Meaning of Forex Trading

Acronyms Business

The term Forex is derived from the English term “Foreign Exchange”. Forex trading has become increasingly popular in recent years.

  • Forex trading differs in spot trading, which takes place between banks, insurance companies and other financial institutions, and forex trading, in which private investors participate.
  • To participate in forex trading, a private investor must open a trading account with a special forex broker.
  • The investor does not invest the full amount, but only a fraction, the so-called “margin”. Still, the risk involved in forex trading is noteworthy.

Forex trading

There are two types of trading in forex trading:

  • spot trading – the actual buying and selling of foreign currencies by institutional traders such as banks or insurance companies;
  • Forex trading as a trading opportunity for private investors.

It is a special form of trading in which the investor does not invest the full amount, but only a fraction, the “margin”. Strictly speaking, this is a type of derivatives trading that is not only viewed by critics as a financial bet. A special feature of forex trading is that traders can make a profit on both rising (call) and falling (put) prices. The investor bets on whether the rate of one currency falls or rises in comparison to the rate of another currency. According to abbreviationfinder, GFT stands for Global Forex Trading.

If one assumes that profits in foreign exchange trading arise in the second or third decimal place, it is easy to understand that with a stake of 500 euros against US dollars it takes a long time for the price to develop in such a way that the investor has a noteworthy one Generated income. However, forex trading makes it possible to trade sums of 100,000 units of a currency at a fraction.

The forex broker

The basis for trading foreign currencies is initially a trading account with a special forex broker. The broker sets the so-called leverage for a trade. The leverage differs from broker to broker and currency pair to currency pair.

When it comes to brokers, a distinction is made between so-called STP brokers and market makers:

  • The STP broker (Straight Through Processing) or non-dealing desk broker forwards the customer’s order directly into the market.
  • The market maker, on the other hand, sets the prices against his customers.

Market makers therefore have an interest in the customer “losing” and his stake, the margin, being lost. The STP broker, on the other hand, only finances itself from a commission, the spread.

The lever – small effort, big effect

Assuming an investor wants to trade the equivalent of 100,000 euros for US dollars with a leverage of 1: 200, the actual stake is 500 euros (100,000 by 200). The broker provides the remaining amount as a loan. Usually trades are closed on the day they are opened. The investor only accrues interest if he leaves the position open overnight.

The usual trade size is one lot, 100,000 units of currency. Depending on the broker, smaller volumes can also be traded.

The trading platform

Trading takes place using a trading platform. This provides the trader with all the necessary information about price developments, statistics and news. The platforms offer the possibility that the trader can trade automatically, i.e. does not have to sit in front of the screen all the time. He has the option of entering an upper and a lower limit. If the price reaches the respective limit, the trade is either canceled or it realizes a profit.

The margin call

If a course runs against the intention of the trader, he is threatened with a total loss of his stake if the price loss exceeds the amount of the capital invested. Theoretically, he would then have to shoot up the difference. Serious brokers, however, waive the obligation to make additional payments, the trade is canceled at the latest when the price loss equals the margin.

But there is another option, the margin call. This occurs when the price loss reaches a certain percentage of the capital employed. If the stake is 500 euros and the margin call is at 50 percent, it applies at 250 euros.

However, there is a catch here. Suppose the trader has ten open deals with a margin of 500 euros each. 50 percent of the capital is set for the margin call. In this case, the broker adds up the entire capital employed, 5,000 euros. The cancellation only takes place when the total loss reaches 2,500 euros. The single trade with 500 euros that went “out of the money” results in a total loss. The trade is only canceled when five trades, which are running in parallel, come into the red and show a loss of 2,500 euros.

The return on Forex trading

On the other hand, the risk of forex trading is offset by a correspondingly high return. The rule here is that the trader is credited with the realized profit in full, minus the spread for the broker. If he achieves a price gain of 10 percent with a stake of 500 euros with a volume of 100,000 euros, he goes out of business with 10,000 euros, not 50 euros.

The path to becoming a successful trader

The odds of winning in forex trading are 50 percent – as high as a football bet, but higher than in roulette, where there is also a green zero in addition to red and black.

However, by choosing a good broker, beginners can increase their chances. Trading in foreign exchange can be learned. The main focus is on chart analysis and the recognition of trading signals. Good brokers not only offer free demo accounts, but also support their customers beyond the initial phase by providing video tutorials, e-books and webinars. They provide continuous training opportunities.