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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

What is forex?

Forex or FX is short for Foreign Exchange, the market on which currencies are traded. Whenever we want to travel abroad or do business with a company in another part of the world, we need to change our own currency into the currency of the other country. The currencies are always traded in pairs, which means the currency of one country is quoted against another, such as USD/JPY (America / Japan).

So 1 EUR will always be worth 1 EUR and in order to determine its value, it needs to be compared with another curency.

The Forex Market is the largest and most liquid market in the world. Billions of Euros are traded in currencies on a daily basis.

The forex market is open twenty four hours a day except for Saturdays and Sundays. The trading week starts on Sunday evening and closes on Friday night. First Australia opens, then Japan. When they are about to close, Europe and the UK are taking over and a few hours later the US opens, after which Australia opens again.

The hours with the most activity are:

  • 0:00 GMT (Asian session)
  • 8:00 GMT (European session)
  • 13:00 GMT (American session)

Depending on the time, you see heavy trading in the currency pairs of the markets that are open. During the Tokyo session, there's a lot of activity in the USD/JPY pair. During the London session, we see most activity in GBP/USD, EUR/USD and USD/JPY. It's always best to trade the currencies with the highest volume.

No central exchange

The forex market doesn't have a centralized exchange such as the stock exchange on Wall Street, it is considered "Over the Counter" (OTC). Some major international banks manage the transactions and set the exchange rates in their interbank trading of currencies. We are talking about institutions like UBS, Citigroup, Deutsche Bank, HSBC, Goldman Sachs, Merril Lynch, JP Morgan Chase, RBS, Barclay's,... Together they are some form of a central exchange on which the prices are made (referred to as the 'interbank liquidity pool).

Retail brokers use a very expensive data feed from this interbank market and then show a quote on their own platform: the bid price if you want to sell a position and the ask price if you want to buy. The broker can already make money from the difference in the price on the interbank market and the price they are quoting on their platform. So as a retail trader you will never be able to trade the prices that are quoted on the interbank market. And different retail forex brokers will all have slightly different bid and ask prices.

Forex is not easy

Forex trading is not easy. Don't believe all the systems that promise that it's easy to make a fast buck. It's not. Ofcourse it's very easy to get started, you only need a computer or smartphone and a credit card to fund an account. You can easily choose to open a long or short trade, but making consistent profits is not easy. It cannot be done without a lot of study and practice. Only when you've got a lot of experience, you'll be able to 'feel' the markets a little bit better and make good decisions from time to time. Ofcourse you can't be right all the time and managing your losses is your most important task. The use of proper money management and position sizing will make sure that you won't lose all the money on your trading account.

Forex and the leverage effect

On the Forex market you can speculate with very large amount of money without investing the whole amount yourself.

For example, with an investment of 333.33 euros you can open a position of 10,000 euros or more and still benefit from the changes in that larger position. Ofcourse, should the market move against you, the loss is also magnified.

A slight difference in the currency price can quickly give you a relatively large profit or loss.

Your investment of 333.33 euros is the margin. The margin, multiplied by the leverage, gives you the total possible exposure to a currency. In this case that's 10,000 euro. Should the market move up or down by only one percent, that would be a gain or a loss of 100 euro. Comparing to the margin of €333.33 you used, that's a gain or loss of 30%. So you can see that you can quickly run out of funds if the market moves against you.

Practical example: EUR / USD

If you want to trade the Euro, you can press on the 'buy' or 'sell' button.

It is possible to trade with 10,000 euros. To do so, you need a margin of 333.33 euros.

When opening this order, you set a stop loss right away: if the Euro drops under 1.15112 you take your loss of 50 pips and move on. Also note that the take profit in this case is set at 100 pips, the double of the amount you are willing to risk.

eurodollar

Contract sizes

A standard contract is called 'a lot'. Let's take the EUR/USD as example.

  • One lot: 100,000 EUR - 1 pip equals $10
  • One mini lot: 10,000 EUR - 1 pip equals $1
  • One micro lot: 1,000 EUR - 1 pip equals $0.10

Micro lots are a great way to start trading when you're a complete rookie. Even with a small account you can start to trade with real money.

The value of 1 pip

The EUR / USD is quoted with 4 digits after the comma. These digits are called pips.

The value of a pip varies depending on the trade amount you choose.

For an amount of 10,000 euros or a mini lot, each pip is worth 1 dollar. To calculate this, you multiply the trade amount by the exchange rate and then by looking at how much money an increase of 1 pip would give you.

For example:
10,000 euros x 1.4005 (ask) = 14,005 dollars
10,000 euros x 1.4006 (ask) = 14,006 dollars
Value of 1 pip = 1 dollar.

Let's do the same for a whole lot:
100,000 euro x 1.1998 = 119,980 dollar
100,000 euro x 1.1999 = 119,990 dollar
Value of 1 pip = 10 dollars.

Open an account

Compare the CFD platforms that offer forex trading and try the free demos or open an account right away.

With an account, you can trade CFDs on shares, indices, commodities (oil, gold, silver, platinum, etc.) and on the Forex market (currencies).

With the free demo, you can practice with a fictitious capital so that you learn how to trade with CFDs and familiarize yourself with the platform from the brokers we selected.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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