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updated: 24.05.2020 - Compare, Choose, Trade!

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Forex Trading

The frequently used abbreviation Forex stands for Foreign Exchange - which means the trading of currencies of the exchange market. This entails two simultaneous actions: the buying and selling of two currencies. With a daily turnover of around five billion US dollars the exchange market can be considered as one of the most liquid and largest financial markets there is. At the same time, this market is not tied to any stock exchanges with currencies being traded all over the world and 24 hours a day between Sunday and Friday evenings. This offers a number of interesting trading opportunities which numerous investors shrewdly take advantage of.

What is Forex Trading?

In principle Forex trading entails the purchase of one currency in exchange for another which is sold in the same process: the price of currencies is always shown as a relationship between two currencies, so in currency pairs. For example, if investors expect the US dollar to become weaker against the euro then they buy euros and sell US dollars - they go long in the euro/US dollar currency pair. On the contrary, when the US dollar is expected to be stronger in future, investors go short: they sell euros and buy US dollars.

If the trend develops as expected then traders will be able to pocket the difference. These profits may look outstandingly small at first but, with the use of leverage, turn out to be an attractive earning opportunity. It is important to remember, however, that the same applies for the opportunity for losses of course. If the currency pair follows a trend counter to expectations then the potential for loss is also multiplied in relation to the leverage.

Until a few years ago, Forex Trading was used by institutional investors such as banks, financial institutions and hedge funds to profit from the constant fluctuations on the exchange market. For some time now internet brokers have offered private investors the opportunity to take part in the lucrative practice of Forex trading. To make it possible to orient oneself in the world of Forex trading, some key concepts and ground rules should be explained from the outset.

Currency Pair

A currency pair always consists of the base currency and the quote currency which represents the price of the base in the other currency. Example: EUR/USD 1.1791 - One euro is equivalent to 1.1791 US dollars.


The brokers fees incurred for each trade effected are referred to as spreads. They are expressed as the difference between the bid and offer rate, i.e. between buying and selling price. For a currency pair the broker offers two rates accordingly, with the buying or bid rate listed higher than the selling or offer rate. Brokers generally list spreads in the form of pips.


A pip is used to denote a change in an exchange rate of +/- 1 in the fifth digit after the decimal point. If the exchange rates only have one digit before the decimal point then a pip denotes a change in the fourth digit after the decimal point. Example: EUR/USD 1.1791 to 1.1795 = +4 pips


Lot describes the size of positions in Forex trading;

Standard lot - 100,000 units of the base currency

Mini lot - 10,000 units of the base currency

Micro lot - 1,000 units of the base currency


The leverage is provided by the broker as a ratio, as in 100:1 for example - therefore investors are able to trade 100 times the value of their stake. The margin therefore denotes the guarantee for a trade, determined by the leverage: A deposit of 2.5% would be payable for a leverage of 40:1, and only 0.5% for a leverage of 200:1. For a standard lot, the deposit amounts to 2,500 units or 500 units to trade 100,000 units of the base currecy.

Forex MT4

The electronic trading platform MetaTrader MT4, produced by MetaQuotes Software Corporation, is widely used in Forex trading. The free tool is available in over 30 languages, user friendly and clearly laid out. This trading platform, equipped with interesting facilities which conduct market analyses or make trading systems improvements possible, is used by over 600 online brokers.

Why trade Forex?

There is a whole list of reasons why institutional investors in particular are moving into Forex trading and why this practice is now becoming relevant for private investors too. Here are just some of the most important advantages of Forex trading:

  • The exchange market is always active all over the world. There are opportunities to trade 24 hours a day thanks to the different opening times of businesses around the world.
  • Investors can make profits on both climbing and falling rates which is a fundamental difference when compared with other financial markets.
  • The trading costs are relatively low and above all transparent.
  • The exchange market is highly liquid with more than five billion US dollars changing hands on a daily basis. Furthermore the key focus is on a small number of currencies so investors are able to enter into and withdraw from the market with ease.
  • The leverage factors make even the smallest rate fluctuations interesting - in either direction of course.
  • The traders can be globally active with digital platforms allowing for trade opportunities all over the world.
  • A practical trading example

    If a trader expects the euro to fall against the US dollar, he opens a short position: he starts selling euros in exchange for US dollars at the current rate in order to get them back later at a lower price and to earn the difference.

    1. He opens a position with a standard lot of 100,000 euros at the opening rate of 1.1791 EUR/USD. Since he is using a leverage factor of 100:1 he must enclose a margin of 1,000 euros. So he sells 100,000 euros for 117,910 US dollars.

    2. The exchange rate for the Euro against the US dollar indeed falls to 1.1771 - so by 20 pips. The trader closes the position by buying back the lot: 100,000 euros for 117,710 US dollars.

    3. The difference and therefore the profits taken amount to 200 US dollars or 169.91 euros. The yield comes to almost 17 percent.

    However it is always important to remember that an unexpected rate fluctuation in the opposite direction can cause losses which will then be deducted from the deposit.

    Trading with Bitcoin

    The cryptocurrency Bitcoin has caused uproar on the financial markets with growth in 2017 alone recorded from around 1,000 US dollars to its current value of over 15,000 US dollars. Interesting trade opportunities come about as a result of its high volatility which is not least due to conflicting interests. With the latest registration of Bitcoin Futures, the digital currency saw a strong upturn but is still under the supervision of the financial authorities.

    The currency pair BTC/USD is reflected in Forex trading. Traders can now back a continually growing Bitcoin but opening a long position - so by buying buying US dollars at the current rate. If they expect the Bitcoin to fall then they sell from a short position at the current rate in US dollars to by them back for less later on. As always with Forex, the earnings come from the leveraged diference.

    Forex trading - suitable for beginners

    In comparison to other trading opportunities, beginners can take advantage of Forex's transparent transaction costs and relatively low margins. The processes can be followed logically, especially with brokers who work with MT4. Still, novices should first become acquainted with the material and obtain some training using a free demo-account. By doing so they therefore make sure they are adequately trained to conduct trading safely using various instruments to reduce the associated risk but they are also able to get a feel for trading on the exchange market. However, strict financial management is essential for an easy introduction to the exchange market. A trader should always be aware of the risk and never stake more than he is able to lose.

    How to find the right Forex broker?

    Another key to success is selecting a suitable Forex broker. Here it is recommended that the trader makes a well researched comparison in which all the relevant facts are clearly laid out as well as the experiences of other users. Above all, novices are advised to seek out Forex brokers with no minimum deposits,

  • flexible leverage rates,
  • comprehensive training and information programmes,
  • professional support and
  • offering free demo-accounts

  • What is more, a thorough comparison lays out the fees and costs to be taken into account so that it is far easier to make a decision.