What is Forex and how does it work? How does a trader make money?
What is Forex and how does it work? The Internet has opened up a lot of new and exciting opportunities for the mankind. One of them is free currency trading in online regime, which may be united under a single term "FOREX market".
For reference. The abbreviation FOREX is derived from the English expression "FOReign EXchange" - foreign exchange. Originally Forex was an inter-bank currency exchange market, but with time private investors gained access to it. Since then, its turnover has been growing and has reached several trillion dollars per day (!).
Unlike traditional stock exchanges, the Forex Market operates 24 hours 5 days a week, because trading takes place worldwide. During the day, the financial centres are Wellington, Tokyo, Hong Kong, Frankfurt, New York, and of course, London - accounting for approximately 30% of all foreign exchange market turnover. For this reason, the trading day for traders is divided into 4 sessions (GMT time):
- Pacific (22:00 - 06:00) - Asian (00:00 - 08:00) - European (07:00 - 16:00) - American (12:00 - 20:00)
During the European session, the Euro and GBP are actively traded, while during the American session, the USD is actively traded. It is worth mentioning that currency pairs are traded on Forex, which are denoted by six-letter names. For example EURUSD is the currency pair EUR-USD.
When you open a "buy" on EURUSD, you are buying euros for dollars, and at the close of the transaction you make the opposite operation - exchange previously bought euros back into dollars. When you sell, it is vice versa.
How do you make money on the currency market? By making money on differences in exchange rates, just like banks and street currency exchangers do. The only difference is that the rate is not fixed, it "swims" depending on the price of the hundreds and thousands of transactions, which are carried out at the currency market every second.
The trader's task is to understand which way the price will move in the future and, accordingly, to buy or sell a currency pair. Usually, there is no psychic at hand, so we have to use other methods, which may be grouped into two groups:
- Fundamental analysis - studying macroeconomic indicators and news. The general rule is that if the news is good, it will strengthen the currency rate against others, and vice versa. - Technical analysis - mathematical methods of price forecasting, which are based on the fact that market participants act in repetitive patterns. A prime example is the massive selling of currencies after a prolonged bullish trend.
How to earn on Forex? Becoming a Forex trader is very simple - all you have to do is to download Metatrader trading terminal from a reliable broker and open a trading account or a training demo account with a virtual currency.
The more important question is how to become a successful trader? As in any other business, you will need time to train and gain experience. It is advisable to take a training course in trading. The main thing is to be patient and not to use much money until you are sure of your abilities.
All the best and success in Forex trading!