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What Is Foreign Exchange Market?

What Is Foreign Exchange Market?

Forex is a global currency market. Forex stands for Foreign Exchange. To put it simply, Forex is a system of foreign economic relations between banks of all countries and smaller players participating through banks. The Forex market is constantly buying/selling currencies, securities, precious metals, and other resources, which makes it an important part of the global economy.



Forex is a somewhat virtual exchange, a gateway for organizations to enter the international economic arena. These organizations are banks, multinational corporations, holdings, large brokers, etc.



The main operations carried out in the ForexMarket are the purchase and sale of the currency or something that is backed by currency. The main type of transactions in the Forex market is speculative transactions - this is when you receive income on the difference in price between buying and selling.

Forex Features

The Forex Market has its unique features, which makes it a separate component of the global financial system. These are:

  • free conversion of all world currencies online in real-time;

  • guarantee of absolute liquidity of every trade, and there is always a demand;

  • the ability to continuously trade throughout the day globally;

  • unifying foreign exchange transactions;

  • the possibility of margin trading for individuals with high profits;

  • high volatility of exchange rates, which do not always rely on economic factors.

You might find these parameters a little overwhelming, but don't worry if they aren't clear. Just skip what is not clear, then everything will become clearer.

Forex Market Geography

The Forex Marketplace is global. Forex is not limited regionally, traders are always selling and buying - currency, securities, metals, oil. Thanks to the internet and modern information technologies, any online user can participate in the Forex Market.

The Forex market has some main geographical areas of activity:

  • 1

    New Zealand Foreign Exchange Market (Wellington);

  • 2

    Australian Foreign Exchange Market (Sydney);

  • 3

    Asian Foreign Exchange Market (Tokyo, Singapore and Hong Kong);

  • 4

    European Foreign Exchange Market (London, Frankfurt, Zurich, Paris);

  • 5

    American Foreign Exchange Market (New York, Toronto, Chicago, Los Angeles).

These are the largest foreign exchange markets. Wellington is the first to start trading, then Sydney,and then through Asia and Europe and lastly LA / USA. A break in trading occurs only once a week - when American exchanges close on Saturday at 01:00 GMT, and New Zealand exchanges open again on Sunday at 9pmin line with international time zones.

Forex Market Participants

Forex has three main types of participants:

  • Trader

    Trader.

    An individual who trades in the Forex market. Any person can become a trader, including you. The only limitation is that a trader cannot enter Forex on his own, only through a certain company - a forex broker.

  • Broker

    Broker.

    The organization that gives the trader the opportunity to trade on Forex. In fact, a broker is an intermediary between a trader and the interbank market. The broker provides the trader with trading instruments, a trading terminal and other conditions necessary for trading.

  • Liquidity provider (or quote provider)

    Liquidity provider (or quote provider).

    Organizations whose activities determine the current performance of currency pairs. First of all, these are international banks and large multinational corporations.

For example
John Smith wants to make money on Forex. Regardless of where he lives, he chooses a broker. You will find the best brokers on our list of the best forex brokers. John gets registered on the site of the selected broker, goes through verification there, makes a deposit, and starts making bets. Now he is a trader who goes to the interbank through the selected broker. John does not need to worry about who acts as a liquidity provider. This is the broker's problem - where to get current quotes and through which bank they can withdraw their transactions to the interbank.

Forex Market Benefits

Now that the basics of what the Forex Market has been outlined, let me onto its benefits.Why it attracts hundreds of thousands of people around the world.

  • You can trade around the clock.

    This gives you a chance to earn in your free time. Lots of traders can work regular business hours in their main jobs, and trade in the Forex market after work. As we have said, while it is night in one part of the world and markets are “sleeping”, it is daytime in the other hemisphere and markets are active. This means that a trader can trade at any moment, even in the middle of the night.

  • This is the most liquid market in the world.

    Every day, millions of transactions occur on the Forex market, each of them is backed by currency. There is always demand and there are always offers. Market turnover is measured in trillions of dollars.

  • Huge leverage.

    Forex trading allows you to trade on a margin system, a trader can get huge leverage. For example, 1:1000. And the profit in case of success will be enormous, while the trader risks only the available capital. This means that by investing $1,000, you will be able to conduct transactions in a million.

  • The most developed investment system.

    Forex offers a huge selection of systems for passive earnings: PAMM, LAMM, MAM, RAMM accounts, trust management, auto trading (Copy Trading), etc. You can read more about investments and their types in this article.

  • Minimum entry threshold.

    The initial deposit can be $1-10, and some brokers do not require it at all. You do not need any economic or special knowledge, you don’t even have to trade personally in Forex, but use only the investment opportunities of the market.

  • Many risk diversification decisions.
    The distribution of capital, the use of portfolios instead of specific accounts, trust management - this is only a small part of the opportunities due to which a trader can reduce the risk of unsuccessful trading to a minimum.

High level of potential earnings: the profit which Traders can make in the stock markets receive within the year can be received by the Forex trader in a day.

What is Forex trading?

What is Forex trading?

Forex Trading is a process of exchanging currency in the Forex market. To understand how it works, let's take the euro/dollar currency pair. As in the exchange office, each pair in the Forex market has two prices. The first one is a BID. This is the price at which the broker is ready to buy currency from the trader. The second one is an ASK. This is the price at which he is ready to sell the currency.



The difference between the bid and ask indicators is called the spread. It can be fixed or floating, depending on the type of currency pair. The spread is taken by the broker, just like the exchange office takes the difference between the sale and purchase prices. Trader takes the direct difference between buying/selling currency.



The EUR / USD pair means that when determining the price of one EUR, we assume that we will buy it for USD. There may be a EURO / GBP pair in the Forex market, it works the same as in exchange offices.

Let’s continue explaining the Forex Market …

Success in the Forex market depends only on the trading strategy Each trader has his strategy. There can potentially be an infinite number of trading strategies, while all traders are usually divided into two groups:

  • Bulls
    are traders who predict an increase in the price of a currency and actively buy it to sell it at a higher price in the future.

  • Bears
    are traders who specialize in price fall forecasts and, accordingly, they sell off their assets to buy them back later at a lower cost.

Of course, no one forbids the bull to work on a bearish strategy. And this is a national division. Sooner or later, each professional trader begins to carry out the bulk of transactions in one of these strategic groups.

What is traded on the Forex Market?

As a beginner you will need to decide what assets you will work with. There are no restrictions, and experienced traders work with several tools at once. But it’s better to start with just one tool to understand the mechanisms and principles of the market. Now we will take a closer look at the main Forex trading tools.

Currency pairs

Here everything is simple, there are major currency pairs (they have the US dollar), and there are cross-pairs (they do not have the US dollar). A trader chooses a pair, say, US dollar / Canadian dollar, and makes a bet, predicting the growth of the Canadian dollar against the US dollar. Here you can set various parameters, up to the exact number of points, that will make the difference between the currencies. If the forecast is successful, the trader gets his profit taking into account leverage (that is, he bought it cheaper than he sold). If it is unsuccessful, the trader loses the bet.

Major currency pairs (majors):

  • Euro / US dollar;

  • British pound / US dollar;

  • Australian dollar / US dollar;

  • New Zealand dollar / US dollar;

  • US dollar / Japanese yen;

  • US dollar / Swiss franc;

  • US Dollar / Canadian Dollar

The list of cross-pairs is way longer, but you are not required to use them as some are complex. It is also recommended not to start with the so-called exotic pairs. They are either very difficult to predict or they give very little profit at high risk.

Metals and energy

Metals and energy sources are less popular than currency pairs, but they are not less liquid. Countries and banks constantly trade gold and oil among themselves, so there is no problem with demand. Note that forecasting these instruments is more difficult than currency pairs.

Major pairs of precious metals:

  • gold / US dollar;

  • silver / US dollar;

  • silver / Euro;

  • gold / Euro.

Intersections with the euro are less liquid than with the dollar. And silver has an important detail: 1 pip of price movement always has a high cost, higher than for gold. Therefore, it is recommended that beginner traders trade only the first pair - gold and the US dollar, it is always a liquid pair, and it is relatively easy to calculate the risks.



The most popular option among energy resources is oil. Here, forecasts are made based on the EIA (report of the US Energy Information Administration), API (oil reserves data from the American Petroleum Institute), and Baker Hughes (report on the number of operating rigs).

Indices and stocks

The stock index is an indicator of the industry leaders’ performance. Indices were invented to reflect the efficiency of the stock market and the economy of specific countries. With the development of Forex, traders now have the opportunity to bet on changes in indices.

Most Popular Stock Indices:

  • Dow Jones Ind. Avg;

  • S&P 500;

  • NASDAQ Composite Index;

  • Euro Stoxx 50;

  • Nikkei 225;

  • MICEX index;

  • RTSI.

The index can be “weighted” by market capitalization, by price, or by equal weight. Stock indices have a lot of their nuances, but they all relate to forecasting. Because in the trading technique everything is the same as for other instruments presented on Forex. Buy cheaper - sell better, predicting the right price movement.

Cryptocurrencies

Cryptocurrency is a fully automated digital currency that uses a decentralized payment system to carry out operations. Technically, cryptocurrency does not have material, and even digital expression - it's just a number indicating the number of units of account.



With the growing popularity of cryptocurrencies, they could not avoid integrating into the Forex market. Today some traders professionally trade cryptocurrency pairs. This segment is not recommended for beginners, because, unlike classical currencies, forecasting is complicated here.

Cryptocurrencies can be traded about each other (and there are already fifty of them) or about classic currencies. Here are some examples:

  • BCH / BTC (Bitcoin Cash to Bitcoin);

  • BTC / JPY (Bitcoin to the Japanese Yen);

  • BTG / BTH (Bitcoin Gold to Bitcoin Cash);

  • BTG / ETH (Bitcoin Gold to Ethereum)

Forex Trading Platforms

A trading platform is software that a broker provides to a trader for trading on the Forex market. That is a program where a trader generates his orders and sends them to the interbank by clicking the mouse in certain places.

Types of Trading Platforms:
  • desktop
    (for PC);

  • mobile
    (for smartphones / tablets);

  • web versions
    (work through the browser)

There are several dozens of trading platforms, and there are brokers that provide their own, original platforms. But the vast majority uses standard, so-called time-tested platforms. Now we will take a look at their main advantages and disadvantages..

Platform Advantages Disadvantages
MetaTrader 4 You can create charts, connect multiple accounts from different brokers; it has functionality for automatic transactions for advisers and experts; more than 50 indicators Lack of fixation of swap withdrawal / accrual; at the end of the day trading positions are automatically closed, and then they open with a slight price shift
MetaTrader 5 Access to the multi-market (not only Forex, but also stock); 4 modes of order execution; 6 types of pending orders; timeframes and reports; one-click trading function You can not use "locks"; as in MT4, there is a modifier when opening a new order on a trading instrument
NinjaTrader Support for Rithmic and CTS accounts (supported by TopStepTrader); the simplest functionality and all basic indicators, a large selection of plugins and an integrated strategy analyzer No options trading; only long-term stock trading; no visualization of objects; glitches happen
TradingView Web platform with a simple and convenient interface; several dozen indicators and graphical tools; supports all cryptocurrency exchanges A high level of monetization - there is no free option, and for additional functions you need to pay extra
cTrader There is a software and web option; built-in functionality for technical analysis; there are more indicators than in MT4; the ability to auto-trade and trade in one click Consumes a lot of system resources; somewhat limited functionality in comparison with MT4 and MT5

Overall
There several platforms that work well but MT4 and MT5 are the industry-standard platforms. In addition to the classic desktop version, they have a mobile version for iOS and Android.

How to earn on Forex without trading?

How to earn on Forex without trading?

As we outlined above, the Forex market offers opportunities for passive earnings. Let's look at these:

Investing in Forex

Investing in Forex is a process where you invest your funds in any investment program of a broker without making any transactions on your own. Today, Forex brokers mainly offer these types of programs:

  • 1

    PAMM / LAMM accounts.

    Such accounts are formed from the accounts of several investors and the manager. The manager trades, and in addition to his funds, he uses the funds of investors in transactions. Investors do not make any decisions; they only determine the amount they are ready to provide to the manager. This is the safest investment option. It is especially popular with beginners because here a professional makes all decisions for you.

  • 2

    Trust management.

    In this case, the investor directly transfers funds from his account to the account of a third party. This approach does not imply any automatic protection against fraud, as is the case with PAMM accounts. However, the investor can work with the trader under the contract or transfer funds under the management of the broker's traders.

  • 3

    Auto trading (Copy Trading).

    This investment option allows traders to view and copy the trades of another trader commonly referred to as the signal provider to make the same trades. Trades can be copied in whole or in part. If the trade wins, the investor pays a commission to the signal provider. The main difference between PAMM accounts and trust management is that the investor does not transfer his funds to anyone and makes bets himself.

MAM and RAMM are varieties of PAMM accounts that provide investors with more control over their investments. But not everyone needs this control. A lot of people prefer trusting professional Forex market players and making money with them doing nothing. For those who decide to try, we prepared a separate TOP of the best PAMM Forex brokers.

Affiliate Programs

Forex brokers often allow traders to make money on their advertising as part of their affiliate programs. All you need to do is to tell others about the broker in one way or another. Forex affiliate programs, unlike investing, are as individualized as possible. That is, each broker has its terms of affiliate programs, its restrictions on entry, and different potential. But in general, all affiliate programs are usually divided into several types:

  • CPM
    for example, you give a link to a broker on your YouTube channel and get a fixed amount for it;

  • Pay per action
    for example, it’s not enough just to show the link, the user has to click on it, and only then you will receive a reward agreed in advance;

  • Payment for registration or first deposit
    for such an affiliate program, you will receive payment only when the user who clicks on your link registers with a broker or makes his first deposit.

These are the main types of affiliate programs, but again - each Forex broker has its programs. At first, they often do not bring a lot of income, but in the future, they can give an excellent passive increase in profit, and without any effort on your part.

Forex Bonuses

Many newcomers to the foreign exchange market completely forget about bonuses when choosing a broker. As they focus on other broker’s parameters. But it is bonuses that largely determine the success of the first trade. This increases the trader’s depot and then the trader can make real trades. These bonuses are divided into two types - deposit and no deposit ones.

  • Deposit Bonuses

    Deposit Bonuses

    According to the name, these are the bonuses that you receive for making a deposit. For example, a broker can offer you $100 after making your first deposit, even the minimum one. Or a bonus of $1000 when replenishing an account with $500. The terms can be different. The main idea is that after replenishing the depositor for a certain amount, the broker transfers additional funds to you. You can use these funds in trading, but as a rule, you can’t withdraw them. Usually, brokers make restrictions so that traders trade for bonuses and do not withdraw them.

  • No deposit Bonuses

    No deposit Bonuses

    This type of Forex bonus is less common. Here, as the name implies, the trader receives additional funds to the account only for registering with this broker. That is, you don’t even need to make a deposit. You immediately receive a certain amount (usually $5-50), and you can immediately use it in trading. This is very convenient because it allows you to test the trading platform, trading tools, and other features provided by the broker live on real accounts.

How is the Forex Market Regulated?

The Forex market is regulated by law in many countries of the world. This is necessary to reduce the likelihood of fraud by the Forex broker and protect the capital of traders.



To enter the interbank market, a broker only needs to register as an organization offering financial services.



That is, licensing Forex brokers is not obligatory. But brokers who plan to work honestly seek to obtain a license, because it provides traders with a guarantee of reliability and protection. Indeed, to obtain a license, a broker needs to fulfill several difficult conditions: undergo proper checks, organize a compensation fund, maintain transparent reporting, etc. Broker licenses are divided into several levels.

  • 1

    First level.
    Комиссия по срочной биржевой торговле США (CFTC) и Национальная фьючерсная ассоциация США (NFA). Это самые требовательные организации, они жестко регулируют работу своих брокеров, поэтому брокеры с такими лицензиями самые надежные.

  • 2

    Second level.
    The UK Financial Regulatory Authority (FSA) and the Australian Securities and Investments Commission (ASIC). Here, the requirements for issuing a license are a little easier, but in general it is very difficult to obtain.

  • 3

    Third level.
    Cyprus Securities and Exchange Commission (CySEC) and Malta Financial Services Authority (MFSA). Reporting is more simple and overall control is weaker for these organizations. However, their licenses are also issued only to reliable brokers.

  • 4

    Fourth level.
    British Virgin Islands Financial Services Commission (FSC BVI) and Belize's International Financial Services Commission (IFSC). These organizations do not require a broker of his own representative office, but they conduct a regular audit.

  • 5

    Fifth and sixth levels.
    Seychelles Financial Services Authority (SFSA) and Saint Vincent and the Grenadines Islands Financial Regulatory Authority (SVG FSA). They feature a simplified license issuance system and a reduced level of control.

These regulators are given as an example, in fact there are way more. The best option is to choose a broker whose activities are regulated by level 1-4 organizations; they are the most reliable.

But there is one more detail. Territorially the regulator has legal force only within the borders of his country. This means that if, for example, a resident of European Union trades in the EU, then only EU regulators can protect him.

Forex Trading Risks

Forex trading is carried out according to the margin type. This means that a broker can provide a trader with high leverage. This way he can get super-profits by managing the amount hundreds of times more than the amount of the deposit.



Forex Trading Risks

Leverage also increases the risk of losing your capital. That is, you need to clearly understand that Forex trading is always a risk. This risk is quite high if it is not diversified correctly.



11-25% of beginner traders become professionals. However, in reality, the majority loses at the start because they have not approached trading seriously enough. The Forex market offers a huge amount of opportunities for risk diversification. For example, you can invest in different currency pairs, opening several trades at once. In terms of investment, you can use not a PAMM account, but a PAMM portfolio, distributing funds between several managers. Then if one trader loses, it is more likely that others will win at the same time. Thus you will not lose your money, but you can even remain in the black.






The main conclusion is
that there is always a risk in the Forex market, and it is impossible to eliminate it. Without this risk, there would be no possibility of high earnings in the foreign exchange market in a short period. However, risks can be successfully reduced if you approach the issue thoroughly and use all available opportunities for diversification.

The Forex Market and the Stock Market

The Forex Market and the Stock Market – What is the Difference?

The stock market is different than in the Forex market in that the securities are traded directly. This is the same Forex, although Forex trading is conducted only with securities. Shares are tied to a specific exchange. Also, unlike round-the-clock Forex, the stock market fixed market trading times (depends on the location of the exchange) and leverage (no more than 1:10). This means that it is very difficult for a beginner to make high profits in a short period compared to the forex market. The stock market is a long-term investment.

Pros and Cons of Forex Trading – from an Industry Expert

«The modern Forex market is, without exaggeration, a storehouse of opportunities; it offers many convenient tools for both the beginner and the professionals. For example, beginner traders can choose a broker with a small deposit and start with investing - PAMM accounts and auto trading services. This will bring passive income and help you learn the basics of the market. In the future, you can continue to invest using PAMM portfolios to diversify risks. Or you can start independent trading. It is simple and convenient with modern terminals. One way or another, but with a competent approach, the Forex market is guaranteed to bring high passive and active income».

Ben Freeman, Traders Union Trader Analyst

Have you decided to try your hand at the Forex market?
Thenyouneed tounderstand how to choose the right Forex broker

Factors to Consider When Choosing a Forex Broker?

We recommend you to pay attention to the following points when choosing your Forex broker:

  • 1

    Amount of commission.

    It is worth paying special attention to the size of swaps and spreads, as this is the broker's earnings;

  • 2

    Reliability is always the most important.

    When choosing a broker, a trader should find out everything about the intermediary’s experience on the exchange. As well as the availability of a license, its reputation among other market participants, and customer reviews;

  • 3

    Amount of the initial deposit.

    Different Forex brokers on the exchange have different conditions for opening an account. Soa beginner trader should open a deposit with a broker with a minimum down payment;

  • 4

    Order execution speed.

    This is an important criterion. It will indicate how quickly your trade closes in the market;

  • 5

    Capitalization of a Forex broker.

    It determines how financially stable the brokerage company is. And whether it can pay profit to its customers in the event of force majeure circumstances.

What is a Reliable Broker?

When choosing a Forex broker, it is important not to become a victim of a scammer, the so-called "bucket shop" or the company "without an address".



To help you figure out the difference between an unscrupulous brokerage company and a reliable one, we have identified several signs of an unscrupulous broker and a reliable brokerage company:

Reliable brokerage company Scammers
The information about the company indicates all the pros and cons; the broker works with both beginners and experienced traders Prefer to work with beginner traders, a lot of promotional materials for beginners
Commissions and spreads are clearly indicated Hidden commissions and payments
No slippage or malfunction Problems with active scalping, servers freeze, frequent slippage
The Customer service is responsive, the consultants are well-qualified Customer support is silent, no quick fix is possible
Withdrawal of funds is carried out promptly Customer feedback on problems with the withdrawal of earned funds
A company with a long history, large capitalization, a license and a huge number of positive reviews The company was created recently, the origin and size of the authorized capital is unknown, the license is not published, customer reviews are negative, or the reviews are positive, but they are written as if “carbon copy”

Top 10 Best Forex Brokers for Beginner Traders

Below, to save you time and help with choosing a broker, we selected the top 10 Forex brokers. The list is based on the analysis of their key indicators. These indicators are crucial for beginner traders. The table shows the most popular brokers. You can safely open an account with any of them with no fear that the company is unscrupulous.

Broker Minimum deposit Accounts for beginners Earnings from Traders Union
Admiral Markets $1 Demo-account, Zero 25% of the broker's net profit
XM Broker $5 Micro-account, Demo-account $8 per lot
FXCM $50 Demo-account, Mini-account 1 pip per 1 lot
FXTM $10 Demo-account, Cent from $5 per lot
FxPro $100 Demo-account $4.8 rebate per 1 standard lot
AVATrade $100 Demo-account $10 per 1 lot
InstaForex 1$ Cent-account, Demo-account 2 pips per 1 lot
Tickmill $100 Demo-account from $2 per lot
Roboforex $10 Demo-account, cent account 40% of broker’s profit
IC Markets $200 Demo-account $2 per 1 lot

Also, it should be emphasized separately that our website allows you to earn more with any broker from our rating. All you need is just to open an account with a broker by clicking on the link on our website. Everything will be exactly the same as if you opened an account directly, except that we will pay you every month for completed trades, even unprofitable ones.

You can learn more about the benefits of working with Traders Union here.

About the Author

John Mayer
John Mayer
independent trader-analyst
  • John Mayer graduated with a master’s degree in Data Analytics from one of the top business schools in the UK. Since then, for the last ten years, he has been working as an analyst in the foreign exchange market.
  • During his time as an analyst, he has worked with several clients. His years of experience in the field led him to want to share what he has been able to learn.

FAQs

What is the Forex market?

This is a foreign exchange market that combines the financial operations of all international banks and organizations. The largest economic system in the world is available to everyone.

How to start Forex trading?

Since an individual cannot become a market participant, a trader needs to register with a Forex broker. The broker provides the trader with a trading terminal, trading tools, and all the opportunities for trading on Forex.

Are there any Forex passive income options?

Yes. A trader can invest funds with minimal risk in PAMM / LAMM accounts, which are managed by professional market players. There are other features, such as trust management and Copy Trading services.

How secure is Forex trading?

Since trading is carried out according to the margin type, there is always a risk, and initially, it is quite high. But brokers provide several effective opportunities for risk diversification, for example, PAMM portfolios. Plus, compensation funds for emergencies.