Forex Trading - Earning Money With Currency Businesses (Forex Trading)

Foreign exchange trading, often referred to as Forex trading in English, is the largest financial market in the world with a daily turnover of around 5 trillion US dollars!  It is also known as the market that never sleeps because trading is practically possible around the clock.

 In this article we take a closer look at what forex is, how to trade it and why currency trading is so interesting, especially for day traders.

 What are foreign currencies?

 First of all, currencies are just foreign currencies.  Euros, dollars, Swiss francs, British pounds, etc. Each of these currencies is in a sense already a currency.  However, only if it is deposited into a bank account.  Coins and bills are called sorts in finance.

 The definition of foreign exchange

 Foreign exchange is a term used in finance and describes assets or claims in a foreign currency.

 In practice, this can be a foreign share, a foreign currency account or simply a check in another currency.  You could open an account in the US today and accordingly have a foreign currency account that is kept in US dollars.  And when you have deposited money, you are already a foreign exchange owner.

 But that's not very interesting for us in trading.  We are primarily interested in foreign exchange trading.

 Foreign exchange transactions

 There are different types of forex deals.  They can be used as a means of payment abroad, as a form of private investment or as a hedge for real economic transactions.  However, in the following we only look at the trader perspective.

 In forex trading, the basic idea is this:

 Today you exchange money in one currency for another in order to exchange it back later when the exchange rate has changed.  So instead of exchanging money for goods, money is exchanged for money in forex trading / currency trading.

 The basis for the exchange is the exchange rate, which is subject to fluctuations due to monetary policy measures and economic changes.

 The historical idea of ​​forex trading

 Originally, the idea behind foreign exchange trading was to hedge large trading transactions against currency fluctuations.  Imagine, for example, that today you are having a ship built in a US shipyard for US $ 100 million and that payment is not made until it is completed.  Since the completion of such a large project can take several years, enormous price differences can occur with such large sums due to the currency fluctuations that occur.  If the rate of the US dollar rises against the euro by the time it is completed, you will be paying more for your ship than you originally planned.

 To ensure now that the $ 100 million at the time of completion also corresponds to the value of the $ 100 million at the time of the order, you would hedge yourself on the forex market with a currency trade.  You would be entering into a trade that would return you the exact amount you would lose in a rise in the value of the dollar.

 The exchange rate of foreign exchange

 The exchange rate in forex trading is always given for an exchange pair, for example EUR / USD = 1.1277.

 This means that for one unit of the base currency, the euro, you get 1.1277 units of the reference currency, US dollars.  The price fluctuations are given as a percentage or, more commonly, as points, also called PIP in English.

 One point corresponds to the fourth decimal place in the exchange rate.

 Sample calculation for a forex trading

 For a better understanding, here is a very simple example from everyday life with concrete numbers:

 You are fl ying to the USA for your vacation.  To do this, exchange 1,000 euros for US dollars on July 14, 2016.

 The exchange rate at this point is 1.1277.  That means 1 euro = 1.1277 dollars and you get 1,127.6500 dollars for your 1,000 euros.

 Let's say you were particularly thrifty on your vacation and haven't spent any money.  You return on 07/23/2016 and exchange your 1,127.6500 dollars back for euros.

 The exchange rate at this point is 1.0975.  That means you get 1,027.47 euros.  So you earned 27.47 euros on your vacation because you changed money at the right time.

 So much for a bit of theory about forex and currency trading.  Now we come to practice.

 Forex trading as a day trader

 But even if you are not currently ordering a ship for 100 million US dollars in the USA, the forex market can be of interest to you.  With a daily turnover of almost 5 trillion US dollars, it is the world's largest financial market and many times larger than the stock exchanges.  Trading takes place 24 hours a day, every working day.  It starts at 10 p.m. GMT on Sunday in New Zealand and ends at 9 p.m. GMT on Friday evening in New York.

 When you trade forex, you buy so-called lots.  One lot corresponds to 100,000 units of a foreign currency.  Various brokers also offer smaller denominations of mini or micro lots especially for small investors.  Trading takes place for you, similar to stocks, using your normal trading software.

 The broker earns with every trade by charging fees for the trade.  The fees are referred to as the spread in Forex trading.  Just as there is a buying and selling price when buying a share, there is also a buying and selling price when trading forex.

 The gap between the prices is the spread and is usually given in pips, i.e. points of the exchange rate.  For a day trader who trades a lot, it is therefore very important to choose a broker with the lowest possible spread.

 Additional fees apply if you hold positions overnight, as the leveraged amount is equivalent to a loan.  This fee is also known as a swap.

 The interesting thing about the Forex market for day traders is the very large leverage, which is between 50 and 800.  If you choose the maximum leverage of 800, you can trade with just 1,250 euros, 1 million units of a foreign currency.  Applied to the vacation example, you would have earned 21,976 euros in the same time with the same 1,000 euros stake.

 The majors in forex trading

 The most heavily traded currency pairs are called majors and make up the bulk of forex trading worldwide.

 You should only concentrate on these, as the others, also known as minors, have significantly higher fees.

 EUR / USD - Euro vs. US dollar

 GPB / USD - British pound vs. US dollar

 USD / CHF - US dollars vs. Swiss francs

 USD / JPY - US dollar vs. Japanese yen

 USD / CAD - US dollar vs. Canadian dollar

 AUD / USD - Australian dollar vs. US dollar

 NZD / USD - New Zealand dollar vs. US dollar

 Conclusion on forex trading

 The forex market is one of the most popular markets for day traders.  Large leverage, high liquidity and constant availability attract many day traders from beginners to professionals.  If you're interested in the topic, start with a currency, create a specific trading plan, and then take your first steps in forex trading.