What is Forex?

A discussion between a professional and a beginner

A beginner:

- People are of the opinion that Forex is a big swindle. Is that right?

A professional:

- Yes, that’s right, but only for fools. Just like any other business or a business sphere, Forex hates individuals that are trying to earn easy money but lose theirs out of ignorance, therefore they become angry and blame it on Forex generally.

A beginner:

- So what is Forex?

A professional:

- Forex (Foreign Exchange) is an exchange market which was formed in 1971 when international trading from a fixed rate of exchange came to a floating one. Exchange trading is buying one currency and selling of another one. It is being traded by currency pairs, for example, euros or dollars, (EUR/USD) or dollars/Jenna (USD/JPY).

A beginner:

- What is needed if you want to earn in Forex market?

A professional:

- Basically if you want to earn in a Forex market it is mandatory to have a computer, Internet access, some money and you must be willing to learn.

- Money is earned only with one’s head, i.e. you do not need to negotiate or argue with partners you will not need to prove anything to nobody, the whole business is going to depend only on you.

- Nobody is going to disturb you in a Forex market; it means that there will be no competition.

- Working forex is quite easy because it’s possible to work at your convenience, plan your day because a Forex market is working 24-7 with the exception of weekends.

- And the most important thing is that it’s possible to work right from the comfort of your home as long as you have access to the internet.

A beginner:

- Is there any hindrance to earning freely?

A professional:

- Imagine a hypothetical situation where millions of traders are sitting right there in front of their computers making contracts, do you think it will be possible to trick them theoretically at the same time?

A beginner:

- It’s often complained in forums that a broker betrayed did not pay money, etc?

A professional:

- Unfortunately, there are instances of fraud among brokers. That’s why it’s very important to choose an appropriate broker. This is of course not the trend but an exception to the rule. While talking about this business integrity, it’s important to mention that a lot of analysts come to a common conclusion that a Forex market is the most independent market in the world due to particularly huge transaction volumes and nothing has the particular influence on that – no world government, no bank or broker or, moreover, a separate person. The rules are the same for everyone. The one who masters the speculation art wins.

A beginner:

- What is the best way to deal with this situation?

A professional:

- You only need to patiently learn, gain some experience and become a professional.

A beginner:

- With which currency pairs is that being traded?

A professional:

- The pairs that have the hugest liquidity (the Majors) are the most popular. Today more than 85 % of all contracts are made with those currencies – USA dollars, Japan Jenna and Great Britain pounds, Switzerland franc, Canada and Australia dollars.

A beginner:

- Where is a Forex market?

A professional:

- Traditionally Forex is not a market. Transactions take place between different sides electronically, therefore, in a different way than an exchange where one trades future shares or future transactions (Futures). Forex market does not have a specific place in any country or building. A Forex market does not have administration as an example, the stock market has none either.

A beginner:

- When and at which hour does trade begin?

A professional:

- Forex requires working 24 hours a day and a trade goes all week long. Trading is beginning in Sydney, then, with respect to timing zone, it goes to Tokyo, London, New York and other financial centres. Those who want to trade are practically in any timing zone. Different from other financial markets, Forex investors can react to currency exchange rate in anytime and this exchange can be caused by any political, economic or social event.

A beginner:

- I have heard that there are very rich people – traders. Who are they?

A professional:

- As per dictionary, a trader is a bank, financial fund or broker who takes part in trading. However, more often than not, this individual is someone not part of any organization but someone who works on his own and risks his own fund or a fund of any other investors. Moreover, there are those who experience pleasure out of the trade process itself.

A beginner:

- I want to become a trader. Where should I begin?

A professional:

- First of all, you should not hurry. If you wish to have positive results you must understand the following things:

1. Learn the basics of Forex trading required for all new players. Later, it is necessary to choose the strategy, and, of course, practical trade.
2. Get to know yourself – learn how to master/control your emotions (fear, greed and patience). That’s very important.

A beginner:

- How much money is needed if one wants to begin trading?

A professional:

- In a Forex market, a minimal transaction sum is 100.000 USD. It’s understandable that not everybody has so many funds and it limits the opportunities of a lot of people. Therefore, in a finance world speculative operations are possible in margin trading or lever. The essence of this principle is that it is not obligatory to have so much money as a contract is worth. It’s enough to bring a deposit which makes 1 to 10 % of contract essence. It means that if you are making transactions a broker credits you by a shortfall giving you leverage. Let’s say 100.000 USD worth transaction needs only 1000 USD deposit if leverage is 1:100. There are brokers who suggest leverage even 1:1000. In this way potential trader’s opportunities become higher – even if one has relatively low level of funding, it’s possible to operate with the sums which are sometimes higher than the mentioned ones meanwhile the whole profit that will be earned will be yours.

A beginner:

- Does that mean that I can start trading with 1 dollar?

A professional:

- Theoretically yes, but I would recommend beginning from at least 50-100 USD so that it will be possible to maintain currency fluctuation quotes if they changed by 100 pips a day not to his side as this kind of trading is inevitable. Moreover, you will have to pay a spread to a broker from each transaction.

A beginner:

- What is a spread, pips, and quotes?

A professional:

- A quote is a value of one (base) currency unit expressed in units of another currency (quoted). The currency pair which is being traded is first expressed when indicating the first one – the base and the second one which is quoted (for example, EUR/USD). A quotation is made of two numbers Bid – a price for which a trader can sell a base currency and Ask - a price for which a trader agrees to sell a base currency. A difference between Bid and Ask is called spread and that is the profit of a broker. A spread can be fixed (1-3 points) or floating. A spread size can be changed dependently from a market situation, for example, at night, or increased after the very important news. A movement is expressed by points or pips. For example, an average movement of one day in EUR/USD is approximately 80-100 points.

A beginner:

- How much time will I have to spend for trading? Will I have to sit in front of the computer all day long and watch how the currency moves? And what if a good opportunity for trading occurs at night and I am sleeping?

A professional:

- It all depends on you. You will have to choose a strategy that works for you based on the time available. For instance, if you have a job that takes much of your time, then working during the day (Daily chart) will be suitable for you. That means that you’ll need to spend only 15-20 minutes for analysis each day. However, if you wish to trade more actively you can choose more aggressive strategies, for example, a scalping.

- Currencies are moving each second; therefore, sometimes it’s more complicated to close a position by a wished price. Moreover, there are some cases when a person cannot close a position because of some reasons (he does not have the access to a computer or the Internet connection is lost). Orders let one avoid that.

A beginner:

- Orders?

A professional:

- Yes. Orders are placed. They buy or sell by parameter settings and also close a profitable or unprofitable position.

A beginner:

- What are the risks to lose money?

A professional:

- Probably the most important thing in Forex market is Money management. That’s very important! The basic rule here is not to risk in any transaction more than 1-3 % from a deposit you have. Even better - 0.5 %. If you are risking a higher percentage and when a series of unprofitable transactions appear you will simply lose your deposit. The lower the risks the better. The most important thing at the beginning is not to try to earn a lot, it is important to try to earn stable.

A beginner:

- How much do traders earn in Forex?

A professional:

- Depending on a managed fund and risks 5 – 10 % per month is not a bad salary. The bigger the fund, the lower the percentage, and the risks associated. A lot of people mistakenly think that in Forex it’s possible to make a million out of 100 dollars. That is a complete nonsense. You can only earn millions if you have milliards of a deposit. To simplify that, if you have 10.000 USD and are watching the strategy that you have chosen, right fund and risk management and discipline – a normal salary would be 500-1000 USD a month. Of course, you have to remember that nobody is going to pay you a Forex salary, therefore, there are also months that are unprofitable but if you are working right in a long run you are going to be in a plus.

A beginner:

- It means that if I want to earn 10.000 USD a month, I need to have approximately 100.000 USD of my money?

A professional:

- Absolutely not. You don’t need to have your own money, you have to learn to stable earn money and money will find you.. There is a PAMM service for that where investors will see your trade results and can invest to your deposit.

A beginner:

- I can’t wait to begin!

A professional:

- Don’t hurry. Forex for beginners is not an easy job as it can seem from the first sight. You will have to learn a lot. Begin from learning the basics and soon you will get the answers to a lot of questions you have.

Later download and install a terminal MetaTrader 4.

Now you have the choice – to trade by yourself or automatically with robots (with the programs which trade independently as autopilots).

In any case please begin from a demo account, see how a trading terminal works. The most important things in Forex are the compliance with the chosen strategy, a fund, risk management and of course patience. Patience makes 80 % success if not more.

Good luck!