What you should know about currency trading
Forex trading for beginners: It attracts high profit seekers.
By far, the largest market in the world is the foreign exchange market. On average, $4+ trillion worth of currencies are traded daily, around the clock, five days a week; an unimaginable sum. By comparison, the sum of all goods and services produced in France (the gross domestic product GDP) amounts to [approximately] three trillion euros – annually.
1. For whom is the currency trading suitable?
2. How does foreign exchange trading work?
3. How can you earn money in foreign exchange?
4. Who offers forex trading?
5. Minimum amount of a foreign exchange order
6. How to avoid big losses?
7. What can you do with a demo account in currency trading?
8. How is foreign exchange trading taxed?
We will answer the most important questions about forex trading for beginners and give some useful tips. Foreign exchange means all modes of payment in foreign currency, apart from cash. Similar to stocks, you can earn money with foreign exchange, lots of money. With luck, high returns can be achieved within a few hours.
Forex trading used to be only for professionals
Worldwide foreign exchange trading (Forex, FX for short) was only available to professionals (banks and institutional investors such as hedge funds) until the turn of the millennium. Deutsche Bank dominated the segment until 2013 as the world market leader, but slipped off recently. Primus in foreign exchange trading is now the Citigroup with a share of about 13 percent. The banks mediate the business primarily for companies (such as exporters and importers) to hedge foreign exchange fluctuations in international orders.
According to a Survey, the largest foreign exchange dealers are the following banks:
Citigroup, JPMorgan, UBS, Bank of America Merrill Lynch, Barclays, Goldman Sachs, HSBC, and Morgan Stanley.
For whom is currency trading suitable?
A small fraction of the global trillion-dollar business is now also available to private speculators via online forex brokers for a number of years; these are mainly traders who want to make huge profits in a short time. These traders are often called gamblers.
As is the case everywhere on the stock exchange, it should be noted that the high chances of profit are also offset by high risks of loss. Everyone has to be aware of that. Anyone who may be afraid of the risks in stock trading should refrain from trading in foreign exchange.
Tip: Anyone who wants to begin trading in the foreign exchange market should only do so with a very small portion of their savings. The money used could, if it goes awry, quickly and completely wipeout!
How does the foreign exchange trading work?
Around the clock, currencies are exchanged worldwide – similar to what US tourists do on overseas trips; US dollars are sold there and in exchange, another currency is bought. In the foreign exchange market, currency pairs are always traded in the same way. Each base currency that is purchased faces a quotation currency that is being sold. By far the most frequently traded online currency pair is Euro/USD. This is followed by USD/JPY (Japanese Yen) and USD/GBP (British Pound.) Subsequently, the Australian dollar (AUD), the Canadian dollar (CAD,) and the Swiss franc (CHF) also play a significant role in global online foreign exchange concert/stage.
The exchange rates are determined by the respective supply and demand ratio every second. However, cross rates have other exchange rates on the respective currency pair. Even interest rate decisions, important political decisions, and unfortunate events like earth quakes and other kinds of disasters can influence the exchange rates.
How can you earn money in forex?
Here’s an example [greatly simplified.] You buy EUR/USD at an exchange rate of $1.22350 and sell the pair a few hours later at $1.22500. Then you made a profit; the amount of profit demand on the volume you traded. (This profit is probably more than what most banks currently pay in interest in one year!)
In order to succeed in currency trading, one must watch the market very closely and must have some experience.
Observe the market announcements in relevant media and the respective movements in the foreign exchange market over a long period of time before you commit with your money.
Basically, exchange rates are subject to unpredictable fluctuations, which can also take on significant proportions during the course of the day. Remember the unexpected separation of Swiss franc from Euro or the pound turmoil surrounding the Brexit vote?
Taking into account that currency transactions can be made with a leverage of up to 1000, profit and loss opportunities are quickly apparent. The price changes are given in pips (in the example above, your profit was 150 pips) in foreign exchange trading and the unit of the trading amount is given in lots.
Who is offering forex trading?
Foreign exchange is not traded via any central exchanges, but exclusively electronically. While the banks are interconnected, private traders need a Forex account to trade currencies. A good 50+ regulated forex brokers are offering their intermediary services in Europe, Asia, and USA with easy to use trading platforms.
Tip: Choose an FX broker that is regulated in UK or USA.
Each broker has its own terms and conditions. Anyone who wants to make sure that he or she finds the best suitable provider, should start with a forex broker comparison (or by using their demo accounts for testing.) Well suited broker for beginners is FXCM.
What fees does a foreign exchange trader need to pay?
The forex broker earns mainly from the spread between the biding and asking price of a currency pair. Due to high liquidity in foreign exchange trading, spreads are usually quite narrow; brokers usually show this spread at four or five decimal place (PIP). The range depends on the currency pair, liquidity, and price fluctuation intensity. The more frequently a currency pair is traded, the lower the spreads. The narrowest bid-ask spreads are about one or two pips for EUR/USD, for exotic currencies (e.g. Mexican peso,) it can go up to six pips!
The spread usually also covers the transaction costs that are due on every purchase/trade. They are lower than what companies charge in stock market trading with equities or derivatives.
What is the minimum amount of deposit?
Different forex brokers have different minimum deposit requirements, ranging from zero to $100,000. In foreign exchange market, the so-called lots are traded. A standard lot of foreign exchange units equals 100,000 units of the base currency. With the currency pair EUR/USD, a lot corresponds therefore to 100,000 euros. For most brokers, in addition to standard lots, mini-lots (10,000 units of the base currency,) and micro-lots (1000 units) can also be traded. Thus, to execute an order, trader does not have to deposit the entire amount of capital required for the order to be executed.
More important is the minimum amount of money that the trader has to deposit in order to execute the order with the volume he desire, the so-called margin requirement. The minimum margin deposit can be considered as a deposit for executing higher volume trades. The minimum amount of margin can be a decisive criterion when choosing the right forex broker, especially for beginners.
How does the leverage affect the profit and loss?
Leveraging: Most FX brokers allow you to trade significantly more money than what the investor has deposited. The offered leverage cans vary from 1:2 to 1:2000.
An example: A trader deposits $1,000. He then receives from his FX broker the option to borrow $100,000 that he can use to participate in forex trading. This equates to a leverage of 1:100, or 1,000:100,000. The greater use of capital in the market can result in large profits, but also large losses if the bet does not go your way.
Can one lose more money in currency trading than what you invested?
Yes! The leverage may cause the margin deposited in the foreign exchange transaction to be insufficient to cover the accumulated losses. This may result in an obligation to make additional payments and under certain circumstances even a requirement to demand additional deposit. That would be a so-called margin call.
An example: The trading volume of a trade order you placed is $10,000 (mini-lot) with a deposit of $100. If, contrary to expectations, the price of the currency falls by one percent, the collateral would then be used up – hence this can result in a total loss of the capital invested. If euro slips even further and if your trade is still open, the foreign exchange broker may ask you to deposit more money to cover the losses.
How to avoid big losses?
FX broker usually close positions automatically when all the margin is used up. Traders in turn should set up a loss limit in the form of a stop-loss. Then the position is closed much earlier. In this way, only a certain portion of the money spent is lost, instead of all of it.
Conversely, if EUR/USD position gains one percent, then your balance will double, giving you a 100 percent return.
Tip: Beginners in the currency trading should only choose a small leverage from 1:10 to 1:30. Greed is not a good thing, especially when you are trading in forex! Proper chart analysis techniques can help you in finding the right stop-loss levels.
What good can a demo account bring to currency trading?
Most forex brokers offer their customers a free demo account. Thus, the future foreign exchange traders can practice trading for a limited period under real conditions with virtual money speculation. This practice is indispensable to succeed later with real foreign exchange trading. With a demo account, you can learn how forex market works; try different strategies and use stop-loss orders without any risk, and finally determining whether you are the right person for such a speculative investment. Special webinars provide additional theoretical strategies implementation.
In short, a demo account can be used to try out different trading systems in various FX brokers. This makes it easier to decide which foreign exchange broker is best for you and which strategy you should use.
In addition to money, luck, and experience, stating up to date with latest news is also important. A good deal of patience and discipline is need to succeed as a foreign exchange trader. This is because good trading conditions usually come after waiting for a long time.
How is forex trading taxed?
Profits from foreign exchange trading are taxed like other profits from sales transactions. All profits from forex trading are subject to the final withholding tax. All types of investment income are taxed. Accordingly, 25 percent of realized profits are paid in tax plus 5.5 percent solidarity surcharge. If a trader pays church tax, the profit is reduced by a further 8 percent.
Tip: Split your annual capital gains tax and submit a partial exemption request to your forex broker.
Anyone who chooses an FX broker abroad who does not pay the tax automatically to the US tax authorities must report their profits to the tax office. Increased international account inquiries from the Treasury can easily reveal tax evasion.