October 22, 2021

What is the foreign exchange market – a complete overview of the concept and types of international foreign exchange markets + instructions for trading in the foreign exchange market for new participants

8 min read
What is the foreign exchange market - a complete overview of the concept and types of international foreign exchange markets + instructions for trading in the foreign exchange market for new participants

What is the international currency market and what functions does it perform? Who are the participants in the global currency market? What risk situations arise when trading in the Forex market?

1. What is the foreign exchange market

You can’t talk about Forex earnings, without giving him a clear definition.

What is it, in simple terms?

Forex trading – it is a global currency market, where traders earn on speculation with currencies of different states.

Initially, it was created exclusively for exchanging one currency for another, however, gradually people discovered, that you can make good money here, if on time «buy money» and sell on time.

As a result, the foreign exchange market switched to pure speculation, now only traders work here, set out to enrich.

What features distinguish Forex from the stock market or from the commodity market/raw materials? Consider the everyday situation.

Example

If the price of sugar rises, we can buy it cheaper and sell it more expensive, making a difference. And if sugar gets cheaper – will we be able to sell it at a lower price and earn? No. This is absurd.

This is one of the main features of Forex. On stock exchanges of securities and goods, there is an opportunity to earn only when the price of any assets rises, Forex traders make money like growth, and on the decline.

By the way, it will not hurt you to know, what is sold and bought in different segments of the financial market, in order to increase the level of knowledge about the economy as a whole.

Segments of the financial market:

Financial market segment Financial instruments
1 Currency market Currencies of different states in pairs with each other (EUR/USD, CHF/JPY, USD/RUB)
2 Stock market Securities: stocks (companies «Magnet», «Lukoil» and t. P.), bonds and others.
3 Commodity market Oil, gas, coal, cotton, coffee, wheat and others.
4 Derivatives market Derivatives Contracts: futures and forwards

All participants in the foreign exchange market (like any other) economists are divided into majorities and minority shareholders. Majority minority, but they pour the most money into the market, therefore, they can reverse prices so, as deemed necessary.

Can you become a majority? The probability is low: this title is awarded only to Central Banks and major investment funds of different states.

Minorities – it’s a crowd. That is a great many people with little money. Some people come, others leave, most minority shareholders successfully part with their money, which flow into the pocket of majorities. Not all, true.

Not particularly influencing trade, but still an important difference in the foreign exchange market – spreads. Define, what is it.

When we buy a large company’s stock in the stock market, we pay transaction fees as a percentage. When we sell – pay again. On Forex, a commission is charged once at the opening of a transaction, expressed by a fixed value.

Forex market is not localized in any large building, it exists in the Internet space, all trades are conducted only through the network. Consequence – trade is available around the clock all days, except weekends.

there is, certainly, and a number of other differences, which we will talk about shortly in the article «Currency exchange» (take note).

let’s get a look, how currency markets are classified (the criteria, it turns out, a lot of).

2. What are the characteristics of currency markets? — TOP 6 main features

Currency market – it is one whole, however economists (and traders themselves) crush it in every way.

There are seven key signs to differentiate Forex exchanges, we characterize them.

Sign 1. In the field of foreign exchange transactions

Most Forex brokers provide traders with the opportunity to trade only in national markets – inside the country. Large companies however (such as finam, which we will talk about below) open the way to world markets.

A novice trader will not feel a special difference between the national and world segments of the foreign exchange market, but this parameter affects the earnings of professionals, strong enough.

Sign 2. By degree of organization

This criterion, sure, applicable to forex, but to a much lesser extent, than to other types of markets. By the degree of organization, currency trading is OTC and exchange. Forex trading, as we found out, completely over the counter, trade is conducted only through the Internet.

Therefore, the exchange form of organization usually applies only to some segments of the Forex. In particular, traders, making transactions on the Moscow Exchange, receive not only securities, but also currency.

Sign 3. According to the composition of participants

Large companies allow traders to set their own price for the currency, and not accept the broker as the only existing.

Another situation – a large number of traders come to the exchange and offer each other their dollars. Someone will sell at the same price, someone else, similarly with purchases. It turns out «straight» type of organization.

Direct bidding gives significantly more profit, but the risk is seriously increased: may not be willing to buy your currency at a set price, or no one wants to sell it to you. «Brokerage» more reliable option, more stable.

Sign 4. By transaction time

At the time of transaction, foreign exchange markets may be «in cash» or «urgent». Cash markets – these are exchanges, on which they buy/sell currency only at current price.

Urgent function the same, as well «futures» (variety of securities). That is, traders enter into contracts with brokers, according to which brokers undertake to transfer to traders a certain amount of currency at a pre-negotiated price within a specified period.

When the deadline, the real price of a currency may be lower than that, by which delivery, or higher. If below – trader will lose money, if higher – will earn.

The fifth symptom flows smoothly from the fourth.

Sign 5. For traded contracts

Typically, traders simply trade currencies and do not bother. Professionals with very big money invest in currency futures (in the derivatives market) or in options.

Option principle – we make an assumption, there will be a price above or below any level at a certain point in time (in one day/month/year). If we are right – we earn, if not – losing money.

Sign 6. By mode

The currency has a fixed rate and floating. Fixed rate set by the state, as a result, one currency does not fluctuate relative to another.

Earn on speculation when fixing can only be done if you hold positions for several days (since in most cases the state revises the courses daily).

The floating course is constantly changing, traders make money even within a few seconds.

Accordingly, foreign exchange markets are single-mode (fixed only/floating rate) or with dual mode (and then, and other).

3. How to trade Forex — step-by-step instructions for beginners

Where to start the path of a trader in the foreign exchange market, how to succeed?

Conventionally, we can distinguish a number of stages, to go through. Let’s get to know them.

Step 1. Choose a broker

Below you will find a list of the three most popular brokerage firms, offering forex trading services. If there is a desire and opportunity — register immediately in any of them, create a demo account and practice.

Naturally, for successful bidding you need to learn. Listed companies offer good courses (often free), with the help of which you will learn the tactics of an exchange game from scratch.

Step 2. Register in the system (create an account)

To register on the broker’s website, usually an email address and a mobile number are enough. The manager will contact you at the indicated number, you ask him all your questions.

Step 3. We open a trading account

When you feel more or less confident, open a trading account and proceed to speculation for real money.

Step 4. We replenish your trading account

Many beginners are interested in the question, how much to start. Professional traders recommend starting trading in the foreign exchange market with $ 250, because with smaller amounts the risks increase.

Step 5. Download and install the trading terminal

In most cases, trading terminals are installed on a computer.

Subsequently, we will separately talk about Internet trading, for it contains a number of very interesting details.

Step 6. We launch the terminal and start trading

When the terminal is successfully installed, you need to log in to it and, in fact, start opening deals. Do not forget, that for successful bidding you must be able to analyze (technical or fundamental).

4. What are the risks when trading on Forex — 5 main risks

On the website of any broker, small-small print will be written «Trading in the foreign exchange market carries a risk of capital loss».

Unfortunately, it really is. What are the risks most often encountered by traders? And how to avoid them?

Risk 1. Course change

The simplest and most commonplace – the market sometimes goes against the trader and eats up the entire deposit. The only way to protect against this risk – establish a protective order called «Stop Loss».

Stop Loss principle in the next – when the price reaches a certain value, broker closes a deal automatically, even if the trader is not sitting at this moment at the computer.

Level «Moose» must be set at the time of opening a trading position, since the market is capable of sharp price fluctuations (especially when important economic news comes out).

Risk 2. Panic attack

The first panic attack you will feel already then, when you open the first position in the market and see the minus on the account due to the paid spread.

The difficulty of trading in financial markets is not so much in understanding the strategies, how much is the ability to control yourself and not give in to emotions.

Panic causes loss of power over reason – trader blindly follows emotions. Speculators can open positions there, where not to, close ahead of schedule.

Risk 3. Psychological risk

Market – big bunch of people. People influence each other. therefore, when everyone buys currency at a low rate. calculated on the growth of their value – how to stay here? If the crowd sells collapsed shares of Sberbank – where to find a reason for optimism and confidence in growth?

The trader should not follow the psychology of the crowd. He must think with his own head, if you don’t want to lose money. The market does not want, to individual individuals earned: the more they earn, the less others will get.

Hence the consequence – all people around you in the foreign exchange market – your enemies, dreaming of getting your money. So don’t succumb to the crowd, if you do not want to merge.

Risk 4. Non-market risk

Loss of money may occur due to non-market reasons. Simple example – you opened a deal, not set Stop Loss yet, and in the apartment the lights suddenly went out. News came out, the market went against you, and while the electricians were messing around with wires, deposit as it was.

5. Conclusion

Forex enriched some traders, but most speculators have lost money here. If you come here do not play, namely to earn – learn constantly. Fundamental analysis, technical analytics in all its directions – all this you must know.