In this section of tradingonlineguide.com, we will explain a bit more about Forex&CFDs trading. If you’re asking yourself: what is forex trading and how does it work? Can I really learn to trade with it? You are in the right place. In this tutorial we will start with the theory behind fx trading, what CFDs are, the most important definition to it and if you can really learn to trade Forex.
All our readers said: “If you don’t read this tutorial you might risk losing a lot of money! Be careful!”
Let’s now see what investing in Fx means is and why a lot of people are doing it.
What is forex trading and how does it work?
Probably you have heard about it, but you’re not really sure what it is.
In this section, we will explain to you what forex trading means and what happens when you are doing online trading in the market.
But let’s start step by step.
Forex is the acronym of FOReign EXchange and it represents the biggest market in the world with more than 53 trillion dollars trading volume generated every day. In this market, it’s possible to exchange currencies such as Dollars, Pounds, Euros etc. We are talking about international currencies and all of them are represented with a 3 letter name:
- USD is the American Dollar
- GBP is the British Pound
- EUR is the Euro
- JPY is the Japanese Yen
- AUD is the Australian Dollar
- CAD is the Canadian Dollar
- NZD is the New Zealand Dollar
- CHF is the Swiss Franc
In forex, all these currencies are always compared with each other. For example, the most common pairing is Euro with Dollar (EUR/USD).
“Ok, but now that I know the fx definition, what is forex trading and how does it work?”
When you decide to buy or sell a pair of currencies, you are actually investing.
To clarify: when you trade, you are deciding which one of the two currencies will become stronger than the other. For instance which one will have more power in the market and will be worth more.
Considering our previous example with EUR/USD, imagine now to buy it in this tutorial.
For example, if you buy the EUR/USD currency, you could consider that the Euro will become stronger than the Dollar. But at the same time, you could also acknowledge that the Dollar will get weaker than the Euro.
Why? It’s all about a simple Maths concept that we all know: fractions.
If the numerator grows the result will increase.
If the denominator decreases the results will grow instead.
For instance, if the EUR/USD price (exchange rate) is 1.22 which means that 1 Euro is worth 1.22 Dollars. So if the price of EUR will grow to 2.22, the price of EUR/USD will be 2.22.
Now let’s expand beyond currencies and apply the same concept to other markets like indexes, commodities, and stocks and enter into the world of CFDs trading.
What is CFD trading and how does it work?
Usually, when people ask “what is forex trading and how does it work?” they don’t usually know that this also includes the concept of CFDs.
If Forex is just about currencies, in CFDs (Contract for Difference) it’s possible to trade Indexes, Commodities, Cryptocurrencies, and Shares too.
A CFD is a contract between a trader and a broker where the trader can buy or sell commodities, currencies, indexes or stocks in the market through the broker.
People usually trade more with this product because they prefer to speculate on market movements instead of buying and owning stocks or commodities.
Investing in CFDs means deciding if a price will grow up or drop down.
Let’s make an example of the commodity ‘Oil’. Imagine that the current price is $50 for a barrel and you think that in the next days the price will grow.
In the market, it doesn’t really make sense to buy a barrel of oil and then to suddenly sell it in the next few days.
It makes more sense to ‘buy’ it through a CFD. In this case, you don’t need to store any oil barrel at home because you are just speculating on the price movement (not actually owning the physical barrel.) After a few days when you will close your trade, you’ll just benefit from your profits made thanks to the price’s growth, It’s as simple as that!
In this example it’s very easy to understand how CFDs trading works: if a trader opens a sell position, they will make money if the price goes down; or if they open a buy position they will earn money if the price rises.
All of this without owning anything but just predicting the price movement.
There is a vast range of tradable products in CFDs:
Now that all the concepts are clear, let’s see dig deeper!
Is Forex Trading a scam?
A lot of people consider online trading as a magic tool to make money without any effort. Others consider it as a scam.
First of all, we can not consider a scam something which is globally regulated by several authorities.
We can instead consider Forex as a revolutionary instrument which has changed the way people trade worldwide.
The only possible scam you can find in this market is unregulated Brokers. They are trading platforms in the market which are not allowed to provide their service. A Broker must be regulated by Cysec or FCA to ensure good practice.
If you decide to sign up with one of our suggested platforms you won’t face any scam risk because we just promote trustable and regulated Brokers like the ones on the top page list. All are Cysec regulated.
Forex Trading for Beginners
A trader, like with all financial instruments, needs the practice to learn to trade Forex.
But even a lot of beginners achieved their goals. Let’s see now how to learn it.
For some, it’s considered a risky type of trading, but if you learn how to trade forex, you can manage the risk and be happy with your knowledge. Click here to learn more.
To practice techniques and knowledge, most brokers give the opportunity to try trading with a free forex demo account.
“What is a forex trading demo account?”
This is a very important tool for beginners who want to see if they are made for trading without risking any real money.
Basically, a demo account allows you to test the broker you select, its platform and all its services and support without any real deposit required.
This is a very good opportunity because it gives a trader the chance to start their trading activity with the platform which suits them.
All the Fx Brokers listed in this page are all trustable and regulated and offer a free demo account.
Finally thanks to the combination between the financial leverage and a very good trading strategy, it’s possible to have high profits.
Here you can find the best forex strategies: https://tradingonlineguide.com/what-is-forex-trading/forex-trading-strategies/
You just need to remember that to start online trading it’s possible with a very small amount of money. On top of that, thanks to the leverage which multiplies the money you are trading, it’s possible to have very high profits. On the other side, it’s necessary to mention that the leverage can also bring losses if used with the wrong strategy.
So how is it possible to trade Forex?
Learn to trade Forex
After answering “what is Forex trading” and how to be aware of choosing the right regulated Broker, it’s time to see how to invest in Forex.
The Forex market is open 24 hours each day Monday to Friday, it’s closed on the Weekend, so it is technically possible to trade all the time during the week- (for more details about the times follow this page).
We also need to consider that forex is a market which is Over the Counter (OTC). This means that it’s a virtual place without any physical base/building to trade in.
Let’s see an example:
Take into consideration the currency pair EUR/USD. The exchange rate between the 2 currencies is at 1,22 at the moment.
Now we have €100.000 EUR that we want to invest in exchange for Dollars. For that exchange rate, we will have $122.000 in return.
But what if the exchange rate increases to 1,25?
In that case with our €100.000 we will have in return $125.000 because the Euro became stronger than the Dollar.
Our profit will be the difference between the $125.000 and $122.000, which is a total of $3.000 USD.
This example represents perfectly the core of Forex trading.
Forex trading is all about speculation on prices and exchange rate changes.
Like in our example, if a trader decided to buy the currency pair EUR/USD, investing on the price rise, they would have made some profits because the exchange price moved from 1,22 to 1,25.
The same concept can be applied to commodities, indexes, stocks, and cryptocurrencies too. All of them are tradable as CFDs which are very similar to Forex.
As we have already explained in the ‘what is forex’ section, forex is just about currencies, all the rest work in the same way. They have just a different name: CFDs.
To see the best trading platforms and their characteristics, read the best trading platform page and chose the perfect one for you.
How does Forex Trading work?
Forex Trading is very simple to understand. After answering “what is forex trading” let’s see now how forex trading works.
You need to think about the stock and shares market. In there when the price of a stock goes up if you bought that stock, you will earn money.
Well, Forex works in the same way!
In Forex you have the opportunity to buy or sell a certain stock, currency pair, cryptocurrency or commodity.
If you bought it, and the price of that asset grows up, you will earn some money; if it goes down, you will lose some money.
The same concept can be applied to the case you sell that specific asset. If the price drops down you will earn some money, if it goes up you will have a loss.
Doing this activity there is a second step where you can control the risk you take for every investment and the potential profit you can make.
This is when you apply some indicators called “stop loss” and “take profit”. (to learn more about them visit our page about “how to trade Forex”)
Finally, there is the third step where you can apply some strategies and indicators to trade forex in order to analyze better how the market could move.
All professional traders use these techniques to trade. To learn more about forex trading strategies please visit our page on this website.
Forex Trading is about the currency pairs, but if we talk about CFDs we need to involve also Commodities Trading.
What is the Commodities Trading?
When trading CFDs is also possible to trade some precious metals, natural gas or agricultural products.
Commodities Trading is exactly this, the investment and speculation on these asset’s price movement.
All the trading platforms have the following tradable assets:
- Gold (xauusd)
- Silver (xagusd)
- Copper (hg)
- Natural Gas (ng)
- Oil (wti)
- Wheat (zwz8)
- Corn (cornusd)
- Cotton (cotusd)
Trading these assets is like trading a normal currency pair. it’s always necessary to sell or buy the asset at a specific price and set up the different take profit, stop loss or pending orders.
Normally their price is measured in points instead of pips.
Finally, the maximum leverage for commodities is usually lower than the currency pair, but here it depends on the chosen trading platform.
To give you an idea the leverage it’s between 1:5 to 1:20.
Trading Forex and CFDs means trading Index too. Every broker gives the opportunity to trade many different types of indexes.
The most important ones are:
- FTSE Mib
- S&P 500 (Standard and Poor’s)
- Wall Street
- US Tech 100
Trading an index is different than trading commodities or trading forex.
An index is measured in points and its movement is related to political decisions and it can influence the fluctuations of currencies.
In this type of trading, it’s possible to invest using a stop loss and take profit, an important characteristic of forex trading.
The index trading is available in every demo account with the same conditions as in a real money account in every trading platform.