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Trading on the Forex market

The Forex Market (Foreign Exchange or FX) is the largest and most liquid market in the world. Billions of Euros are traded in currencies on a daily basis.

Traders in the forex market are literally buying and selling money. The financial assets are called pairs, for example:

  • EUR/USD (Euro/US dollar)
  • GBP/USD (British pound/US dollar)
  • CHF/USD (Swiss franc/US dollar)
  • USD/JPY (US dollar/Japanese yen)

1 EUR will always be worth 1 EUR, in order to determine it's value, it needs to be compared with another curency.

The forex market does not have one physical exchange, it is considered "Over the Counter" (OTC). All the trades are executed electronically, between central banks all over the world.

It's open 24 hours 5 days a week. The hours with the most activity are:

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

The advantages of Forex trading

  • Trade 24 hours a day, 5 days a week
  • Potential large profits with a limited investment, thanks to the leverage effect
  • Making money by speculating on increases and decreases
  • You choose your own stop-loss and the risk you want to take
  • You can never lose more than the deposit on your account (for Plus500 and Markets)
  • No commissions: the broker makes money on the spread between the bid and ask.

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 100 Euros you can open a position of 10,000 Euros or more and still benefit from the changes in that larger position.

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

Your investment of 100 Euros is the margin. The margin, multiplied by the leverage, gives you the total possible exposure to a currency.

With a margin of 100 Euros and a leverage of 200 you can take a position of 20,000 Euros.

Your margin decreases when the position turns on you. With a small margin, it is best to place orders for smaller amounts, like 5,000 or 10,000 Euros.

CFDs are only dangerous if used unwisely.

If your position is lucrative, then you obviously get the entire profit. For example: you have a margin of 100 Euros and you take a long position of 10,000 Euros. The price rises by 0.5%: you make a profit of 50 Euros.

Value pips

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, 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.

Practical example: EUR / USD

If you think that the Euro is going to rise and that, consequently, the exchange rate will go up, you press the "buy" button. To act on an increase of this currency pair you must buy Euros.

eurodollar

Press the "buy" button and choose to trade with 10,000 Euros. To do so, you need a margin of 50 Euros. Also set a stop loss right away: if the Euro drops under 1.1000 you take your loss and move on.

eurodollar

Open an account

Compare the CFD platforms 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.