Definition of Forex Trading
Currently Forex trading is a global market, accessible 24 hours a day, 5 days a week. Simply register with a broker or financial intermediary through the broker’s website and then access a platform with which you can place orders.
This will mean that Traders from all over the world can act on it, precisely for this reason it is able to attract large amounts of capital and every day with Forex trading operate individuals, banks, economic operators, central banks, states.
This creates a situation in which prices are determined exclusively by supply and demand and no single trader alone can determine the price in one direction or another.
This feature makes the Forex Market tend to be more secure than other markets, because each trader will have access to the same information and will not be able to influence the price, so the validity of their analysis will not be invalidated by market distortions, which for example as can happen with Shares.
How To Start With Forex Trading
Only a few years ago in Italy Forex Trading has spread as a form of financial investment, the recognition implies that there is regulation, and this feature helps to make Forex safer. There are rules for Forex Brokers that have been implemented to make the transactions made by Traders safe.
The regulation states that in order to offer brokerage services for Online Trading, it will be necessary to have a license, which can only be issued by the public authority in the country where the company that intends to offer the brokerage service is based.
This public authority has the task of assessing whether the Broker complies with MiFID regulations and only in this case will it issue the license that will allow the Broker to operate legally. Once the license has been obtained, it will not have unlimited validity because it can be revoked following checks that show that the Broker does not comply with the regulations.
But What Does The Legislation Provide For?
In turn, the regulation will provide that the Broker who provides platforms for Online Trading, must apply the principle of transparency and therefore warn the Trader of the risk of investments with Online Trading.
It is provided that on the website from which you can access the platforms are clearly indicated the details of the license obtained, so that each Trader can carry out checks, the Broker must also join a compensation fund, separate from the share capital and separate from the funds paid by the Traders, whose purpose will be to compensate any damages that the Traders may suffer during the activity of Online Trading.
Once the license has been obtained by a public authority of the European Union, the Broker will be able to operate and therefore offer the service throughout the European Union, and in any case you can also apply for Registration with other public authorities, the same is a sort of further confirmation of compliance with the regulations.
From a practical point of view many Brokers are based in Cyprus and the authority that gave the license is therefore the CySEC, but for further confirmation ask and obtain the Registration also in other countries where they often have secondary offices.
Many are the Brokers who for example have the Registration with Consob. All this has been made clear to make it clear that Forex Trading is a completely legal financial investment and that Traders who consider themselves cheated can be protected, so it is recommended to operate exclusively with certified Brokers.
How to Make Money With Forex Trading
The first thing to do before starting work will be to choose the Broker.
You will then need to choose a Broker to open an account with in order to access the platforms. This is a delicate and important choice. As we said before, one thing to do will be to evaluate if it is regulated, and it may also be helpful to search for opinions on the net, to understand if it offers different services, for example assistance, educational materials. Forex Trading is not a game, so without the proper training it can be very difficult to earn money.
A second aspect to be evaluated will be to find platforms that are intuitive, therefore easy to understand, available if possible also in their own language and with a high level of receptivity, i.e. they must immediately execute the orders placed, because in Forex the values can change quickly and then in the time between the order to close a position and the actual closing, you can move from a position in surplus to a position in deficit.
It will also be essential to verify the way in which the transactions will take place, i.e. they must be executed with a protected system so that there is no risk of fraud.
Finally, according to your possibilities and capabilities, it will be good to choose a Broker that will not require an excessively high initial payment.
Fundamental analysis and technical analysis will be important to determine currency trends. Forex Trading is based on the exchange of currencies, the Trader will have to predict the future trend of one currency against another and try to earn with the forex on value movements, logically if his analysis will be right there will be a gain otherwise there will be a loss.
What Are The Important Factors In Trading?
In order to understand the trend of a currency’s value you will need to know the factors that determine an upward trend or a downward trend of currency pairs. In summary, it can be said that the value will be determined primarily by the decisions of the Central Banks, because they will determine the amount of money in circulation and the interest rate of currencies, i.e. the cost of money, where a high cost of money will lead to low demand, while a low cost will stimulate more demand.
These two factors alone will not be enough because, for example, a low cost of money will offer support to the real economy and a recovery of the same will determine an increase in the value of the currency. In addition to these factors, data on employment and unemployment rates, inflation and deflation, GDP, imports and exports, i.e. all those elements related to the economy of the countries in which a particular currency circulates, will also affect the value of currencies.
Generally speaking, it can be said that an increase in demand for a given currency leads to its appreciation, while a decrease in demand leads to a depreciation, on the contrary, an increase in supply leads to a depreciation and in turn favours exports, while a limited supply leads to an increase in the value of the currency itself.
In order to have gains with Forex Trading it will be necessary therefore to try to know in advance the moves that may come from the Central Banks, governments or those appointments where relevant statistical data will be collected and in this case we are talking about economic calendar.
When you start trading in Forex, what is important is that all the terms used are really clear, i.e. what they mean. It can be very easy for a novice to make mistakes due to misunderstanding of the terms used. The first important term is “bag”, which is usually a precise amount of an asset or currency.
During trades it is very likely that purchases are made in terms of lots or, for small amounts, in terms of mini or micro lots.
As is easy to understand, mini and micro lots are parts of the lot, and in particular, they represent the tenth part and the thousandth part of the lot.
Another term often used in Forex trading is “Pips”, which is the percentage of points. It is a small measure, very useful in changing currency pairs, in fact, the relationship between the various pairs is always complex and needs multiples and submultiples of units. So using Pips allows you to work with decimal numbers.
In Forex language there are two terms related to the amount of coins or stocks and terms related to stocks. For example, very common terms, also included in everyday languages are supply and demand.
“The offer” is what is made by the investor or trader, or rather, is the price at which you (or the broker for you) buy a currency pair, or an asset.
Conversely, “demand” is the price at which you (or again the broker for you) want to sell. Of course, when entering into a transaction, usually the buyer and seller must make an agreement that may be more or less convenient for the buyer or seller depending on the different conditions.
The “spread” is the amount of pips between the bid and ask price, which is the difference between these two parameters.
All these terms are related and it is very important to understand what they mean to understand what the spread is.
If a broker buys a currency for 100 and resells it for 102, the spread is the difference between 102 and 100.
These terms have been used to better understand the meaning, but in reality, the spread continues in decimal terms, so the real values could be for example 10.0004 and 10.0002.
To conclude, let’s take a look at “leverage”, which is a term used to indicate borrowed funds. In forex, leverage is closely related to gain and loss, as it magnifies them. Often this carries the risk that the financial charges will exceed the income from the activity. This will, of course, lead to a reduction in profits.
For example, an investor who buys a security on the margin of 50% will lose 40% of his money if the stock decreases by 20%. The risk can be attributed to a loss in the value of the collateral assets. Intermediaries will be able to request the addition of funds when the value of the securities in their possession falls. In addition, banks may not renew mortgages when the value of the real estate declines below the principal debt. The more IIF cash flows and profits are sufficient to maintain ongoing financing costs, the more loans may be issued by banks.
This can happen when there is little market liquidity and sales depress prices. This means that when things go wrong, leverage increases, multiplying losses. This can lead to rapid ruin, even if the value of the decline is slight or temporary.
How to use Technical Analysis in Forex
The term technical analysis refers to a series of disciplines that study the performance of financial markets in the past to predict the future, very useful for both forex trading and CFD trading.
Although skeptics speak of it as a kind of astrology everyone, including them, looks at it.
Many financial analysts use methods of analysis, cd fundamental, which is based on the “fundamentals” of business and the economy in general.
There are large financiers who use a “Top Down” approach, i.e. a study of the markets in general aimed at identifying the economies with the best fundamentals and then move on to the analysis of the most promising industrial sectors and, in the end, identify the stock or bond to buy or sell.
Others using the “Bottom Up” approach, where, instead, we start by sounding all or almost all of the assets that can be purchased to trace back, gradually, to the most promising ones.
It is undeniable that the fundamental analysis allows, in the medium-long term, to obtain results; people like George Soros and Warren Buffett have built fortunes with these methodologies.
It must be said, however, that these methodologies require large amounts of capital because they require very costly and time-consuming analysis and that, above all, not all those who use these models have become millionaires!
The technical analysis, instead, starts from a completely different assumption: history repeats itself and, therefore, from the trend of a stock in the past we can get an indication in the future.
As it is understood the technical analysis has nothing to do with the fundamentals, with the reference market or with other macroeconomic variables, but it is based simply on some graphical and statistical principles.