Here’s our guide on forex trading meaning, risks, legality, benefits, rules, and so much more that will help you navigate the forex industry and whether you want to partake in the same.
Forex Trading Meaning: 12 Fundamental Things For Beginners
According to Investopedia, the Forex market is called a portmanteau. This means to blend two different things like how we have “breakfast” and “lunch” which became “brunch”. Similarly, the Forex market entices traders to make money using their mixture of “foreign currency” and “exchange”.
To trade in the world’s largest market can be scary despite its massive appeal. Some question if trading in the Forex is equal to gambling? Some see a side of the market where they cannot use the opportunities it offers correctly. Can getting to know it better, finding out what it’s really like help you decide if it’s right for you? Ofcourse, let’s begin!
1. What Does Forex Mean?
- In short, it means currency trading. This is because it represents the transactions that take place according to the value of the currencies of the countries against each other.
- This general definition may not be enough for you. However, simply think like this: When you go to a foreign country, you convert the currency you presently own into the currency of that country. While doing this transaction, you give the money in your hand to the exchange office, and you get the foreign currency in return.
- The Forex is the market where investments are made on these conversions. And it is the largest market in the world with a daily transaction volume of around 7 trillion dollars – and you can profit from this!
- For that, you need to convert your savings into dollars on the mobility in currencies and you can do the same in Forex as well. In addition to hundreds of currency pairs, gold, silver, corn, and shares of companies such as Apple and Facebook are also applicable to forex transactions.
- You can simply think that you are performing the transactions/exchanges you do at the exchange office in a foreign country using a more professional way. The forex market makes it possible for you to invest in these instruments in non-physical ways by taking advantage of the price difference.
2. Is The Forex Market Like The New York Stock Exchange?
- The New York Stock Exchange is the world’s largest stock exchange. Often called the NYSE, this place can round up a daily transaction volume of around 20 billion dollars! Forex, on the other hand, hosts a daily trading volume of close to 7 trillion dollars. That’s a huge difference compared to the NYSE. This massive feature helps recognize the Forex as the world’s largest financial market.
- The market has a decentralized structure. So we wouldn’t say that forex is managed from the USA. It works through financial centers located all over the world.
- Did you know that you can wake up at 3 am and open your computer and buy and sell dollars? Yes, In Forex, you can open your computer or smartphone and trade whenever and wherever you want. The global nature of the market ensures that it remains open 24 hours a day, 5 days a week, excluding weekends. In this way, you can trade uninterruptedly from the night connecting Sunday to Monday, to the night connecting Friday to Saturday. Staying 5/24 on the foreign exchange market allows you to trade while the US trading time is open.
- This form of market structure that is not available in the stock market has both great advantages and significant disadvantages. With its large structure, you can make your transactions in seconds and get daily earnings. However, this will cause you to take more careful actions. You can make two-sided transactions and evaluate the falling prices. Moreover, you do this simply by placing a sell order.
- Forex is a form of market structure where leveraged transactions can also be made. Leverage, which is limited to 1 to 10 in our country, makes it easy to increase your earnings. However, it is a feature that should be used correctly. You will increase the loss you will experience, if you do not know how to use the feature.
- With its global structure, the diversity of investment instruments is also high – you can even create instant positions in cocoa and cotton!
- You trade hundreds of different currency pairs. In addition to these; You can easily add instruments such as precious metals, industrial metals, stocks, agricultural products and stock market indices to your portfolio. In Forex, you trade instruments in non-physical ways. In this way, you can easily buy and sell Apple shares or agricultural products!
3. Does Forex Make Money?
- Another curious question is how traders can earn money in the Forex market or how the money comes in.
- Due to its market structure, it offers a faster profit than the stock market. You can reach strong profits in the short term. However, this also requires you to be more careful. Therefore, it would not be wrong to say that you earn money as long as you can keep up with the rhythm of the market.
- The market offers short-term returns due to the high daily trading volume, the ability to buy and sell quickly, the ability to open a bidirectional position, and the leverage. As a knowledgeable and experienced investor, you will have these returns.
- As in any market, there are risks in Forex, but if you can manage them, you will earn money.
4. Is Forex Legal?
- The global nature of the market and online transactions raise the legality of the Forex market.
- Forex is controlled by the market supervisory authorities of each country to protect investors.
5. How Does The Forex Market Work?
- Transactions carried out online take place directly between two parties. In other words, it works over communication networks established between participants like you.
- Each of the participants is connected to each other by electronic communication networks. When a participant places an order on his internet-connected device, it is instantly transmitted to the market.
- In the 5/24 open market, your order will be executed instantly due to the high trading volume. In other words, when you place an order to buy the 100 dollar EUR/USD parity at the 1.20 level, it will instantly pay off. Yours will match the order of another participant who placed a sell order at this level.
- In the market, trades are made on the exchanges of 0.0001 units. Therefore, you can earn a profit by selling the parity you bought at 1.2000 when it is 1.2002.
- Its massive structure allows you to profit from minimal changes. Since this structure works 5/24, you will make your transactions in the same environment with all the investors of the world.
6. Want More Forex Experience? How Can I Learn?
- One of the good things about the Forex market is the free educational opportunities that you can get in intermediary institutions with trained staff to help.
- Expand your knowledge by purchasing books or even watching Youtube videos on this subject.
- At the same time, websites like ours present topics about the market as articles or blogs.
- Lastly, demo accounts are another option to prepare you for the market. You gain experience by making buy and sell transactions as in the real market in these accounts, where there is $100,000 worth of virtual money.
7. How Do You Get Started With Forex Trading?
- For those traders who want to get into Forex, you should start the market entry process. For this, you must first have knowledge about brokerage firms with a certificate of authorization, showing that they can make forex transactions. Your priority should be to look for the existence of these documents.
- Authorizations mean that your rights as an investor will be protected. It also indicates that you will invest legally.
- After reaching the legal intermediary institutions, you should evaluate them and make your choice according to their service quality. After choosing the brokerage house, you should read the framework agreement and risk notification form before creating your account.
- After completing your business with contracts, you can open your account. After depositing the initial margin amount in your account, you start making your investments as an official forex trader.
- Next, you need to learn how to trade in forex.
8. How to Trade in Forex?
- You can go to ANy location to trade Forex. Simply open the program installed on your computer or smartphone. Within seconds, you can earn a profit piggybacking on the rise of the dollar, the depreciation of the euro, and gold.
- Just as you buy products for money while making a purchase, in the forex market, you buy and sell for the money in your account. The investment instruments subject to this exchange are instruments such as EUR/USD. For example, let’s look at Euros and the Dollar. Suppose 1 dollar is equal to 2 Euros. With 2000 Euros in your pocket, you get 1000 dollars. Let’s say that after a few days, 1 dollar is 2.5 Euros. This time, when you sell the 1000 dollars you put in your pocket and buy Euros, you will have 2500 Euros. In this way, you will make a profit of 500 Euros.
- So, in the forex market, you can perform this process in a much simpler way and you will make a profit in a short time. You make the transactions you will perform in forex, which has a transaction volume of around 7 trillion dollars, on highly developed platforms. You can profit from very sensitive changes within minutes.
- E.g; Even when $/Euro is 2.5867 while it is 2.5870, you have a chance to get a very high return. This is related to both the trading volume and the opportunity we call the leverage system. Thanks to the leverage system, you will be deemed to have made the transaction with your 100 dollars and the profit you will gain will be 10 times in this way. Of course, in the leverage system, as the profit increases, the risk also increases. Therefore, you need to do this consciously.
- If you think the dollar will appreciate against the Euro, you buy the dollar with the Euros and wait for the dollar to rise. When the dollar rises, you sell and you buy Euros again. In this way, the difference between buying and selling is your profit.
- The question of where brokerage houses make money is also very curious. Brokerage houses, just like exchange offices, earn their own profits from the difference between the buying and selling of parities. Every investment instrument has a buying and selling value and you can see them sequentially on your forex trading platform.
- One difference between forex from exchange offices is that investors can earn money while the dollar is falling. This feature is called bidirectional trading and allows you to profit from every price movement.
9. What are the Benefits of Forex Trading?
- Forex has a global mechanism. It is managed through trade centers in various parts of the world. Thus, you can make your transactions through advanced systems in the world’s largest market.
- The diversity of investment instruments is also high due to its global nature. While dealing with almost all currencies of the world, you make non-physical transactions with tradable goods. At the same time, world-famous stock markets and stock indices are also subject to transactions.
- The market has a reliable control mechanism. Thanks to two-way transactions, you win not only when prices are rising, but also when they are falling. If you think the prices will increase, you create a buy position. If the prices will decrease, you can trade in the direction of selling.
- Investors can increase their earnings by 1 to 10, thanks to the leverage system. Also, you can make a $100 transaction with $10 and as a result you make a profit of over $100. However, you also increase your risk.
- You do not pay commissions or transaction fees for transactions you make in Forex making it a more advantageous market compared to the stock market.
- Another feature is that risks can be controlled. You can deal with risks and situations by taking profit and stop loss orders.
10. What are the Risks of Forex Trading?
- While the Forex market has many good aspects, it also has some risks. However, for an experienced investor, these risks can be easily limited. Novice investors, on the other hand, can learn how to deal with risks with free training. So let’s look at forex trading risks:
- Illegal intermediary institutions are at the forefront of risks in the market. They began to deceive investors by promising attractive trading opportunities and unusually high leverage.
- Foreign forex companies, even if they are not fraudulent, are not considered legal in some countries. Another major risk is that it is a market sensitive to political and economic developments. In the market with a daily trading volume of 7 trillion dollars, a sudden political development can be seen as excessive fluctuation in prices. Did you know? An unexpected tweet by Trump/ Warren Buffett/ Kim Kardashian/ Joe Biden/ Your Country’s President can cause extreme volatility in prices. While experienced traders can cope with this situation somewhat, novice traders may face losses.
- The next risk in Forex is the use of high leverage. It has been observed that investors who do not have sufficient experience are under greater loads than they can handle with the use of high leverage.
- The fact that the market is open 24 hours a day, 5 days a week is also a risk in a sense. If you become dependent on the market and cannot get up from the screen, you will be more likely to make mistakes. You will start to encounter losses instead of gains in such incidents.
- After you’ve made a few trades to do, you should step aside and see what’s going on in the markets to both not increase the risks and open more profitable positions
11. What Are Some Tips For Success In Forex?
- The price movements that occur may complicate the forecasts a little, which can hinder success.
- Prices move with the forces of supply and demand. When you predict these fluctuations correctly, you will also make a profit. Therefore, it is important to do a good market follow-up.
- At this point, you should follow the central bank statements. Because the central banks of the countries control the supply to control their currencies. For example, the central bank that makes a monetary expansion decision means that it will inject more money into the economy. This causes the value of the currency to go down.
- At the same time, commercial banks and investors want to invest their capital in economies with a strong outlook. If positive news comes to the markets about a certain region, it will encourage investment. This will increase the demand for the country’s currency and increase its value. Similarly, negative news will reduce investment and demand for the currency. Therefore, you should monitor the health of the economies.
- Market sentiment, which reacts to the news, is also important in the rise of currency prices. When traders begin to believe that the currency will go in one direction, they align their trades accordingly. So they start increasing or decreasing demand.
- Economic data is also effective in the price movements of currencies as they express how the economy is performing. Economic data also provides insider knowledge on how the central bank will act.
- Another important issue that you should follow is the explanations of credit rating agencies. A country’s credit rating is an independent assessment of the probability of debt repayment.
- A country with a high credit rating offers a safer investment area than a country with a low credit rating. In other words, a spike is seen in the currency of a country whose credit rating is upgraded. In the opposite case, the currency depreciates.
12. What Should Investors Pay Attention to?
There are some issues that investors should consider in forex for successful investments.
- Learn the financial terms in your country. Unconscious investors who entered the markets such as forex with the greed of making money often face losses otherwise.
- Do not enter the market without evaluating the free education opportunities. After all, you will invest a certain amount of money in the market. Isn’t it better to win by entering equipped than to lose by doing this unconsciously?
- Pay attention to the choice of brokerage house as there are many fraudulent companies emerging on the internet. These companies say that you can trade forex by offering bonuses or high leverage. Find out the limit on 1) initial capital and 2) the maximum leverage so that you know if it is an illegal business, should they go above these. These companies are trying to be blocked by the government. However, they continue to exist on the internet with different websites. For maximum safety, make sure that if you are going to choose a brokerage house or enter the market, it is through an audited institution.