How the Forex market works?

Nowadays, finding an adult that has not heard about forex in one way or another might prove to be a difficult task. Someone came across it directly, someone has relatives or friends that are traders, and someone just saw a tempting advertisement on the Internet and wanted to become financially independent and earn big money. Nevertheless, information about Forex is often contradictory. Opinions are divided equally. Some people assure us that they make a living trading on forex, and others say that Forex is a scam and that you should not even bother trying to engage in currency trading.

The latter group of people mainly compare the Forex market with casinos and gambling, where earnings are made mostly due to luck, and the results are not predictable. Of course, there are people who are able to make a huge fortune on the Forex market in a short span of time, but it is more than simply a lucky combination of circumstances, Rather, the acquired knowledge of fundamental and technical analysis, as well as a long trading experience.

How does forex market work?

Forex, short for foreign exchange market, is a market based on trading currencies from around the world. Forex traders earn their fortune on the differences between these currencies. Simply put, they buy currency at one price and sell it at another. The market never stands still, quotes change, and prices rise and fall depending on certain economic or political circumstances. Practically all markets share the same core rule – buy low, sell high, and forex is no exception.

The market is so massive, that it attracts new players every day. However, according to statistics, only 10% become successful and come out positive. The rest – deposit money, burn through it, and leave trading forever. If you wish not to remain among the latter, we suggest you understand in more detail what Forex is all about and how it works.

While you can trade with other assets that your broker provides such as precious metals, indices, and CFD’s, most of the trading is carried out in currencies. You can trade in both the dollar and the euro, the Japanese yen, the British pound, as well as dozens of other currencies. When you go on vacation abroad, you need to exchange your currency, as a rule, so you go to a bank or specialized exchangers. For example, you exchanged 100 dollars at one rate, and upon arrival to a different country, you notice that the rate either rose or fell. It is on these differences that currency speculators earn. You could also exchange one currency for another at a favorable rate and even make money on it, but the profit would not be very noticeable unless dealing with huge sums. Even by exchanging one currency for another, you already participating in currency trading, that is, you are making a purchase of currency at one price, and selling it at another one.

As of today, the Forex market is the largest financial market in the world. Even the well-known New York Stock Exchange is not as big as the foreign exchange market. Currently, its daily turnover slightly exceeds $70 billion. Forex? Over $5 trillion. Feel the difference? That is why the Forex market has become a very attractive option for pretty much anyone looking for an extra income source.

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Open any chart of the trading terminal and you will see that the dynamics of currency pairs are in constant motion. This is influenced by many factors – from political to economic. There is practically an infinite amount of events that can either provide support or pressure on the national currency. Professionals can spend years learning to forecast the future dynamics of currencies and various assets. After all, that is what puts bread on their table.

So, we have figured out what Forex is. Now we will be paying more attention to the money making process. Immediately forget that the Forex market is a game of good luck. This is a phrase thrown around by pretty much everyone that has failed in their forex endeavors. You don’t have to be one of them. Millions of traders all over the world make money here every day. If you want to be among them, you will have to put in some time and effort. That’s the way it works.

Money Management

Many novice traders neglect this important aspect, risking their entire capital right off the bat in an attempt to double their deposit off of one lucky trade. This is the most common mistake that will sooner or later lead to the complete nullifying of your account funds. If you want your earnings in Forex to become regular and stable, it is important to follow all the basic rules of money management and learn proper risk management. Always start out small, and work your way up from there. Don’t pretend to understand what you don’t.

Trading Psychology

The Forex market is a serious test for all traders. It carries enormous financial risks. After all, the market is chaotic. One day it’s all sunshine and rainbows and the next thing you know you have $0 in your account. As a matter of fact, no one can say with complete confidence where the asset’s value will go the next day, no matter who they are. That is why you must approach every transaction with caution and care. It is very important to maintain composure, not to succumb to excitement and greed, to be disciplined and to respect your trading schedule. Emotions are the first enemy of trading, and they are especially dangerous to newcomers that are pumped to make a quick profit and leave. Only when you are cool, and keep your emotions under control, can you succeed.

Trading Strategies and Statistics

In order to make money on Forex, it is important to have your own trading plan and strategy. Otherwise, you will be making deals at random, relying on luck and intuition, which doesn’t get you far in this market, at least not for long. You need to develop your own trading strategy, or borrow someone else’s, and make an effort to stick with it. Every highly successful trader has had to constantly improve their trading strategies for months, if not years, until they began to make consistent profits. Analyze not so much your successful trades as your failed ones. The best traders are the ones that learn from their own mistakes. Keep a trader’s diary, where you will record all your thoughts and transactions, analyze the profitability of your trade on a daily basis, after which you will understand what to avoid and what to adhere to in trading.

Nowadays, thanks to the Internet, you can directly communicate with experienced and successful traders who have already gone through the difficult journey of mastering the art of trading. Don’t shy away from asking them for advice and help. If you really want to succeed in trading, then be prepared to endure this long journey by yourself. Fortune favors the bold.

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