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AvaTrade - Advantages in overview
- Regulated by MiFID regularities
- Many webinars for newcomers
- Different kinds of support
- No fee’s for deposits & deposits
- Demoaccount possible
- Mobile App for the traders
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What is Forex Trading?
The term Forex should already be familiar to most traders, new or experienced. However, most newcomers won’t know exactly what’s behind this term and how Forex works. That is why we’ve decided to begin by clarifying what exactly Forex trading is and how it works in reality. The Forex market, known as well as the Currency or Foreign Exchange Market, is the biggest and most important global financial market, with an average daily turnover of more than 4 trillion dollars. Trading with Forex is carried out between the individual market participants. For this reason, Forex trading is also known as Over the Counter (OTC). Trading partners are able to barter with different international currencies.
Lucrative Trading with Forex
Simply put, Forex trading allows you to buy and sell the currency of a particular country against a currency belonging to another counter. Currencies or futures are, therefore, regularly traded in pairs. Amongst the most popular pairs are the Euro against British Pound, Dollar against the Japanese Yen and the Dollar against the Euro. The most traded currency pair is the Euro against the US Dollar. The price development is directly related to supply and demand. The demand can be influenced by the economic and political situation of a particular country, the rate of interest or even tourism. Forex traders make a profit by correctly estimating how the relationship between two particular currencies develops within a predefined time frame. If a trader, for example, expects the price of the Euro to rise against the US Dollar, then they’ll decide on a so-called long position. On the other hand, the same trader could decide on a short position, if he expects the price of the Euro to fall against the US Dollar. This means that traders can make a profit regardless if a currency rises or falls in value, as long as they correctly predict the outcome.
Market Participants and Trading Times
The most frequently asked question by newcomers is which market participant offers the highest turnover when it comes to Forex trading. The big credit institutes, as well as well-known industrial and trading companies, are all amongst the ‘big players’. Additional participants include medium and small banks, trading companies and consumers. The central banks also have a large part to play when it comes to Forex trading. They can heavily influence the exchange rates of individual currencies through their imposed monetary measures. In contrast to the fixed trading times of the stock exchanges, Forex traders can trade around the clock. This flexibility makes this type of trading suitable for all traders. It’s possible to trade with currencies without any interruptions from 10pm on Sunday to 11pm on Friday. The electronic trading systems are not tied to the fixed opening times of the stock markets. Trading is, therefore, also possible during the weekends. However, as most of the big institutional market participants (banks, insurance and other companies) aren’t active during this time, a large portion of the market volume is unavailable during this time. As trading occurs directly between traders, trading in currencies can be done in real time without any interruption.
High Returns and Losses
It’s also possible to use leverages while engaging in Forex trading. This means that traders can minimise their transaction deposits in the form of security provisions to the corresponding Forex broker in order to increase their own trading volume. A high leverage can result in traders making profits well in excess of the invested capital. The same, however, counts for potential losses. A leverage ratio of 1:100 is enough to be able to deposit a percentage as a margin. In this case, traders stand to either make a profit or a loss of 100%. If the loss is higher than the capital available on the trader’s account, then the broker will require you to provide additional capital through a margin call.
The currency market is a very liquid and popular one. Around 5 trillion dollars are turned over daily through Forex trading. Currency exchange trading takes place directly between the individual market participants. Traders decide on whether a currency’s value will rise or fall. It’s possible to earn very high returns on traders due to the wild price fluctuations and leverages. On the other hand, Forex trading could result in you incurring heavy losses. In some cases, losses could be higher than the initial capital investment. This is particularly true when trading with high leverage ratios. The price of a currency is influenced by the supply and demand. This is based on real events, as well as political, social and economic factors. Forex trading is suitable for private, as well as small investors, due to the flexible trading times and minimal investment requirements.
How Does Forex Trading Work?
More and more private traders are entering the Forex market and there are plenty of reasons to follow them. On the one hand, traders can enter trades with a relatively minimal amount of capital. Additionally, the level of trading volume is almost limitless. Therefore, it’s possible to enter trades with thousands of pounds, as well as with several million. Forex traders only need to deposit a proportion of their trading volume from their own capital. This, however, increases the risk factor.
Exchange Rates and Currency Pairs
Exchange rates are increasingly indicated through currency pairs. This is due to traders constantly buying certain currencies, while selling another. Each individual currency in the currency pairs is identified by a unique 3-digit currency code. For example, the British Pound against the US Dollar (GBP/USD) and the US Dollar against the Japanese Yen (USD/JPY). Newcomers wanting to begin trading with Forex, should definitely learn the most important currency pairs and their identification codes. The first currency of a pair is regarded as the base or primary currency. The second currency of a currency pair is known as the counter currency or exchange currency. The exchange rate is a detailed indication of how much of the exchange currency is needed to buy a unit of the base currency. If traders see an exchange rate of 1.63750 when dealing with GBP/USD, then that means that the British Pound is worth 1.63750 US Dollars. If the trader then wants to sell a British Pound, they’ll get 1.63750 US Dollars for it. The difference between the base value and the exchange currency is known in Forex trading as the spread. The spread amount is dependent on the current available liquidity. The spread amount increases during periods of low trading activity and decreases during periods of increasing amounts of liquidity.
A Practical Trading Example
Due to current market developments, a trader decides that the British Pound (GBP) will rise against the Australian Dollar (AUD). He decides to invest 10,000 GBP/AUD at an exchange rate of 1.41703. This costs the traders exactly 14,1703 AUD. The trader then waits a couple of weeks, when the current rate stands at 1.52703. This means that the traders 10,000 GBP is now worth more than the original investment. The trader then decides to cash in his profit and exchanges his British Pounds into Australian Dollars. In this example, the trader has made a profit of 1,100 AUD. This practical trading example should highlight to new traders how Forex trading works. Forex trading allows traders to either buy (go long) or sell (go short). Trades can be carried out rather quickly and cost effectively. The most lucrative currency pairs can result in the biggest profits and can be easily found through currency charts. Exchange rates with a high degree of validity are characterised by wild fluctuations and larger trading durations. These currency pairs can earn traders a large amount of profit than exchange rates with minimal volatility.
What Do I Need to Trade with Forex?
Forex trading is particularly popular with newcomers due to its simplicity. Traders wanting to start trading with Forex, only need to fulfill a few requirements. Previous experience with financial instruments will definitely be advantageous but is not necessary. Traders must own a computer or a mobile device with access to the internet. Additionally, they’ll also need to have a suitable Forex broker. This broker gives traders access to a trading platform. Depending on the broker, you’ll either have access to a web-based or software platform, which will need to be installed directly onto the computer. The trading platform is designed with various functions which differ from broker to broker. Traders can use the trading platform is find out all the important information about the various exchange rates and price fluctuations. These are normally displayed in the form of a graphic or chart and can then be used to help you make an informed decision.
Also Suitable for Newcomers
Forex trading is suitable for all traders, whether new, experienced or professional. Newcomers should, of course, use different strategies than those of experienced traders. It’s quite common for the first few losses to shock new traders and deter them from trading further. Losses are also part and parcel of trading with Forex. For the most part, you should prepare yourself for losses at the very beginning but you shouldn’t let this put you off straightaway. It’s possible to minimise the potential losses suffered by using reliable risk management functions provided by your broker. Most newcomers will start off trading with a virtual trading account, which allows them to trade without having to invest real money. This is an additional advantage with Forex trading, as most brokers will provide you with such an account to begin with. This allows beginners to practice and learn the ropes in peace, allowing them to familiarise themselves with the necessary functions before having to risk their own capital.
What Can Be Trading with Forex?
The most traded currency pair in the world is EUR/USD (Euro and US Dollar). Compared to other currency pairs, the liquidity from pairs containing either USD or EUR is the highest. Currencies like GBP (British Pound), CHF (Swiss Franc), AUD (Australian Dollar), CAD (Canadian Dollar) and JPY (Japanese Yen) are the most traded currencies combined with either USD or EUR.
The Major Currencies in Overview
Generally, the currency pairs can be categorised as major or minor (also known as exotic). Trading with major currencies is clearly defined. Around 67 percent of all currency trading is done with major currency pairs. The USD is featured in all the most popular currency pairs. This should highlight just how popular the American Dollar continues to be. The most popular major currency pairs are traded on the international currency exchange market with the US Dollar featuring as either a base or counter currency. Forex trading behaves in such a way that some of the major currency pairs often tend towards the same direction. This is especially true for pairs such as the EUR/USD, GBP/USD, AUD/USD and NZD/USD. It’s possible to pair two major or two minor currency pairs together, as well as one major and minor currency. However, if you choose to combine a major currency with a minor currency, then you risk losing the rate of returns attributed to most minor currencies. This rate of return makes trading in exotic currency pairs particularly advantageous as they also possess relatively calculable currency stability. For this reason, many Forex traders focus primarily on the minor currencies. In addition, exotic currencies are also suitable for those wanting to get a return on a major currency.
Trading with Exotic Currencies
Exotic currency pairs are not generally traded against the USD when it comes to Forex trading. Apart from the USD, the Euro and the Japanese Yen are also seen as two of the most important currencies on the Foreign Exchange market. This is due primarily to the Euro and Yen being kept by many different nations as currency reserves. For this reason, Forex trading with Yen and Euro Pairs, without USD participants, can result in a very high amount of turnover. The most popular of these currency pairs include EUR/JPY, EUR/GBP, EUR/CHF and GBP/JPY. In contrast to the major currency combinations, these exotic combinations have a relatively limited amount of liquidity. These circumstances mean that exotic combinations are generally riskier and more difficult to trade with. Amongst the most popular exotic currency pairs are CAD/CHF, GBP/CHF and AUD/NZD. Traders should regularly keep an eye on the exotic currency market. It’s possible to gain important knowledge for trading with major currencies on learning the strengths of the exotic ones. If a trader is needing to decide whether to buy NZD/USD or AUD/USD, then they should first have a look at the currency charts for AUD/NZD. If the Australian dollar is falling against the New Zealand dollar, then buying NZD/USD will be a better option than AUD/USD based on its current strength.
Trading with Currencies
The demand for traded currencies plays an important part when trading with Forex. Traders ultimately earn the price differentiation between the two currencies at the end of trade. On average there are around 160 different currencies available to trade with. The exact currency pairs available depend on your chosen broker. Traders will need to keep an eye on the market developments in order to determine which currency pair is currently an effective trading option. It’s easier to monitor a long-term price development than a short-term one. Predicting spontaneous fluctuations in order to make a profit is generally very difficult to do. Whereas long-term fluctuations are normally due to economic partnerships or political decisions, spontaneous price developments are influenced by different factors. Both major and minor currency pairs are suitable for those comfortable with taking risks. Inexperienced traders, however, should start by trading with major currency pairs.
Those who decide to trade in currency pairs will potentially benefit a lot more than with more traditional financial instruments. Due to the size of the Forex market, it possesses a large amount of liquidity and is not bound by any strict opening hours. Price gaps occur less frequently than they would trading in shares. The big currency pairs are known for their very high volatility. Traders looking for quick gains can, therefore, benefit from large price fluctuations within a relatively short time frame. The major currency pair often tend to move in a recogniseable trend, which gives almost every trader a high chance to make a profit. Trading with Forex is very flexible and traders can trade day or night. The forex market does not have a maximum limit in terms of trading volume either. Traders are free to decide on a suitable order volume that suits their own trading style. The currency market is suitable for professional traders with a large amount of capital, as well as beginners with a minimum amount to invest.
What Should I Look Out for with Forex Trading?
Newcomers wanting to trade with Forex should start by familiarising themselves with the subject area. Forex trading is not as complex as trading with more traditional financial instruments. However, it’s important to get to know a couple important definitions and terms. Within a short period of time, newcomers will have gotten to grips with the most important functions, trading instruments and strategies. Amongst the most important definitions to learn at Pips and Lots.
Definition and Function of Pip & Lot
The current exchange rates are shown very precisely in up to four digit decimals. The so-called Pips refer to the tradeable unit from each participant. If, for example, the popular currency pair EUR/USD has a rate of 1.2630 and then falls to 1.260, it’s regarded as having had a loss of 30 Pips. Pips aren’t just the official unit of measurement for rate developments, but are also used for other areas. Many forex brokers will give their spreads, for example, in Pips. The final performance of various trading systems is also measured in Pips. In addition, it’s also normal to see profits and losses measured and displayed in Pips. Normally, a Pip refers to the price development of Forex trades to 4 decimal places. This is true for all currency pairs with one exception. The currency pair USD/JPY counts the second decimal place as the Pip. This is due to the Japanese Yen only having an exchange rate up to 2 decimal places.
There is also another important unit of measurement with Forex trading alongside Pip. The value of a Pip depends on the corresponding position size. The position size with Forex trading is stipulated and measured in Lots. These positional sizes encompass 10,000 units of a particular currency. In the aforementioned example, the currency pair EUR/USD would have 100,000 Euro. Some brokers don’t just offer traders a chance to trade in Lots but also with Mini Lots. Mini Lots correspond to 10,000 units of a particular base currency. Additionally, there are also Micro Lots, which consist of 1,000 units of a currency. If a broker allows you to trade in Micro Lots, then it’s possible to trade with Forex with just a few pounds of starting capital.
What Should I Know About Forex Arbitrage?
Arbitrage trading isn’t just limited to the Forex market but also comes into play with other trading instruments. Arbitrages are used by market participants to effectively exploit minimal as well as short-term price inefficiencies in order to make a risk-free profit. Traders with a special trading strategy are known as Arbitrage brokers. These market participants also contribute to the efficient formation of market prices. There is an important condition when trading with arbitrages. Traders must only trade multiple orders in one market and without a broker spread. For this reason, private investors are almost only able to trade using ECN brokers. These brokers allow traders to trade in multiple orders directly through an order book. Arbitrage trading is a very popular trading strategy for many traders. The so-called arbitrageur brokers strategically exploit temporal and spatial price differentiations from various exchange rates on various markets to earn themselves profits.
Forex Leverage – Functionality and Characteristics
The implementation of big financial leverages is amongst the most attractive properties of Forex trading. These leverages allow traders to potentially make large profits through investing a minimal amount of their own capital. Of course, these leverages also bring a large amount of risk with them. This risk factor should be taken into consideration before using leverages in trades.
If a trader borrows 100,000 dollars to invest this in pounds, then this is known as a Lot. An investor, however, won’t be able to get this amount of money from a bank or broker without depositing a security. For this reason, a so-called margin is levied, with the exact amount varying from broker to broker. If a provider asks for a margin in terms of a percentage, the trader will have to deposit 1,000 pounds. This money is then used as a security provision and is locked on the Forex account. The forex leverage is the reciprocal of the margin requirement. In the aforementioned example, the margin corresponds with the leverage ratio of 1:100. If the trade has predicted the right market development for his trade, he can expect to get a return of 100%. However, the leverage ratio can also work against the trader. In such a case, the investor doesn’t just lose the entire capital invested. If he can’t cover the loss with his available capital, then the broker will initiate a margin call. This requires the trader to deposit new capital in order to cover the loss. If the trader can’t produce this capital within a given time frame, then his position remains open.
Forex leverages allow traders to make large profits, as well as heavy losses. The potential losses can even be larger than the initial investment and could result in you losing all your capital. In order for traders to trade in high volumes with small financial transaction values, each trader is given a type of loan by their broker. This can only happen once the trader has deposited a required margin payment.
How Can I Find the Right Forex Broker?
Before you can start trading with Forex, you’ll need to make a very important decision. It’s practically impossible to trade on the currency market without having found a suitable Forex broker first. Newcomers, as well as those looking to change, can profit from an extensive selection of providers. Brokers are currently competing very hard to attract new customers with great offers. Experienced traders will no doubt have discovered for themselves the important criteria to watch out for. However, newcomers will have a more difficult task to find the right one for them.
The Spread Value
A broker, which works with the Market Maker Model, will be particularly suitable for newcomers. These brokers offer traders fixed spreads and are therefore easy to compare with each other. The spread value is one of the most important financial factors when it comes to Forex trading. Traders should try their best to find a broker with as minimal a spread value as possible in order to reduce trading costs. The most minimal spreads concerning currency pairs are around 0.8 for AUD/USD, EUR/USD and USD/JPY. The EUR/GBP and GBP/USD pairs have a minimal spread of 1.
Minimum Deposit and Leverage
Each broker will also have a different requirement when it comes to minimum deposits. Newcomers will no doubt benefit from a low amount. Many brokers allow you to deposit amounts of 50 US-Dollar or more. The higher the leverage, the less capital you’ll need to invest when trading with Forex. Traders, trading with a leverage ratio of 1:100, will only need to deposit 1 percent from their own capital. Traders can therefore trade a Mini Lot of 10,000 US-Dollar by investing 100 pounds of themselves. Some brokers even allow customers to increase the leverage ratio to 1:400. Aggressive traders will benefit from this the most.
A suitable Forex software should not be underestimated and is definitely amongst the most important decision making factors when choosing a broker. The software should be clearly designed, easy to navigate around and quick to learn. It should also offer many important and useful functions, such as chart tools, order masks and indicators. Some brokers even allow you to make your own risk-free and free-to-use test account. This allows traders a chance to familiarise themselves with the software without risking their own capital.
Bonuses and Extras
The growth in Forex trading’s popularity has meant that there are now many different brokers on the market. Each broker has to compete vigorously for new customers and attract them with bonuses and additional benefits. These, however, should not be the first things you look for when it comes to choosing a broker. Once you’ve looked at the other important criteria, you should factor in the bonus offers. The most popular are monetary bonuses on deposits and VIP programmes. Finally, traders with a high turnover rate could unlock improved trading conditions and additional functions. Traders should always look at the terms and conditions first.
Our Broker Comparison Will Help with The Decision
Many newcomers won’t automatically know all the important criteria to take into consideration before making their decision. Even when they have informed themselves about what to look for, they’ll then need to put every broker under the microscope before making an informed decision. This could require traders to invest a lot of time in the decision process. That’s why we’ve carefully put together a carefully researched broker comparison list. This extensive and time-intensive research has been done for all the current providers in order to compare them closely with each other. Those interested in trading with Forex can easily see the most important information and won’t need to trawl through the internet to find it themselves. Our broker comparison has taken all the important criteria into consideration. Each user can define their own criteria in order to sort through and find the most suitable broker for them with minimal time or effort.