Given my experience and knowledge in the currency market, I have prepared this article with 10 things you should know about the Forex market (if you still do not know it and are interested in doing it) which may be useful to you.
1. FOREX IS NOT A SCAM
Unfortunately, many people without any criteria have used the name of the Forex market to create different types of scams such as the pyramid type, but that has nothing to do with Forex (Foreign Exchange) which is simply the currency market that operates in its different squares, highlighting those of London, Tokyo, Sydney and New York, distributed among these to operate 24 hours a day, 5 days a week (it closes with the New York market on Friday afternoon GMT-3 and opens with Sydney Market on Sunday afternoon GMT-3).
2. ACTORS OF THE FOREIGN EXCHANGE MARKET
Various players participate in the foreign exchange market who trade enormous amounts on a daily basis. These actors are: Commercial Banks, Central Banks, Hedge Funds, Commercial Companies and individual Traders through Brokers that serve as intermediaries.
3. FOREX IS NOT A REGULATED MARKET PER SE
Being a decentralized market (not belonging to a country in question) there is no regulation that guarantees its regulation. This does not mean that it is a scam or that it lacks seriousness since it is the market where more than all the volume of the stock markets combined is traded daily. This makes it the most liquid market in the world.
4. FOREX IS A ZERO SUM GAME
It is very important that you know from the beginning that Forex is a zero-sum game, this means that when you win money, “someone” loses that money and vice versa, which makes it very similar to a game of poker (for giving an illustrative example) where everyone bets but some lose their money so that others win it and that is one of the causes that make it one of the most difficult market to maintain permanent gains over time for traders (we have all lost money in Forex). It should also be clarified that in reality, it is not exactly a zero-sum market since if the commissions/spreads charged by the broker are considered, it has been a negative-sum game but for it to be understood, at least among market participants (traders) it is zero-sum.
5. TO OPERATE YOU NEED A BROKER
In recent years, the Forex market has become quite popular and what was once an exclusive market for large entities such as Banks, Investment Funds and Central Banks, today any independent trader like you or me can invest or speculate in it from home Through an entity called Broker that works as an intermediary between the market and you. For this, you must know the different types of brokers and the characteristics that differentiate them from each other. For this, I have written an article detailing each one of them since the choice of broker is one of the biggest concerns you have to have when entering this market.
6. THERE ARE REGULATIONS FOR BROKERS
Although it is true, Forex cannot be a regulated market because it is decentralized, if there are regulations in different countries that apply to brokers and it is important to consider them. The most important is the UK regulation, the FCA (Financial Council Authority) whose regulation is the strictest of all and therefore the most reliable. In the United States, there is the NFA that also enjoys reliability and in other countries, there are also regulations but less strict than those previously mentioned. Unfortunately, there is NO regulation in all countries so personally, I prefer to operate with brokers that are regulated by the FCA since remember that you will give your money to your broker and it would be really unfortunate if it fell into disrepair. hands.
7. THEY CAN LEND YOU UP TO 1000 TIMES YOUR INVESTMENT TO OPERATE
A very typical concept of the Forex market is that of leverage. Thanks to this, the retail trader can access the market and take positions in currencies for an amount much higher than that available in his account since some brokers allow leverage up to 1000 times the amount available in the trader’s account. For example, with some brokers, it is possible to acquire €1,000,000 with only $1000 USD of deposit in your account. This is without any interest or additional documentation to that required to open the account but leverage is a double-edged sword since if the position you take is incorrect (bets up for example and it goes down) you play in against and if you use a leverage of 400 times, it means that only a drop of 0,
Leverage is defined in this way 1: 100 being always “1” at the beginning which indicates your deposit (1 time) and to the right, the multiplication or credit offered, being in the case of the example “100” which means that With your balance in the broker’s account, they allow you to trade up to 100 times that amount. Due to the danger that this entails and the need to use leverage by those of us who are private traders (we do not have the capital of “Bank of America” or “Citibank”) it is necessary to use the “stop-loss”, a tool used to stop losses up to a certain margin strategically established by each trader.
It should be noted that corporate (Banking) traders do not use stop-loss or leverage. Given the large capital that banks handle, they do not require the use of leverage to carry out million-dollar transactions and therefore are not subject to the risk of suffering a significant loss in percentage terms of their capital in case of having a reduction in their positions, therefore they can avoid the use of Stop-loss.
8. 90% OF TRADERS LOSE MONEY IN FOREX
It sounds incredible but it is true, according to figures provided by the brokers themselves in Europe, they show that 90% of traders lose money in the currency market, this due to several factors (which I consider): Excessive use of leverage, operating with a Market Marker broker, lack of psychological control (falling prey to fear and/or greed), over-trading, not having enough experience or knowledge in trading and not having a “winning” strategy (at least for you). That is why I recommend that you trade in DEMO for months and until you manage to win more than you lose (because losing trades is inevitable) before starting a real account. This will prevent your learning from costing you part or all of your capital.
9. FACTORS THAT INFLUENCE CURRENCY FLUCTUATIONS
Political decisions, indices and the historical movement of the price are what determine where the market will move. Interpreting this data is key to reducing the margin of failure when taking a trade.
Although it is hard to believe (due to the rapid movement of the numbers), the volatility of Forex is lower than that of the Stock Market, so if you do not use leverage, you will hardly have losses greater than those common in a downward stock in the market. stock market although in some exceptions there are strong jumps such as those seen in Brexit and in the last election of Donald Trump as well as in the event of a war conflict or a terrorist attack, etc.
10. CAN YOU MAKE A LIVING FROM FOREX TRADING?
Of course, yes, but the figures say that only 5% could do it (they are the ones who win) so if you think it is easy, no, it is not but it is not impossible, you just do not have to make the mistakes of 95 % loser and that entails, for example, having a capital according to what you need to earn monthly considering realistic and sustainable profitability over time. In short, to make a living from forex or trading in general, there are three aspects to consider: capital, target monthly income, and average monthly profitability. This will define if you can dedicate and live from trading 100% or part-time and share it with other sources of income.
Probably wanna read:
- What is the forex?
- 5 reasons to invest in education
- Is It Possible To Live by Forex Investing?
- The five advantages of trading in Forex
