What is Forex and can you make money on it

In this article we will talk about the global currency market Forex – we define its essence and get acquainted with some basic concepts that will help you feel in any of its trading platform like a fish in water.

In subsequent articles, we will deal directly with whether it is realistic to make money on Forex for people who have neither financial education nor large capital – we will analyze several strategies that allow you to go straight to trading and start making money. So, we proceed.

Differences between the forex market and other leading world financial leaders

All the diversity of economic markets can be represented in three main components:

  1. Exchange where goods and raw materials are sold ;
  2. Exchange stocks – there already are traded not commodities, and securities, each of which has its own abbreviation and change the price;
  3. Forex is a currency exchange – money is bought with money.

What distinguishes Forex from other markets? There are a number of elements:

  1. Forex does not have a trading platform . Any stock or commodity exchange is localized in a particular city, for example, there is the Chicago or London stock exchange, Forex is traded on the interbank market.
  2. Since there is no market, there is no opening / closing time: currency transactions can be performed around the clock on any day except Saturday and Sunday (an important point is not always reasonable to leave open positions on weekends).
  3. Volumes in the Forex market are tick , rather than monetary, the difference can be easily illustrated with an example: if there are three transactions in the stock market with cash volumes one dollar and one hundred dollars, then the volume will be equal to 1 + 1 + 1 + 100 = 103; on Forex, the moment of the transaction will be taken into account, and the volume is simply ignored: 1 + 1 + 1 + 1 = 4. This is rather a disadvantage than an advantage, since many profitable trading strategies cannot be applied, but there is nowhere to go.
  4. When making a transaction, a trader in the stock market Forex must pay a commission in percent , the commission is charged both at the opening and at the close of a trading position. In Forex, not the interest is paid, but the spread , we will give an interpretation of the term below. You only need to pay it once when opening a transaction.
  5. Terms of trading on the Forex spot , that is, the calculation is carried out after one day from the moment of the transaction (this is also slightly lower).
  6. You trade through leverage – this allows you to begin to make transactions even with a small amount of initial capital.

In order to answer the question of what Forex is complete, we must determine who performs the financial transactions here. All participants are divided into majority shareholders (the largest, able to unfold price trends for certain assets) and minority shareholders (as a rule, individuals or small firms). Majoritarian banks include Central Banks of various countries, which follow the dynamics of changes in their exchange rates, influential brokerage houses, investment funds, and so on.

There are several methods for making trading decisions in Forex and other markets, and we will give them a brief description:

  1. Graphic analysis (read about this in the article about Forex strategies and trends ) – forecasting price movements based on graphic data, studying reversal patterns and continuing trends, drawing support and resistance lines, and so on;
  2. Indicator analysis on the Forex market – you need to set up the indicator so that it tells you at what time to buy and at what time to sell the currency;
  3. News analytics in Forex – the price often changes due to the expected news, tracking them allows you to successfully trade and make good money.

The first two methods fall into the category of technical analysis, the latter embodies a huge area of ​​fundamental analysis.

How to make money on Forex: acquaintance with trading

We have listed the main differences between the foreign exchange market and other components of the economic system, now we are gradually turning to the question of how to make money on Forex. The principle is obviously simple: you need to buy currency and receive income from changes in its rate.

All transactions are carried out through the trading terminal, as a rule, this is MT4 (you can download it on the website of the broker with whom you decide to cooperate, the best option is Alpari – a broker legally registered in Russia, having offices in all major cities). The first step towards success is to understand how the terminal works, what it reflects, how to work with it. Below, we will shed some light on this question, and we will talk about earnings strategies themselves later.

If you open MT4, you will immediately see several graphs reflecting the value of a particular currency. We stretch to full screen, for example, the EUR / USD graph and we will work on his example.

Under the price chart you can see the indicator window . For now, do not pay attention to it: we will talk about indicator methods of analysis in a separate article.

To avoid confusion, it is necessary to bring all the graphics to a common format. To do this, click on the graph with the right mouse button, select “Properties” and (preferably) “Black on White”:

Next, in the “General” tab, check the box next to “Show the Ask line” if it is not by default:

You probably noticed that the names of all graphs consist of the names of two currencies indicated by a slash, in our case, it is Euro and US Dollar (besides it there are “Canadian”, “New Zealander” and others). The first currency is the base of the quotes – what financial transactions are carried out on, what you will sell or buy, the second one – the currency of the quotation – what is the value of the currency being bought / sold.

Quotes, for which the US dollar is the base, refer to direct quotes, for which USD is the currency, are reverse. There are also cross-rates – when the dollar does not appear at all, for example, EUR / GBP (euro to pound sterling), etc.

Earnings on Forex is not possible if you do not understand these theoretical points, so absorb the information and try to delve into it. Above, we met two new words: spread and swap, let’s look at the first on a practical example.

In the timeframe window, select M1 (one minute) and look at the chart, you should see two features – black and yellow.

You earn Forex through an intermediary – a broker – who executes your trading instructions. Spreadis the broker’s earnings, the difference between the Ask price (red) and Bid (black). When you buy a currency, you ALWAYS do it at the price of the Ask; the broker previously bought at Bidu, sold you at a higher price – Asuka – and earned on the difference – spread. For example, when you watch economic news, they always say: the Central Bank buys a dollar at a price of 66 rubles (for example), sells for 68 rubles – this is exactly the bank’s earnings on the spread (the bank will take 2 rubles from one dollar if you come and buy one dollar).

If you press the F9 button, the New Order window will open (you can click on the corresponding button in the top menu). You have two options: either choose Buy (buy) or Sell – sell.

If you think that the price will rise – you need to buy (click Buy). 
If you think that the price will fall – you need to sell (click Sell).

Swap means that financial calculations are made not during the current day or the next, but after one day, that is, the day after tomorrow. As a result of recalculation, you can lose or get a negligible amount. Open the order in any direction and do not close it for two days – in the column “Swap” you will see the expense or income. Remember also that on Thursday you have to pay a triple swap, since the settlement falls on a Saturday, and Saturday and Sunday – weekends.

Lot – is the volume of transactions that you make. To start trading with a minimum lot – 0.01, later, when you learn trading strategies and start earning well on Forex, the lot can be increased.

The following two important terms that we analyze – Take Profit and Stop Loss . In the window of opening a new order you can put them in, it’s important that you can successfully take profit (Take Profit) or stop losses if the price does not go in your direction (Stop Loss).

It is necessary to set values ​​for Take Profit and Stop Loss at the moment of opening the order, and not after.

Remember the above written rule, because sometimes the price soars up sharply or “overthrows”, which leads to huge losses (usually as a result of spontaneous news).

Suppose you opened a trade when the price was at 1.1065, set Take Profit to 1.1117 and Stop Loss to 1.1052. The price went in your direction, therefore, when the schedule reaches the Profit mark, the transaction will automatically close and your account will be credited. If the price starts to fall, the transaction will close as soon as the schedule reaches the Stop Loss, but in the case under consideration this did not happen:

Now a very important point. When you open a buy deal, you buy at the Ask price , but the position will be closed only when the Stop Loss or Take Profit level reaches Bids . The opposite situation: the sale is made at the bid , to close the position, the schedule should touch the agreed line of the Askom .

Example. We opened a sale deal (clicked Sell), the sale is made at the Bid price. We have taken Take Profit, the Bid price not only reached it, but even passed, but the position does not close. What’s the matter? In order to close the sale you need to buy, and the purchase is always carried out according to Asuka, Ask due to the large spread has not yet reached Take Profit, so our order does not automatically close:

Once again the key rule: buy by bid, sell by ask. To close a buy position – you need to sell, to close a sell position – to buy. Another important point: if on the stock markets it is necessary to perform the opposite action to close an order, then everything is easier on Forex – just click on the “cross”, if after a purchase you open a sell transaction (if not a closed Buy order) You just have two deals.

So, Forex earnings will not be possible if you are not aware of what Spread is and do not understand at what price we buy, at what price.

The last thing we consider in this theoretical article – the lines of support and resistance, as well as the options for representing the graph, is more logical to start from the second.

You can view the chart in three formats : lines, candlesticks or bars. A line is simply broken, showing how the value of a certain financial asset is changing:

Bars were invented in the United States, so almost all American traders use them in the process of trading. The tails of the bar show what the price was at the time of opening and what was at the time of closing:

The most popular and informative version of the presentation of graphics is the Japanese candles , which have a body (rectangle) and a shadow (line). Shadow means that the price reached a certain value on a smaller timeframe, but at the considered time interval the candle was closed at the level reached by her body:

Now let’s get acquainted with support and resistance lines . We will dwell on this material in more detail in the next article, “Basic Principles of Technical Analysis,” but you should get a general idea right away.

The support line is a conditional feature on which price relies in its movement. Why it relies on it is difficult to say, but the fact remains that it allows you to make huge money. To draw a support line, you must select the tool “Draw a trend line” and stretch a beam or a segment (what is this?)Through the points of the lower extremes (points “low”):

The resistance line is a conditional line from which the price bounces in the course of its movement, and the movement can be both upward and downward:

In the process of changing the course of the line are adjusted, the breakthrough of support or resistance can be perceived as a signal to action within a certain trading strategy, but more on that later.

Forex Market Reviews on the Internet

Probably, nothing is gaining such a huge amount of different reviews, like Forex, let’s conduct a brief analysis. The conclusion is always the same: you will earn money when you understand how Forex functions, when you clearly see a causal link in making decisions to buy / sell currencies.

Real reviews posted on the Internet demonstrate the blind faith of people in what they can earn, doing nothing or “playing”. Work on the stock exchange is not a game and not guessing, it is an analysis. A newcomer becomes a professional when, by any of his actions, he can clearly say: “I bought, because …” or “I sold, because …”.

Reviews of huge profits need to be ignored almost always. Indeed, traders often make 300 percent a month or even more (popular PAMM accounts prove this), but such a return indicates a huge risk. The normal income that you must rely on is 10-30 percent of the capital each month.

In addition to regular trading, interest in Forex is evoked by robots that automatically make trading decisions — newly created, surprisingly profitable utilities that can make any inexperienced trader a billionaire everywhere are advertised …

In the article “How to analyze the market with the help of indicators” you will learn how to independently set up and trade indicators, you will understand the essence of any trading robot. It turns out that automated trading on Forex is really possible, and it can really bring a lot of money, but at certain times the robot must simply be turned off so that it does not bring losses, and in order to know when to do this, you need to learn.

You can find a lot of real feedback from people who have mastered Forex and began to successfully trade. They all agree in opinion – the cause of failure is not in the market, but in the subject, in the person. If you really want to succeed on the currency exchange and are ready to study for a long time for this – you will definitely succeed!

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