Nowadays, forex is the biggest financial market in the world. Average daily trading volume (ADTV) for forex is around 5 trillion USD, more than any other asset. The reason why forex is dominating the financial industry is quite simple: money is something everyone uses and everyone needs. For example, let’s say you are a sports shop owner in the United States. You want to sell goods that are produced in Germany, which means you have to import them. Of course, United States and Germany have two different currencies: USD and EUR. German supplier will be paid in USD, which means they will need to exchange that currency for their local one. This is only one small example of what happens each day on global markets, not only among small business, but private persons and great industries as well. No wonder forex market reaches such a high volume!
How to trade Forex Online?
Forex trading became popular when it became accessible to a greater number of people. Most people who are interested in any form of online trading, sooner or later encounter forex contracts that are based on currency pairs and the ratio between them. There are many combinations of currency pairs, but keep in mind that not all of them are equally popular or present on the market. Of course, currencies that dominate the forex trading industry are USD, EUR, JPY, CAD, GBP, CHF, AUD etc.
One of the main benefits of forex trading is that it can be done from the comfort of your own home. All you need is a computer, tablet or a smartphone and a good internet connection and you can start trading. Also, most forex trading platforms are also web-based or have special mobile trading apps which means you can trade whenever and wherever.
Online Currency Trading on Forex Platforms
The Internet is literally overflooded by different guides, eBooks, webinars and videos on how to participate in forex trading. Some of those educational materials oversimplify the entire trading process, while others go in depth and can easily confuse beginners who have no trading background and lack basic understanding of technical and fundamental analysis. However, forex trading can and should be learned, but basically it is predicting the movement of the exchange rate. Right prediction makes money, while wrong prediction causes loss.
The best and easiest way to explain basic principles of forex trading is by an example.
Let’s say the trader is interested in a currency pair that is among the most popular on the market EURUSD. The exchange rate for this popular pair is 1.1515 which means someone doing a currency exchange has to give 1.1515 USD (quote currency) to get 1 EUR (base currency). Traders who believe that EUR (base currency) will get stronger in the future should “go long” (buy) the EUR, as they believe the value of this currency will grow. Traders who expect that euro will lose value “go short” and should sell it for some other pair (for example, USD).
It is important to understand how currency market is never static, it has fluctuations and is moving all the time. Sometimes it gets very volatile as well, but no matter how significant the movement is, it is always influenced by several factors and variables, that are out of the trader’s reach of influence.
Let’s get back to our trader from the beginning of the story. For the purpose of this story, we will say that the trader believes that the Euro will grow, and buys 100 EUR for 115.15 USD. Europe gets affected by some significant changes and good news from monetary banks, so EUR gains in value. It shifts from 1.1515 to 1.1540. The change seems almost insignificant to an average person that is not on foreign exchanges. Still, the trader who bought the 100 euros managed to make 0.25 USD. If he decided to sell the Euros, he would make money.
What are Pips?
Pips are a significant term in forex trading, that describes the price movement of 1/10000. In our example, the movement was 0.0025, and the trader from the story earned 25 pips. Pips are calculated in both directions, no matter whether the currency
What are pips in forex trading?
Remember these 0,25 that were earned as trading income in our example. Traders usually don’t speak in these absolute numbers since exchange rates movements are not that big on a daily or monthly basis most of the time. Each 1/10000 of the exchange rate, they call a pip. Meaning that what was earned in the previous example was 25 pips. This is the way the market expresses movements no matter whether the value is falling or rising.
What is Leverage in Forex Trading?
We will continue with our example. The trader made 0.25 USD – certainly not an amount to be proud of. Some might say that it doesn’t even make any sense. Still, the trader can use the leverage. Leverage is allowing traders to make more money in their trades and literally serves as a lever that allows them to multiply their profits as they have more money at their disposal. Leverage is always expressed as a ratio and is based on margin requirements that are always set by the broker.
So, if the broker offers 1:100 leverage, the trader from our story won’t be trading just 100 EUR, but 10,000, as the broker offered a leverage. Our trader that made 0.25 USD when trading his own money, could have made 100 times more ($25) if he only used leverage.
Traders must put some effort to understand that leverage is not a free money or a free loan. Also, it is no guarantee that you will profit. Traders who use leverage can also lose money. If our trader lost $25, he would get a margin call. This means that the broker can no longer risk the money that was given to you as a leverage. A margin call is an amount that needs to be available on the trading account to execute the trade and cover losses that may occur. If our trader accepted the leverage but didn’t have enough money to cover the potential losses that exceed the initial investment, he would get a margin call.
What is a Spread in Forex Trading?
Another important term in forex trading is a spread. Traders who just stepped in the world of forex will immediately notice how to buy and sell price are never the same. The highest price that is set for selling is also called ASK – the asking price, while the highest price someone is ready to pay for the same asset in order to buy it is a BID price. The spread is the difference between the ASK and the BID price. Keep in mind that the bid is always lower than the asking price.
Again, we will explain spreads in forex trading by using an example.
Let’s say the trader is buying EURUSD pair. The trader is ready to pay a certain price, 1.1234 (the asking price), but the trader that is selling it can do so at 1.1230 which is the highest bidding price. This also shows how traders who try to buy and immediately sell will be in a somewhat worse position as they will lose the initial investment, in this case – 4 pips. The spreads are not fixed and can fluctuate depending on the market volatility: it is wider when there is not a lot of liquidity on the market. Also, the spread is fluctuating during the trading process, so traders should act swiftly and mindfully to take advantage of market movements. Some brokers, both forex and CFDs brokers, will offer fixed spreads to help traders gain more control during the trading process as they have stable costs.
The spread is also the cost of using a broker.
What are CFDs and How to Trade them?
Contracts for difference or CFDs are another type of financial instruments. When traders trade the CFDs, they trade on the difference between the strike and closing price of a chosen asset: commodities, indices, shares, treasuries…
To understand CFDs trading, it is important to know the basic terms involved in trading. Just like forex trading, CFDs trading is best described by using an example.
Imagine that you are buying CFDs related to stocks. The strike price is the price of the asset contract when it is being bought. BMW stock price can be $100 at a certain moment, and that is the strike price of the stock. Just like in forex trading, the CFDs trader can either enter a long position if they believe the price will rise and buy the BMW stock position. They can also believe the price will fall, go short and then sell their position. If the trader did the right move by trading CFDs, their profit will be calculated as the difference between the strike price and closing price (the price at that contract is sold). Traders who made a wrong prediction lose the same amount from their trading balance.
CFDs Contracts Explained
CFDs trading offers greater asset variety than forex trading that is based on currencies. CFDs contracts can be based on more different asset types – commodities, stocks, bonds and many other instruments can be underlying assets in the CFDs trading, which means that traders can easily create very diversified trading portfolio they will use to access global markets. The list of underlying asset can be found on every trading platform and with every broker. It is no secret, so make sure to check it out before you start CFDs trading or even make a deposit with a CFDs broker.
How to trade CFDs?
CFDs trading is not very difficult to understand, especially for traders who already encountered forex trading. Just like in forex trading, in CFDs trading, you can buy or sell a contract, based on the speculation of the price of the underlying asset. The trader who believes that the price of gold will rise, can simply go long and buy contracts. If the trader believes the opposite, he will simply go short and sell contracts. The trader that makes the right move at the right time, gets the price difference added to their balance. To put it simply, the main difference in forex and CFDs trading is in the underlying asset.
CFDs trading Example
Let’s say you want to start CFDs trading. You are convinced that the price of XYZ stock will rise soon. For this reason, you buy contracts. Of course, you can’t buy the actual stock, as it is much more expensive, so you buy the CFDs contracts.
The next step I that you use the leverage if you like. The CFDs broker is offering you 1:100 leverage, you accept it and buy 100 contracts. As times go by, it turns out you were right and the price of XYZ stock is now 105 USD. The price difference ($5) belongs to you, and as you accepted leverage offered by your broker, you made $400. Keep in mind that you have to pay back for the leverage.
Difference Between CFDs and Forex
Even though CFDs and forex trading seem like the exactly the same thing, they are not. There are some differences that traders need to understand.
The main thing they have in common is that they are accessible to everyone. You can speculate on the prices from your own home, and from any device that supports online browsers or mobile apps. Also, compared to binary options, forex and CFDs offer more efficient money and risk management, as there are no unpleasant surprises in the last second. Binary options are more dynamic, but also a lot riskier because of expiry times. In CFDs and forex trading, everyone can close the position when they think the time is right as there is no timer ticking. Traders can lock in profits when they make that decision based on the market movements.
How to Select a Forex or CFDs Broker?
There are several things you need to know and understand before choosing a broker. First and foremost, know that forex and CFDs brokers are companies that offer services of trading. They allow you trade on markets you couldn’t access without them. Every trader has to make an account and make a deposit in order to trade.
But not all brokers are made the same. One of the main things to keep in mind is that it is the best solution to open an account with a regulated broker. Regulated forex and CFDs brokers have all necessary licenses for operating their business and offer a higher level of customer protection. Regulated forex brokers usually have clear terms and conditions and treat their customers better. Make sure to check out whether the broker is regulated or not before making a deposit. Sometimes brokers have more than one license for different markets, so don’t let that confuse you.
In the text that follows you will find out more about different regulators
Forex trading in South Africa – FSB
South African traders will be happy to know that their local regulator, the FSB is also providing the proper regulation. The FSB or the Financial Services Board of South Africa regulates several brokers, Markets.com and CM trading, among others.
Cyprus Securities and Exchange Commission
Also known as CYSEC, Cyprus Securities and Exchange Commission is one of the most recognized regulators in the forex and CFDs industry as they regulate brokers that are interested in the EU market. This regulatory body is also in charge of binary options regulation, and provide licenses while implementing high customer support standards at the same time. Some of the brokers with CYSEC license are IronFX, IQoption, BDSwiss, and others.
Some other regulators that are present in the forex industry are FCA from the United Kingdom, AFM from France, CFTC (United States), ASIC (Australia), Finma in Switzerland, CONSOB in Italy, etc.
Forex and CFDs Brokers Trading Features
Even regulated brokers have some differences. Not all of them have the same trading assets, software or equally good educational materials. Also, they differ in terms of spreads, minimum deposit requirements, and withdrawing conditions.
When it comes to forex and CFDs trading, there is a great range of minimum deposit amounts and traders can trade for as little as $10, but only with some brokers.
Here are some minimum deposits:
24option – $100
CMTrading – $250
Of course, the more you deposit, the more benefits are offered to you, so traders who deposit larger amounts get a premium treatment. Account packages come in different sizes with each broker, but most of them include special signals, educational materials, and support as well as personal account managers, larger leverages etc. for more expensive accounts.
What is Forex and CFDs Trading Platform?
Forex and CFDs trading platforms are of great importance for all traders. The platform is usually delivered by a special software provider. Even though they highly differentiate in the way they deliver the trading experience, there are some elements that every platform has.
Most important elements of forex and CFDs trading platforms are:
Charts – usually in a very visible place, they allow traders to follow market fluctuations and apply different tools.
Asset list – a long list of all underlying assets available, organized by type. Sometimes traders can create customized lists as well.
Positions frame – place where traders can place their trades and set specifics
History – list of trades placed in the past
Open positions – trades that are currently active
Now we will list some of the most popular forex and CFDs platforms.
MetaTrader4 and MetaTrader 5
Almost a household name, MetaTrader is among the most popular forex and CFDs platforms. The most popular versions are MetaTrader4 and MetaTrader5. This is not a web operating platform, but a platform that requires download and installation to the personal computer. Every trader gets a set of credentials they have to use to log in. MetaTrader is very popular among traders as it delivers a great variety of tools, indicators, and other trading features. Traders can also upgrade their trading software by using special add-ons and plug-ins.
Proprietary Forex Platforms
Sometimes brokers decide to develop their own trading platforms. Some of them need to be installed, while others are accessible from the browser. The quality of proprietary platforms varies significantly.
Web-based Forex Platforms
There are also platforms that don’t require a download like classic MetaTrader does. Such platforms are Sirix, web-based MetaTrader, or iForex. Traders just have to log in with their username and password and they can access worldwide contracts. These platforms are very user-friendly as they allow access from multiple devices, and not only from the one that has a software installed.
Forex and CFDs Mobile Apps
Mobile apps have become all the rage in forex and CFDs trading, as they are very convenient to use. After all, we all have our smartphones with us all the time. Forex trading mobile apps can be used on any device that supports them, and allow traders to take advantage of every trading opportunity. Traders don’t have to waste time and sit in front of the computer but can be on the go and master the markets.
Forex and CFDs Trading Assets – What to Trade?
Forex and CFDs trading is impossible without underlying assets. They are contracts, so their value is derived from a certain asset the trader decided to trade. The fact they are contracts, allows traders to skip big investments and high personal brokerage fees that are common in traditional trading. With a minimum deposit of just a few dollars, traders can experience the world of financial trading.
What is interesting about CFDs and forex trading is that there is a great variety of assets available. In forex, that is based exclusively on currencies, these are the most popular pairs: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF, USD/CAD, EUR/JPY, EUR/GBP.
There are also other currency pairs the trader can trade. However, while all brokers offer these basic pairs, more exotic and unusual pairs are not always available with all brokers. Also, not all pairs are made the same, so some get to be more volatile than other. Also, movements in one pair can cause movements in some other pair. Forex trading can be very interesting so make sure to check out all the possibilities.
Currencies are not the only underlying asset available for traders. They can also trade any other underlying asset that is offered as a CFDs contract – wheat, oil, bonds, stocks etc. It is estimated there are over 10.000 CFD contracts available on the market, so just try to imagine the possibilities.
Commodities are usually raw materials and similar p, like agricultural products. Some of the most popular commodities are:
- Crude oil
Stocks are shares of certain companies that listed them on certain exchanges. Also, buying actual stocks can cause changes in the ownership of the company, but in the CFDs, traders are buying contracts and not real stocks, so there is no chance for ownership. Almost all popular companies are listed on most influential exchanges – Mercedes, Apple, BMW, Microsoft, IBM, Coca-Cola, Nestle… CFDS trading opened door to small traders who can’t afford to actually own a stock.
Bonds or – IOUs are issued to define the relationship between the person that borrowed money and the owner of the money. For a person that gave money, it is the right to a certain interest and full amount when the bond matures. They are usually used by governments and companies as a source of financing themselves.
Indices indicate how a certain market is performing. For example, DAX30 shows how 30 biggest stocks in Germany are performing when combined. Indices can also show the performance of stocks and can be traded as any other CFDs contract. With CFDs, you can also speculate on the changes in the index value. Most popular indices are:
- NASDAQ 100,
- DAX 30,
Technical and Fundamental analysis in Forex Trading
Traders are often surprised when they find out how selecting a broker, installing a platform and deciding on the asset is only a half of work done. Also, traders need to apply certain forms of market analysis if they wish to perform well and enjoy all the benefits forex trading can bring. The basic types of analysis are technical and fundamental analysis.
Technical Analysis in Forex Trading
Technical analysis is using the data from the past to predict the performance of the underlying asset in the future. Trading based on historical patterns is frequently used not only among the traders of all kinds but also by financial institutions all over the world. In technical analysis, traders and specialist are always looking for certain forms that prices forms, whether they are head & shoulders, wedges, triangles or any other form recognized as important.
Fundamental analysis in Forex Trading
Fundamental analysis is done based on the major economic news and forces that have a great potential to cause market fluctuations. For example, if a big and influential company goes bankrupt – it will cause significant shifts in the financial market. The same scenario will happen if the company performs unpredictably well. Some of the factors that are taken into consideration during the fundamental analysis are GDP reports, liquidity ratios, inflation etc.
CFDs and Forex trading as an interesting way of trading that has potential to change your life forever. Make sure to read our reviews and get familiar with brokers before making a deposit.