Understand Forex Trading and How It Works

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With a trading turnover of almost US$ 6.6 billion per day (as of 2019), the foreign exchange market is the largest financial market in the world. Forex transactions are usually carried out in over-the-counter interbank trading, so there is not the typical forex exchange as with stock markets.

The return on forex trading is always the difference between buying and selling a currency minus the fees charged by the forex broker who is the link between private investors and the foreign exchange market.

Forex brokers today are mostly smartphone apps or PC software that allow you to buy and sell currencies. There are also brokers categorized as unlimited leverage brokers and high leverage brokers. The difference is in the offers. When choosing your broker, pay attention to low fees, small margins between buying and selling prices (so-called spreads ), easily accessible customer service, and the option of being able to place orders on several channels.

Which technical terms should I know?

If you want to do forex trading, you should know the technical terms. A selection of the most important terms.

Currency pairs. Currency pairs mostly consist of the US dollar and another currency. For example, the currency pair EUR/USD denotes the purchase of euros with dollars. Here the euro – the first mentioned currency – is the base currency, i.e. the currency that is bought. The US dollar is the quoted currency. If the so-called “chart” in which currency pairs are displayed shows EUR/USD 1.20, a trader must pay 1.20 US dollars in order to receive one euro.

The majority of forex trading takes place in US dollars (USD), euros (EUR), yen (JPY), pounds (GBP), and Swiss francs (CHF) – the so-called majors. The minors include currency pairs from smaller industrialized nations, and there is also the option of trading emerging market currencies.

Leverage and Margin. If you use leverage, you can multiply your profit – but also your loss. Since 2018, private investors have therefore only been allowed to use a leverage of 1:30 for major forex pairs – i.e. 30 times the capital invested. For other currency pairs, only leverage of 1:20 is allowed.

Depending on the size of the leverage, a trader must deposit a corresponding security deposit (margin) . For example, if security of 500 euros is deposited and the leverage is 1:30, the trading volume is 15,000 euros.

Pip and Lot. A lot denotes a trading unit in the foreign exchange business. Typically, one lot represents 100,000 units of the base currency. So if you trade three lots in the EUR/USD currency pair, that is a $300,000 stake. There are also smaller lots, such as a mini lot that is 10,000 units.

Pip denotes the smallest possible price movement. Because in currency trading, unlike when shopping in the supermarket, the slightest price change is not just a cent but refers to the fourth decimal place. This is also the reason why forex traders work with leverage.

Also Read: 5 Ways To Prevent Money Loss When Trading Forex

What do I have to consider when trading?

Except for the weekend, you can trade in the forex market almost 24 hours a day. This is different from stock trading, which is linked to the respective stock exchanges and their opening times. However, the time between 1 p.m. and 5 p.m. is particularly worth trading, as this is when the markets in the USA and Europe are open.

Forex traders should keep an eye on the central banks, such as the European Central Bank or the Federal Reserve. If a central bank increases the money supply, the supply of this currency increases – so demand falls temporarily, and the currency weakens.

Understanding the Basics of Forex Trading as Precursor to CFD Trading

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Prior to entering into forex trading and entering into contracts for differences (CFDs), it’s important to first, fully understand how forex markets work. Basically, the term forex stands for foreign exchange, while trading refers to the buying and selling of major foreign currencies in forex markets. In other cases, forex trading also involves buying contracts for futures or price differences of foreign currencies.

.Where Does Forex Trading Take Place?

First off, it should be clear that there is no central marketplace for forex trading because the selling and buying occurs in an over-the-counter (OTC) setup. All major financial centers of countries have an OTC market that operates 24 hours each day of the 5 working days of the week.

Who Participates In Forex Trading

Any person, organization or country can participate in forex trading, whenever the need for a specific foreign currency arises. An American who will be travelling to Europe will have a need to purchase Euro Dollars (EUD) from an OTC forex outlet or from its accredited satellite sub-outlets, being the acceptable currency in the region.

Throughout the day across countries, consumers, travellers, business organizations including investors are into buying a certain type of foreign currency. In the meantime, the demand level for each currency will influence the exchange value. If the demand for a foreign currency is high, its exchange value in the market rises; conversely the exchange rate goes down if there is no or low demand.

What is an Exchange Rate?

Since forex trading denotes buying of one type of currency, the exchange rate determines how much of the buyer’s currency will be paid to purchase a unit of the currency needed. To illustrate by way of example, let’s say a U.S. company needs €1K (1K EUR) to pay for materials purchased from a firm located in a European country.

If the current exchange rate between EUR and USD is 1.2096, it means 1 unit of EUR is equivalent to 1.296 worth of USD. The currency pairing is EUR/USD, denoting that the US company has to shell out US$1,209.60 to buy €1,000. Here, the EUR/USD exchange rate of 1.2096 is simply multiplied by the €1,000 purchased.

Now if the example is reversed, wherein a European firm buys US$1,000, the mathematical operation is also reversed. The pairing of the two currencies will be flipped to USD/EUR, while the computation of the cost will require dividing a unit of EUR by the current exchange rate of 1.296. The USD/EUR exchange rate therefore is 0.7716 (1/1.296 is 0.7716), and the cost of 1,000 worth of US currency is only €771.60.

The examples above also explains why forex trading always comes in pairs, since one currency is selling while the other currency is buying. In a currency pairing, the first that is mentioned is called the base currency, while the second currency mentioned is called the counter currency. The exchange rate indicates the equivalent value of a unit of counter currency for every unit of the base currency.

Understanding Trading with Foreign Currencies by Way of CFDs

Forex trading known as a Contract for Difference does not require actual ownership of a foreign currency. A trader simply takes a position based on a projected difference between the exchange rate of two currencies; of whether the rate will increase or decrease by a certain spread or price difference. The outcome therefore depends on the performance of the two currencies in the forex trading market.

One of the online trading platforms that has been drawing a lot of CFD investors is an award-winning Malaysia-based platform known as Rakuten Trade. Based on a Rakuten forex trading review, this broker accepts forex trading only from members who have an existing Rakuten Forex account. Most of the time, the trading platform offers only fixed spreads during core-time trading periods of the month and based on HK time. However, Rakuten’s fixed base spread does not apply during extreme market circumstances, as spreads could widen beyond the figures offered.

The Best Forex Brokers In UAE – The Pros And Cons Of Hiring A Forex Broker

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The forex (foreign exchange) market is enormous and extremely busy with the volume of trading transactions it receives on a daily basis. This is because the forex market involves the exchange of currency for another currency.  Forex trading can be a very profitable investment particularly when done the proper way.

Make Successful Trades – Hire a Forex Broker

For many forex traders, one of the best and effectual ways to do forex trading is to hire the expert service of a reliable forex broker, like the best forex brokers in uae. By hiring a forex broker, traders are able to get the currency they want and make successful trades. However, do note that forex brokers or forex brokerage firms operate differently form each other. Hence, it is important to be cautious and sensible about your choice of forex broker to work with. Check out the best forex brokers in uae.

The Pros of Hiring a Forex Broker

In order to know what to look for in a reliable forex brokerage company or a forex broker, you need to first know and understand the pros and cons of hiring one.

Easily Gain Access to Foreign Currencies and Make Trades

If you don’t work with a forex broker, you may have to visit a physical currency exchange and wait for the whole day until a profitable opportunity to trade turns up. This wastes a lot of your time. Moreover, currency exchanges also look out for their own benefits, which is why their fees are usually higher compared to forex brokers.

Have Access to Demo or Practice Accounts

Numerous brokerage sites give access to demo or practice accounts to its clients with either limited or unlimited funds in order for them to go through and practice the process of forex trading prior to them starting to actually trade in the forex market. With a demo or practice account, forex traders, particularly those who are new to the system, are given the opportunity to have a feel of what forex trading is, how it works and if it is right for them.

Receive Bonuses

A lot of forex brokers provides a sign-up bonus to traders who hire their service. Some offer a certain amount in the form of free credit or a bonus wherein additional money is given for each dollar that is deposited which will be placed towards trading. When looking for a forex broker such as the best forex brokers in uae, it won’t hurt to check out the bonuses they offer as it may benefit you in the short and long term.

The Cons of Hiring a Forex Broker

Knowing the cons of hiring a forex broker or a forex brokerage firm will also help in your decision-making process. So, here are a number of the disadvantages to be careful about.

Associated Fees

Just about every transaction that you make on a foreign exchange has associated fees, like funding your trading account, making trades, and withdrawing these currencies to a banak account. In the end, forex brokers are running a business as well and they aim to safeguard their bottom line. Hence, make sure you know and understand what you are paying for when hiring with a forex broker.

There is a Risk of being Scammed

This is especially true if you aren’t mindful and careful bout your choice. There are forex brokerage firms with complex T&Cs which can be very perplexing and hold up or choke your attempts to withdraw your own money. Some are complete scams which you will only notice when you try to withdraw money.

Bottom Line

Know that a reputable forex broker, such as the best forex brokers in uae, puts your interests first and charge or take a reasonable percentage for themselves in order to keep their service operational. On the other hand, unreputable ones will deceive you every chance they get. Therefore, before signing and committing to any forex broker, make certain that you have done your research about them and are certain that they are licensed, regulated, reliable and trustworthy.

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