Everyone has heard about the fantastic possibilities provided by Forex: that it means high income, low initial deposit, availability of various trading-facilitating software, absence of intermediaries and thus, of high commissions that eat into the profits, etc. Let's consider all this item by item.
Forex is an international currency market where major world currencies are traded. Anyone can become a trader and make money in this market. The main currencies traded on it are US dollar, euro, Japanese yen and British pound.
What is the work schedule of this market?
Forex is open for trading around the clock, five days a week from Monday to Friday, closing only on weekends and major holidays, such as Christmas and Easter.
How is money made?
Everything is very simple: you have to buy currency at a lower price, wait and then sell it at a higher price. Let’s suppose that the quotation of the euro to dollar currency pair (EURUSD) is 1.1226, and the trader believes that the rate will grow in the next few hours or days. Thus, he buys euros for dollars, and if the quotation goes up to, let’s say, 1.1296, he can conduct the reverse operation: sell euros and buy dollars.
As we can see, the difference between the purchase and sale price is 0.0070 or 70 points, which are called thousandths or PIP (point in percentage). Since the trader buys not one but 10,000 euros at once, he earns $70.
What to do if the exchange rate is going down?
If a trader believes that the exchange rate will fall, he can first sell, for example, the same 10,000 euros, and then buy them back. The main thing is to make this operation profitable, and thus, every PIP of the rate decrease will translate into one dollar of profit.
Fluctuations of exchange rates are based on fundamental principles, including the strength of the economy and changes in interest rates; yet, political and economic news, events elsewhere in the world or neighboring countries can affect these fluctuations as well. To profit from these changes, the trader needs to either own extensive amount of funds or use credit leverage. When using the latter, even small amount of a few hundred or a thousand dollars can grow 100-, 200- or 400-fold.
With only 1000 US dollars, you can use credit leveraging, for example, 1 to 50 or 1 to 100, to get very large profits within a short period of time. Let's say, the exchange rate of the peso against the dollar has changed from 19.20 to 19.60, i.e., the difference is 0.40. With a leverage of 1 to 50, your earnings with an investment of one thousand dollars will increase 50 times, from 400 pesos to 20,000 pesos. On the other hand, if the trader’s estimation of the direction of the rate change proves to be wrong, he will lose the lion share of the deposit amount with even the slightest fluctuation.
Where can I get 1,000,000 pesos? I don’t have so much money at my disposal
This issue can be solved by using leveraging. If you have funds sufficient for a small security deposit, leveraging will enable you to obtain the amount of funds that is several times larger: the broker will lend you this amount, albeit for a short time and only for investing it in financial markets. With about 1,000 US dollars at a 1-to-50 leverage you will be able to use $50,000 (about 1 million pesos); and the higher the leverage is, the greater the amount of funds will be, meaning that even a 1 point change in the exchange rate will bring you tens and hundreds dollars of profit if your prediction of the direction of price movement has been correct.
All this is true: you can indeed trade at any time convenient for you from almost any place with access to the Internet, getting high profits from small investments. However, you always need to remember the risks involved and understand that Forex trading may not be suitable for everyone.
What are the Forex risks?
The main risk of trading in the Forex market is the use of leveraging. Leveraging will multiply your profits manifold provided the rate moves in the direction you have predicted, but it can also cause losses as quickly if your prediction proves to be incorrect. Statistics show that most Forex traders lose their investment, but it is possible to reduce the risk.
To reduce risk, you must develop a trading strategy and strictly follow it, as well as to be determined and non-greedy. A trader must keep learning, be able to extract information from the news, know how to analyze it, and anticipate possible changes in the exchange rates. Technical analysis and trading robots that reduce errors can be of great help. You should also avoid using the entire deposit or maximum leverage for trading.
How safe is Forex trading?
The Forex market is global and operates 24 hours a day, 5 days a week; therefore, no one controls or regulates it. Forex is not under the control of, say, the Mexican CNBV or the American SEC. However, brokers who provide trading services in this market are issued licenses and being controlled by the financial regulators of the countries in which they are registered.
Often, advertising for the services of Forex brokers does not disclose all the risks that accompany currency trading.
Forex trading is conducted round the clock and you can earn money in your free time.
Indeed, you can conduct Forex trading at any time and in any convenient place, but this doesn’t mean that you can earn at any time. The choice of the moment of opening or closing a transaction is very important, and for this you will have to study the exchange rate charts, follow the news and wait for the best moment for buying and selling a certain currency pair. This moment does not necessarily coincide with your free time. If you really want to make good profit on Forex, you need to make it your full-time job.
Some people argue that Forex trading is the easiest and fastest way to increase income.
If everything were that simple, everyone would be making money on Forex, but this is not so. In financial markets, the profit of one trader is, as a rule, derived from the losses of other traders. At that, it is the inexperienced traders who most often lose their investments.
Risks in the foreign exchange market are high, and financial advisers recommend Forex to major investors who already have sufficient trading experience, a good understanding of both the macroeconomic and political situation and have the ability to diversify their investments.