term, but it can also be used by traders who want to take advantage of high volatility to make money. These moments of volatility usually come after important economic news surge since they represent a good opportunity to obtain benefits in a short period of time.

For example, important news about the situation of a country like the United States can lead to significant changes in the price of currency pairs with the presence of USD (US dollar). A good economic data of unemployment, an increase in exports, the announcement of the good economic status of the Federal Reserve, amongst other situations can make the USD stronger and therefore investors buy it by increasing its value against other currencies. The opposite situation can occur if the data is bad for the economy of that country.

Having an economic calendar on hand is a good option in order to be aware of this news. Remember to focus especially on the most relevant ones as there are many throughout the day that is just going to have an impact on prices.

Professional or experienced traders can detect Forex trading opportunities using technical analysis and fundamental analysis although most use technical analysis. It is important that you learn to perform the technical analysis correctly and that you are taking practice and experience from the first moment. Over time, technical analysis will be your biggest ally to detect trading opportunities and earn money on Forex.

200,000 pesos? I don’t have that much money saved, how can I do it?

Well, this is where leverage comes in. There are brokers that allow to open accounts with only 2.000 euros ($46,125.88 Mexican pesos) and lend you the rest. In this case, if you have 2.000 euros and you need to buy 10,000 ($230,629.41 Mexican pesos), they would lend you the rest and that would represent leverage of 5 to 1. With that leverage, every pip would be worth 1 dollar. But there are brokers that leverage up to 50 to 1, where each PIP would be worth about 50 dollars.

You may be thinking, wow I can operate at any time, with little investment, and have good profits. Well, it isn’t that simple. Let us explain the risks and why Forex is not for everyone.

What is the risk of Forex?

The main risk of Forex lies in leverage. Leverage is a strategy used to increase the gains and losses of an investment, it allows you to multiply the final profitability of that investment, either positively or negatively.

Leverage multiplies my earnings, but if the market goes in the opposite direction to where you think, you also multiply your losses. In fact, it’s a lot of people who lose their investment.

Is Forex safe?

Forex is a global market, which operates 24 hours, worldwide, but nobody regulates it. It is not monitored by the CNBV in Mexico, the SEC in the United States, or any regulator in the world, and therefore, no one protects you. This lack of supervision has allowed a lot of frauds.

What else do trading platforms not tell you?

Forex ads show half-truths, and therefore are misleading. Here are the main clarifications:

Forex operates all day, so you can earn money in any free time.

Forex does allow you to operate at any time, but that doesn’t mean you can make a profit at that very moment. To win in Forex you have to check carefully the chart to find the right time and price of entry, and that is not always going to be in your free time. If you want to make money on Forex, you need to devote time, not just free time. And this process takes a lot of commitment.

Forex is the simplest, most effective and fastest way to improve my income.

If it were so simple, everyone would be making money. Remember that in these markets, for someone to win, another needs to lose, and usually the ones who lose are inexperienced who seek fast and easy gains.

Investing in the currency market is not an easy thing and the risks are high. Specialists recommended Forex for large, advanced and aware investors in the macroeconomic, political and social environment that want to make a profit.

Learning anything new in life always requires discipline and effort, but it also may represent the path to success and good results if done properly.

Forex trading can allow you to earn a lot of money and the best part is that it doesn’t need full-time dedication. You can combine your new forex trading ability with your current professional activity. Also, trading can eventually become your full-time job if you become experienced in it but we suggest you that in the beginning, you have another source of income and that you only invest a small amount of money which you can afford losing in the worst case scenario.

If you use trading as a desperate way to get money or if you want to earn money fast, you might be looking towards your financial death. We tell you this because it will lead you to too many risks which you aren’t prepared to take, and it will make you lose your money much faster than you think.

In order to drive a car, you must learn the basics first, then start step by step with caution and practice. You will make mistakes that you must learn, and we know that sometimes you will feel defeated or uncomfortable, but you have to overcome them. There are people who are insecure or fear driving so they quit it, and there are others that are passionate about driving because they acquired the necessary experience through practice. Something like that happens in trading. If you think you can start without learning, if you think it will be very simple, if you aren’t resilient to mistakes, if you risk too much or if you have all of the odds against you when it comes to investing money then think twice. Trading may not for you.

Forex can be a very profitable investment if you apply it in the right way and if you manage to be disciplined and consistent.

In this article, we wanted to compile an overview of Forex trading. Thank you for reading this post, we hope you found it helpful and that you will consider Forex as an investment option. Don’t forget to leave us a comment letting us know if you enjoyed this post and what else would you like to read about and stay tuned for our next post.

DISCLAIMER: This information is based on thorough research made by us. We aren’t paid to say any of this information. Feel free to research further on your own or ask us any question you may have regarding these topics.