FOREX FOR DEUTSCH: BEST BROKERS AND HOW TO TRADE THE WORLD'S LARGEST FINANCIAL MARKET
Currency interactions in the Forex Market represent what is happening in the world. But, do you know how it works? Here you will find everything you need to start investing and a selection of the best platforms available.
Best Forex Trading Platforms [Available in Germany]
What is the FX market?
The Forex market is a decentralised market where traders and investors exchange currencies from almost every country in the world. In Forex, it is possible to transact currencies at the current market price, determined by factors such as supply and demand of the particular currency and financial and political reasons affecting the issuing countries.
What does 'Forex is decentralised' mean? The FX market is decentralised because, unlike other financial assets listed at the stock market, the transactions carried out in Forex do not have an intermediary (a specific space) responsible for regulating or evaluating them. For this reason, Forex is an OTC market (Over The Counter) because the transactions directly involve the participating agents (buyers and sellers), without the need to go through a centralised entity (like a stock exchange). These transactions are called trades; the users participating in this market are traders, and exchanging financial instruments between traders is called trading.
What is a Currency Pair or Forex pair?
At the Forex market, currencies (such as the Euro, the Dollar, the British Pound, etc.) interact in pairs. For example, the EURUSD pair represents the interaction (measured in relative value or price) of the Euro against the US Dollar. The GBPUSD pair represents the British Pound against the Dollar, and so on. The first currency is considered "base currency", while the second is the "quoted" one.
Forex pairs get classified according to their importance level. In the first level, there are the so-called Major pairs:
EURUSD (Euro - US Dollar): The world's most popular currency pair and the one with the highest volume of operations estimate that 70% of every Forex transaction worldwide involves this pair.
GBPUSD (British Pound - US Dollar)
USDJPY (US Dollar - Japanese Yen)
USDCHF (US Dollar - Swiss Franc)
The remaining three Major pairs are still strong, and they are involved in a huge transaction volume, although they are much more volatile. Hence, they allow traders to benefit from the wide swings in their prices, although they also pose a greater risk if you are a beginner.
Secondly, after the Major Pairs, we may find the Secondary pairs that involve major currencies with major currencies alternative to the ones presented previously, such as the Australian Dollar (AUD), Canadian Dollar (CAD), or the New Zealand Dollar (NZD).
Third, we find the exotic pairs, where we include all the rest of the global currencies. Exotic pairs have a considerably lower trading volume and much higher volatility, with a consequent increase in financial risk due to the difficulty in predicting the pair's price behaviour. Among these pairs, we find currencies like the Mexican Peso (MXN), the Russian Ruble (RUB), the Swedish Krona (SEK), the Brazilian Real (BRL), among others.
Something which is not crucial, but it's a nice-to-know fact, is that in everyday foreign exchange market trading and news reporting, the currency pairs are often referred to by nicknames. They are used to simplify the pronunciation of each currency pair (try saying out loud 'GBPUSD' or 'NZDUSD'):
The GBPUSD pair is known by traders as "cable", having the nickname its origins when a communications cable under the Atlantic Ocean synchronised the pair quotation between them.
"Swissy" or "Euro-Swissy" for EURCHF.
Fibre for EURUSD, because of the GBPUSD pair is called Cable, so, being the EURUSD a newer pair, traders made an upgrade of the old cable to a newer fibre one.
Chunnel for EURGBP, after the common English nickname for the undersea train tunnel linking the U.K. with France (or in other words, the Eurozone), which is formally called the “Channel Tunnel”.
Loonie for USDCAD, from Canada's $1 coin, has a picture of a loon (a bird) on the backside.
Aussie for AUDUSD.
Kiwi or The Bird for the New Zealand Dollar NZDUSD pair.
If you attend a Forex webinar and the presenter talks about Kiwis or Loonies, he is not talking about going to a zoo. There are more nicknames; we won't list all of them. You get the picture.
How does Forex trading work?
Forex trading involves transactions (buying and selling) of currency pairs. That is, one user buys, the other one sells. To better understand how Forex works, it should be clear that the main objective is to speculate on the movement that the price of the currency pair may present. Hence, you are not saving when you trade, nor you are investing: you are speculating on the pair's price movement in the hope of making a profit if the currency pair moves in the way you have forecasted.
Specialised Forex trading platforms display currency pairs as a financial instrument. The user "buys" a certain number of what's called "lots", which are units of the base currency, and a sell of the equivalent value of the quoted currency occurs. In the case of the EURUSD pair, a trader buys the Euro price compared to that of the US Dollar, and he does this because he believes that its price is going to rise. In the opposite case, those who forecast that the Euro's value will decrease will sell the lots of the EURUSD pair, which ultimately implies a Sale of Euros and Purchase of US Dollars transaction.
A key aspect to keep in mind is that despite talking about buying and selling currencies, the value of the quoted currency is not physically acquired in these types of markets. That is, when you trade the EURUSD pair, you are not effectively buying Euros to spend on a trip to Paris. What happens effectively is a transaction on that the exchange rate, no user obtains the amount of Dollars, Euros, Pounds, or Yens. What's called FX trading focuses mainly on transacting pairs in a relatively short term to (try to) forecast the price movement and make a profit with the accurate ones.
All trades are executed electronically through broker's apps that offer Forex trading, although other alternatives such as banks or exchange houses act as the intermediary. This one is a much more expensive option, though.
Forex Candlestick Charts
Forex trading through CFDs
Suppose that you are interested in becoming a Forex trader, then the question would be: how would you carry out Forex transactions in the real world? You would have to go to a bank or a foreign exchange shop, with a briefcase full of cash nominated in different currencies, Euros, Dollars, Pounds, Swiss Francs, Yens. Whenever you see that the price of one of the exchange rates is low at the moment, and you forecast that there will be a short term move on the exchange rate, you would buy the currency with another currency you hold in your briefcase. Suppose you intend to acquire Pounds with Yens. Do you have an idea of how complicated and expensive this transaction could be? There has to be an easy option to fulfil this transaction, which is through CFDs.
CFDs are financial derivatives (assets that replicate the price of the underlying financial instrument). Traders use CFDs as the representation of a particular currency pair of the exchange rate. So, CFDs allow them to speculate over the short term price changes of the underlying asset (the one the CFD tries to replicate) without actually having to buy the underlying asset. An example: Investing in a CFD on the Euro-Dollar involves buying the CFD EURUSD, which is the instrument that replicates the exchange rate between these two currencies.
Forex Trading platforms have excellent graphic interfaces, where it is not required to transact with a briefcase full of money. Clients can trade anywhere, through their phone. To buy a CFD, you have to search for it at the brokers' app and then press Buy.
An Example of a CFD transaction
An example of how Forex CFDs work is as follows: Let's suppose that a trader decides to start trading the EURUSD pair.
To determine whether to buy or sell, he performed a technical and fundamental analysis on the potential price variation of the pair, which allows him to predict the decline of the US Dollar price against the Euro. This prediction then means that the user assumes that the USD's price will decrease, and that of the EUR will increase in relative terms to the USD. At the time of opening the order, the exchange rate is 1.1 euros.
He monitors his trade, time passes, the price of the US Dollar falls, and on the other hand, the Euro price rises, reaching the exchange rate of one USD equivalent to 1.12 Euros. So, the trader would have generated two pips in favour of the executed order:
Initial Price: 1.1
Final Price: 1.12
Difference: 2 pips
And how much profit does this difference of 2 pips represent in real money? To calculate the equivalent of pips in terms of real money, you must calculate the CFD contract size combined with the leverage applied to it. >>> But what is leverage? It is a "loan" that allows you to multiply the initially invested capital to have extra firepower available in the account. It is a loan provided to you by the Broker. If the leverage level is 1:100, it means that for every dollar or Euro you deposited, you will have 100 available for trading. Sounds good, right? You might think: I invest 1, and I get the profit multiplied by 100. The downside to this is that leveraged trading also multiplies losses, the reason why it can lead to the total loss of the amount invested. Yes, all of it.
How long should a Forex trade stay opened?
A Forex trade stays open until the reversal transaction is completed (if your order was a Buy, then a Sell order should come after), and the profit or loss gets calculated. Completing a transaction could take you from a few seconds (buying a CFD and then subsequently closing it) to hours. The duration of a trade will depend on each trader's objective, strategy and trading plan, and available capital.
There are different categories of traders based on the duration of their trades:
Scalpers: Those who keep orders open for minimal periods. The opened trades are maintained for 15 minutes or less before the position is closed. That is, after a minimum movement in the price, the scalper closes the trade.
Day traders: They tend to liquidate all their trades before the trading hours end. It does not imply that the day trader leaves his/her trades open until the end of the day. It means that he goes to sleep at the end of the day, yes or yes, without having an open position.
Swing traders: They operate according to the medium-term trend, for example. They can maintain the same trade for periods ranging from a week to a month.
These are not the only classifications, although they are the most common ones.
What is the cost of Trading Forex?
To calculate the cost of each trade, we (again) use the lot size. A lot represents 100,000 units of the base currency. So, the size of the lot should be multiplied by the price of the acquired contract. Then:
2 EuroDollar Lots * 100.000 (units of the base currency) = € 200.000
As we mentioned before, through leverage, you do not need to deposit (at an exchange rate of 1.1) $ 220,000 to buy € 200,000, but you must keep something like $ 2,200 in the account (because if the leverage is x100, multiply the value of your real money x100).
When does the Forex market opens and closes?
The Forex market operates all day long, all year round, since there is always someone trading anywhere in the world at any time, although it closes on weekends. To better understand how Forex works, trading hours are one of the most important aspects to consider since they are based on the opening and closing of the most important financial centres in the world. They, in turn, have different time zones, which allows transacting Forex 24 hours a day.
Following are the opening and closing hours of each financial centre, described in GMT:
Tokyo: opens at 00:00 GMT and closes at 9:00 GMT
New York: Opens at 13:00 GMT and closes at 22:00 GMT
London: opens at 08:00 GMT and closes at 17:00 GMT
Sydney: opens at 21:00 GMT and closes at 06:00 GMT
During the day, one major financial centre's trading time intersects with those of another territory, such as Tokyo and London and London and New York, for example. During these hours, the tradeable liquidity (the amount and volume of operations) is much higher.
How to open a Forex account and start trading?
To start trading Forex, you need to open an account on a trading platform that offers Forex CFDs. The options that we have detailed at the beginning are some of the best available locally. Opening an account with these Brokers is an easy task that involves registering some personal info (an ID and a proof of address), depositing money through different payment methods. Once the account is open, start trading in the currency market.
Glossary of terms that you must know by hard when starting Forex Trading
Forex broker. An intermediary through which the exchange of the assets between buyers and sellers is completed. By acting as a third party, they charge a commission, and they must have a license or be regulated by some government watchdog.
Pip. It is the minimum variance that the price of a pair can present.
Lot and mini lot. The amount is defining the contract's volume: the amount that has been “bought” or “sold” of a pair.
Leverage. A tool that allows multiplying the initially deposited funds, allowing traders to have more resources.
Spread. The commission collected by the broker when a trader buys or sells. Each broker applies different spreads on Bid and Ask orders and the chosen asset type.
Central bank. A government entity that controls the monetary policy of each country. These organisations' decisions directly affect the price of their currency prices, so keeping up with them is essential when you are interested in investing in currencies.
Interest rates. Amount paid to acquire or transfer a specific amount of money.