What is Forex Trading? Your Guide to Start Earning

This guide will provide you with a simple introduction to the Forex market. We have cut out the jargon to make it simple to start trading the Forex Market today!

In the forex market, you are simply exchanging foreign currencies. Forex brokers make these exchanges on behalf of the trader and the profit is the difference between each currency. Forex traders earn from these profits.

You, as the trader, earn a profit if you buy a currency that subsequently rises in value, or sell short a currency that subsequently declines in value.

The modern forex market is over 40 years old, however, it’s only since the turn of the century that individual retail traders have had access to trade Forex. There are opportunities for anyone to trade and earn money. You do not need any specific economic education or special skills. Here you will learn everything you need to start successfully trading in the forex 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 and selling currencies - exchanging one currency for another in hopes of investing in the currencies that have the highest relative value to other currencies. Forex trading is an important part of the global economy.

Forex Market Benefits

Now that the basics of the forex market have been outlined, let’s examine some of its benefits and why it attracts hundreds of thousands of traders all around the world.

• 

  You can trade around the clock.

  This gives you a chance to earn trading profits in your free time. Lots of traders can work regular business hours in their main jobs, and trade in the forex market after work. 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 in the forex market. There is always demand and there are always offers. Market turnover is measured in trillions of dollars daily.

• 

  Huge leverage.

  Forex trading allows you to trade on a margin system, a trader can access high amounts of leverage - often up to 1000:1. Using leverage enables forex traders to trade the market even with small amounts of capital, and also amplifies the size of profits earned (however, it also amplifies the size of trading losses)

• 

  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 various investment types in this article.

• 

  Minimum entry threshold.

  Minimum deposit requirements to start forex trading can be as low as $1-10

• 

  Many risk diversification options.

  The distribution of capital, the use of portfolios instead of single investments, trust management - these are just part of the measures a trader can use to reduce their trading risk.

• 

  High level of potential earnings.

  The profits that investors can make in the stock markets in a year can be made by some forex traders in a day.

What is Forex trading?

Forex trading is a process of exchanging currencies in the forex market. To understand how it works, let's take the euro/dollar currency pair. Each currency 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 prices is called the spread. It can be fixed or variable, depending on the terms offered by individual forex brokers. Part of the bid/ask spread is taken by the broker as its fee, just like the exchange office takes the difference between the sale and purchase prices.

Success in the forex market depends on implementing a good trading strategy There are a potentially infinite number of trading strategies, but 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, in order to, hopefully, sell it at a higher price in the future.

• 

  Bears
  are traders who specialize in price fall forecasts and, accordingly, they sell one currency against another on the assumption that it will fall in relative value, enabling them to buy it back later at a lower price.

What is traded on the Forex Market?

As a beginner you will need to decide what assets - what specific currency pairs - that you want to trade. There are no restrictions, and experienced traders may trade several currency pairs simultaneously. But it’s better to start with just one pair until you’re more familiar with the mechanisms and principles of the market.

Forex Trading Platforms

A trading platform is software that a broker provides to a trader for trading on the Forex market. Traders use the platform for analyzing the market and then placing orders.

• 

  desktop
  (for PC);

• 

  mobile
  (for smartphones / tablets);

• 

  web versions
  (work through an internet browser, via the broker’s website)

There are several dozens of trading platforms, and there are brokers that provide their own proprietary platforms. But the vast majority use any of several standard trading platforms. Now we will take a look at some of the main advantages and disadvantages of different trading platforms.

How to earn on Forex without trading?

As we noted 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 with the pooled investments 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 invest with the manager. This investment option is especially popular with beginners because 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 automatically duplicate the signal provider’s trades in their own account. 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 copy trading and PAMM accounts or trust management is that the investor does not transfer his funds to anyone else, but is placing trades himself in his own account, although automatically.

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 to make trades for them. For those who decide to try, we prepared a separate TOP of the best PAMM Forex brokers.

Forex Bonuses

Many newcomers to the foreign exchange market completely forget about bonuses when choosing a broker, as they focus on other factors. Bonuses increase the trader’s deposit. These bonuses are divided into two types - deposit and no deposit ones.

• 

  Deposit Bonuses

  According to the name, these are the bonuses that you receive for making a deposit. For example, a broker may offer you a $100 bonus for making your first deposit, even a minimum one - or a bonus of $1000 when replenishing an account with $500. The terms can be different. You can use these funds in trading but, as a rule, brokers place complicated restrictions on withdrawing bonuses - if they allow bonuses to be withdrawn at all.

• 

  No deposit Bonuses

  This type of Forex bonus is less common. Here, as the name implies, the trader receives additional funds to their 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 without risking any of your own money.

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 a 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.

Licensing of forex brokers is not obligatory in all jurisdictions. But brokers who plan to work honestly seek to obtain a license, because it provides traders with a guarantee of reliability and financial protection. To obtain a license, a broker typically needs to fulfill several conditions, including undergoing proper checks, organizing a compensation fund, and maintaining transparent reporting, etc. Broker licenses are divided into several levels.

• 1

  First level.
  United States Derivatives Exchange Commission (CFTC) and National Futures Association (NFA). These are the most demanding organizations. They strictly regulate the operations of brokers. Brokers licensed by these authorities are considered among the most trustworthy and reliable.

• 2

  Second level.
  The UK Financial Conduct Authority (FCA) and the Australian Securities and Investments Commission (ASIC). Here, the requirements for issuing a license are a little easier, but in general still 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 woith these organizations. However, their licenses are still 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 to comply with many standards, 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 examples. There are many more. The best option is to choose a broker whose activities are regulated by level 1-4 organizations; they are considered 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 using margin trading. This means that a broker can provide a trader with high leverage. Using leverage enables a trader to control financial assets whose full value is much higher than the margin deposit required to trade the assets.

Leveraged trading amplifies both profits and losses. You need to clearly understand that forex trading involves significant risk.

11-25% of beginner traders eventually 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 a PAMM portfolio, distributing funds between several portfolio managers. If one portfolio suffers losses, another may realize profits.. Thus, a trader’s overall risk exposure is reduced.

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

The stock market is different than the forex market in that it trades different types of financial securities - namely, shares of publicly traded companies. Also, stocks are traded on exchanges, whereas the forex market is a decentralized, over-the-counter market.Also, unlike the round-the-clock trading that takes place in the forex market, stock exchanges have fixed market trading times. Stock trading also offers much less leverage than forex trading does. This means that it is very difficult for a beginning trader with limited investment capital to make substantial profits in a short period of time by trading stocks..

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 open a trading account with a small deposit and begin trading. PAMM accounts and auto trading services are also available to generate passive income. In the future, you can continue to invest using PAMM portfolios to diversify and reduce risk. Or you can start independent trading. It is simple and convenient with modern terminals».

Ben Freeman, Traders Union Trader Analyst, Contributor

Factors to Consider When Choosing a Forex Broker

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

• 1

  Amount of commission, spread, or other trading fees.

  It is worth paying special attention to the size of bid and ask spreads, as this often the primary source of a broker's earnings

• 2

  Reliability is always the most important.

  When choosing a broker, a trader should find out about whether the broker is regulated, and check its reputation among other market participants, by checking customer reviews

• 3

  Amount of the initial deposit.

  Different forex brokers have different conditions for opening an account. A beginning trader may wish to find a broker with a low minimum deposit requirement

• 4

  Order execution speed.

  This is an important criterion. Trading profits can be significantly affected by the speed at which orders get filled when price is rapidly changing

• 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:

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 factors, which are especially crucial for beginning traders. The table shows some of the most popular brokers. You can safely open an account with any of them, with no fear that the company is unscrupulous.

FAQs

What is the Forex market?

The foreign exchange market is the market for international currency exchange trading.

How to start Forex trading?

To start trading forex, an individual needs to open an account with a forex broker. The broker provides the trader with a trading terminal, trading tools, and all the opportunities for trading 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 available options, such as trust management and Copy Trading services.

How secure is Forex trading?

Since trading is conducted on margin, using high amounts of leverage, the risks of forex trading are significant. However, brokers provide several effective opportunities for risk diversification, such as PAMM portfolios.