What is Forex?
Forex is a short title for foreign exchange. Foreign exchange marketing is the transaction of changing one currency into another currency. Similarly, it is also known as the FX market.
Forex comes with a turnover of more than $6.5 trillion; thus, it is the world’s most traded market at the current time. As a matter of fact, Forex turnover had increased from $5 trillion just a few years ago.
In fact, in 2019, the associated derivatives and foreign exchange transactions in the United Kingdom amounted to 3.65 trillion dollars. And, it was just an average daily turnover of Forex.
As a result, the UK came to the position of the world’s largest forex market. And not only in terms of activities where currency get exchanged but also for multiple forex derivatives. In fact, the UK market is over 2.5 times greater than the United States, which is the second-biggest forex market in the world.
What is Forex Trading?
Forex, or foreign exchange, can be defined as a network of sellers and buyers who exchange currency between each other in return for a price. It is how companies, central banks, and even individuals convert one currency into another. If you have ever visited out of your country, you have probably made a Forex transaction.
Although practical purposes are the main drive for foreign exchange, most currency conversion happens to earn profits. The amount of daily currency conversion can make currency price movements extremely unpredictable. For some instant, this inconsistency makes Forex attractive to traders. After all, a greater chance of high risk will also increase the profit.
To learn more about Forex and Forex trading, take a look at this Forex Trading Diploma Course and learn the intricacies of profitable trading.
How does Forex Trading work?
Now let’s see how actually it works before getting to the point is forex trading profitable or not. There are numerous ways of Forex trading; however, they all work in the same direction. By simultaneously selling one currency while buying another.
Traditionally, Forex trades currencies in pairs. Hence, a trader considers whether one currency will fall or rise in value against the other by exchanging currency.
Trade flows, political, economic, and geopolitical events influence a currency pair’s value that affects Forex’s supply and demand. This creates daily inconstancy, and as a result, Forex traders get new possibilities every day.
Therefore, Forex traders take advantage daily of fresh possibilities by being extremely receptive to market news releases. And then they trade based upon the presumed market attitude.
The foreign exchange market serves the global marketplace where banks, investors, institutions, and tourists trade national currencies. This market is available 24 hours a day, and 5 days a week across banks, institutions, investment firms, hedge funds and retail traders. For worldwide individual traders as well.
Besides, there is no centralised marketplace for Forex, unlike other financial markets. Usually, currencies trade over the counter in whatever market is open at that time. Since all trading is performed technically via computer networks, this is also known as the Over-The-Counter (OTC) market.
Global brokers like FXTM provides online trading, which is why you can sell and buy currencies from your electrical devices like your phone, laptop, and PC.
How does Forex Market Works?
You must understand how the market works before diving into the fact is forex trading profitable or no; Joanna in order to grasp the matter. See, Forex trading works directly between two parties in an OTC market. It is run by a global web of banks. These banks are spread over four primary trading centres in separate time zones:
1. London
2. New York
3. Sydney and
4. Tokyo
Thus, you can trade Forex 24 hours a day since there is no central location.
Besides that, there are three different types of forex market:
1. Spot Forex market: It is the physical exchange of a currency pair. Spot Forex market takes place to be settled at the precise point of the trade.
2. Forward Forex market: It set the currency amount to be settled at a specified price, within a set of date in the future or a range of future dates.
3. Future Forex market: It is another version of the Forward Forex market. Unlike the Forward Forex market, the Future Forex market is legally binding.
Is Forex Trading Profitable?
In short, YES. Forex trading undoubtedly CAN be profitable. However, for a lot of traders, it might not be as profitable as a handful of successful traders. Now, perhaps you are wondering how, or why is Forex trading profitable for some traders and not for some? Let’s find out.
How or Why is Forex Trading Profitable?
Well, it’s tricky to answer this question in just a few words. So let us bring you a story instead.
Meet Joanna!
Joanna is a mother of two and has a stable job as an accountant in Aylesbury town. She is relatively successful and can bring in about £72313 a year as income for her family.
Unfortunately, this £72313 is not enough for her to save for her children’s future while also maintaining regular expenses. Therefore, she needs to find £360 as extra income. She soon discovers Forex and researches on is Forex trading profitable for her or not. She finds out that yes, it can be.
However, she also finds out that she can devote only £216 a month to trading. Furthermore, due to her time-consuming job, Joanna can only trade for around 2 hours a day. So how much can she expect from her trading habits? Let’s break it down.
Joanna Uses Leverage to Pump Up Her Numbers
There is this thing called leverage trading in the Forex industry. To explain it as simply as possible, it’s basically borrowing money from the company you’re trading with for a single trade.
Let’s say, for instance, Joanna has £216 on her account, and she uses all of it for a EUR/USD trade. She then applies the company’s 1:100 leverage, which turns her trade into £21650.85 instead of just £216. Of course, at the end of the business, Joanna is supposed to return that borrowed £19,485 with a bit of extra. But the profit she has gained by trading such a large amount can keep her afloat.
In fact, some platforms offer leverages so high that a 100% increase in your trade with favourable conditions is realistic. But only with smaller amounts.
Joanna Chose The Right Forex Broker
Thanks to a couple of hours that Joanna had invested in finding a Forex broker, she can now trade without any fear or hindrance. The company she found offered good leverage, tight spreads, and the ability to withdraw any amount.
Spread is actually the difference between the bid/ask price. So, for example, if I sell you an apple for £10, and you immediately want to sell it back to me, I won’t buy it for £11; I’ll buy it for £10. That £1 is the spread. Therefore, opening and closing positions in mere seconds is often not a good idea.
Most traders tend to wait for days or even weeks to see significant profits. And by substantial, we mean 100% increases in their investments, often achieved with exotic currency pairs or with Brokers with ridiculously high leverage.
Joanna Researched
Before making a trade, Joanna had to research a currency pair; that much is obvious. But, first, she needed to know what type of sentiment is out there in the market, what clues could she find to see where the pair was going shortly.
Furthermore, Joanna had a factor in all of the fees she would have to pay to keep her position open for more than 24 hours. Therefore, a lot of maths is required to calculate the exact returns you’re expecting. Thanks to Joanna being an accountant, she managed to do that without an issue. But what if you aren’t an accountants or maths expert? Well, brokers come with their own software, which helps them predict the expected result.
Anyway, that’s further from the case. So let’s get back to Joanna doing research.
She went to some of the most popular financial news outlets, such as Bloomberg or CNBC. All of the hottest political, economic and financial topics are being discussed and reported. One single article can change the exchange rate overnight. Therefore, she needs to be very attentive. So, what type of article would call Joanna to action?
For instance, imagine an article, “Brexit is happening in October, and the government still doesn’t have a plan”. It’s funny because there was indeed such an article. This news would affect the exchange rate of both the EUR and the GBP. Joanna would be able to see this and prepare immediately. Either to minimise her losses or maximise the profits.
Joanna Used Tools At Her Disposal
There are several tools available for traders on pretty much any platform to find out when is Forex trading profitable. It could be helpful guides, Forex signals, or just tried and tested equations and strategies.
There are two tools that we always recommend to beginners
1. The Fibonacci Retracement level
2. The Simple Moving Average
These two can do miracles for beginners.
