Forex market: what is and how to make money there | GERCHIK & CO

What Is Forex market and how to make money there

28-11-2019

Forex is one of the most popular ways to make money but do you know how this market emerged, how it is arranged and how you can make a profit there?

It is about time you learn what Forex is really all about, for the basic knowledge is the very backbone of your efficient trading!

Forex Market and its concepts

Read in today’s article:

1. History of the currency market
2. Special aspects of the Forex market
3. Forex trading sessions
4. Forex players
5. Basic Forex concepts
6. How to start trading Forex

History of the currency market

The international exchange market in its today’s form has emerged fairly recently, a little over 40 years ago. Until 1971, the exchange rate of the world currencies had been linked to the gold standard. Following its cancelation back in 1976, a new principle of currency trading has been introduced.

Since that time, the value of national currencies has been determined not by the state, but by the market relations only i.e. supply and demand. This is how the Forex market, where you can buy and sell all the major world currencies at a price determined in the course of trading, entered the picture.

Essentially, the term «Forex» is a combination of two words: foreign and exchange. This is a universal trading platform where you can exchange dollars for euros, euros for pounds or Japanese yen etc.

In a way, the Forex market is just like a gigantic currency exchange office, with the only difference being that the exchange rates are determined by the balance of buyers and sellers and not by the bank. The bigger the number of people wishing to buy a certain currency, the higher its price. By the same token, when the demand for currency drops, it becomes cheaper.

Today’s daily currency turnover of the Forex market is 7 trillion U.S. dollars, which, let’s admit, is a pretty jaw-dropping figure. But most importantly, you can make money on it. For instance, if you know that the U.S. dollar may go up on a short-term horizon, you can buy the USD in advance, and then sell it at a more favorable price.

Special aspects of the Forex market

1. Versatility. The key task of the Forex market is to exchange currencies at the most favorable rate. That being said, central banks use this market for exchange rate interventions aimed at stabilization of the national currency, whereas the traders use it to make money.

2. Ability to trade from anywhere in the world. Forex is not a stock exchange with an actual building where you go to in order to make a trade. Forex trading operations are carried out on the Internet, so it is irrelevant if the trader is based in Australia, Canada or China.

3. Business hours. To make money trading Forex, you don’t have to wait for a certain time. The trades are made around the clock from Monday to Friday. This provides traders with a huge advantage, since you can trade in your free time.

4. Accessibility and affordability. Not only large banks, stock exchanges and investment companies, but also regular traders who have a small starting capital can easily trade in the foreign exchange market.

5. Great opportunities. By trading Forex, you can make money not only on the increase in the exchange rate, but also its decline. This is a great advantage of the Forex market as compared to other ways to make money e.g. those who invest in stocks or gold make a profit only when their asset goes up in value.

Forex market and its trading schedule

Forex trading sessions

While the stock and raw exchanges have a specific location e.g. in London or New York, Forex is an over-the-counter global marketplace that is not attached to a specific platform. The trades are made in regional currency markets. They are interconnected thanks to modern-day web technologies.

In terms of the opening hours of the exchange platforms, there are four trading sessions:

  1. Asian;
  2. European;
  3. North American;
  4. Pacific.

With its key financial hubs in Singapore, Tokyo and Shanghai, the Asian session is the earliest one. The most traded currency of this session is the Japanese yen.

The majority of the market players trade during the European session, with the most popular instruments being the Euro, Pound Sterling, Swiss Franc, Swedish Krona and Norwegian Krone.

The North American session is also extremely active. This is the time when Chicago and New York trading platforms are at full swing, with USD and Canadian Dollar becoming the market favorites. Traders make sure not to miss the chance to make money on this.

And last but not least, there is the Pacific session, which is the latest and calmest of them all. During the operation of stock exchanges in Sydney and Wellington, Australian Dollar and New Zealand Dollar are predominantly traded. The trading session schedule is arranged according to the winter and summer time. The time is indicated in international formats i.e. GMT, EEK, and MSK.

Summer time

Session City GMT EET MSK
Asian Tokyo
Singapore
Shanghai
00:00-06:00
01:00-09:00
01:30-07:00
03:00-09:00
04:00-12:00
04:30-10:00
03:00-09:00
04:00-12:00
04:30-10:00
European London
Frankfurt
07:00-15:30
07:00-15:30
10:00-18:30
10:00-18:30
10:00-18:30
10:00-18:30
American New York
Chicago
13:30-20:00
13:30-20:00
16:30-23:00
16:30-23:00
16:30-23:00
16:30-23:00
Pacific Wellington
Sidney
21:00-03:45
23:00-05:00
00:00-06:45
02:00-08:00
00:00-06:45
02:00-08:00

Winter time

Session City GMT EET MSK
Asian Tokyo
Singapore
Shanghai
00:00-06:00
01:00-09:00
01:30-07:00
02:00-08:00
03:00-11:00
03:30-09:00
03:00-09:00
04:00-12:00
04:30-10:00
European London
Frankfurt
07:00-15:30
07:00-15:30
09:00-17:30
09:00-17:30
10:00-18:30
10:00-18:30
American New York
Chicago
13:30-20:00
13:30-20:00
15:30-22:00
15:30-22:00
16:30-23:00
16:30-23:00
Pacific Wellington
Sidney
21:00-03:45
23:00-05:00
23:00-05:45
01:00-07:00
00:00-06:45
02:00-08:00

Forex players

All players in the Forex market can be classified into 4 large groups:

1. Banks. Since Forex is chiefly a market designed for foreign currency exchange, its key players are central banks and large commercial banks. They carry out the largest transactions, thus setting the market trends. Private banks make large foreign currency exchange transactions for their clients, whereas state-controlled banks perform exchange rate interventions aimed at regulating the exchange rates of their currencies. This specific category of market players is the one that creates supply and demand by increasing or decreasing the quotes.

2. Investment companies. Funds invest their investors’ money in securities and bonds from different countries, so currency exchange is essential to them. Investment companies and funds are not as large of a market player as central banks are. Nonetheless, they are of great weight in the market.

3. Brokers. Dealing centers and brokerage companies act as intermediaries between the market and traders, various financial companies and investment funds. This group is pretty large, yet has less impact on exchange rates.

The brokers’ key function is to provide access to the market, which they charge the customers a certain fee per trade for.


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4. Traders. This is the biggest category of the market players. Hundreds of thousands of people around the globe attempt to make money on fluctuations in exchange rates, and the number of traders continues to grow every single day.

Typically, there is no way regular traders can affect the market situation. That being said, they can keep an eye on the price charts, analyze them using various tools (e.g. economic calendar and technical indicators), predict the increase or decline of quotes and profit from it.

Forex Quotes

Basic forex concepts

The number one concept in the Forex market is a currency pair. All currencies are traded in pairs e.g. EUR/USD (Euro and U.S. dollar), USD/JPY (U.S. dollar and Japanese yen). The base currency is the first currency in a currency pair quotation, followed by the second part of the quotation, referred to as the quote currency.

When the traders make trades, they buy or sell the base currency for the quote currency. For instance, in a pair of EUR/USD, you can buy and sell euros for U.S. dollars. Since you can sell and buy currency in Forex, there are two parts of the Forex quote, a bid and an ask.

IMPORTANT!

The bid price is what the dealer is willing to pay or “bid” for the base currency. The ask price is how much the dealer wants for the base currency.

The difference between the bid and ask prices can be several pips, and is called a spread. A lot is the standardized number of units in which a financial instrument trades. A standard lot is equal to 100,000 units of the base currency.

It goes without saying that regular traders do not have such amount of money, so in prior years they couldn’t trade Forex. But then a leverage entered the picture. Leverage is a tool that allows the traders to make trades that are tens or even hundreds of times bigger than their actual investment.

E.g. if you wish to make a trade worth $20,000, you can invest only $2,000 of your own funds using 1:100 leverage.

Trading terminal is a platform that is installed on a computer and allows the trader to make Forex trades online. The platform is typically offered by brokers for free.

In the terminal, you can keep track of the quotes of all major currency pairs and wait for the right time to open and close the trades. A special program called the Linker will help you with this. To learn more about it, make sure to watch the video below.

How to start trading Forex

What you need to do first is to get registered with a brokerage company. Once you’ve done that, you will get access to the trading platform. When you do, simply download and install it on your laptop, computer or smartphone.

However, platform access is not the only thing you need in order to make money. You will have to replenish your trading account. You will be using this money to make trades.

If you are only starting to trade Forex, you can practice on a free demo account first. All of the money in demo account are virtual.

Demo Account offers an excellent opportunity to learn how to open and close trades and test out your trading strategy. That said, you can only get real profit on a live account.

Forex trading is not only a great chance to make money but is also associated with certain risks, since in case you fail to correctly identify the direction of price movement, the trade will be losing. Risks cannot be entirely ruled out, but they can be mitigated.

To achieve this, you need to:

  • undergo a training;
  • pick a solid trading strategy;
  • stick to the trading algorithm;
  • get a grip on your emotions.

Everything comes from experience. But in order to gain it, you need to take the first step. Don’t be afraid to start, for all great traders once used to be newbies!

In order to see how Forex can generate real profit, make sure to watch a short video brought to you by a successful person, the president at Gerchik & Co Alex Gerchik who - just like you - was once a newbie, having come to the market with a very small capital. However, he was able to achieve a lot because he believed both in himself and Forex.



What to know:


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