FX Trading Basics that You Must Know
In the first article of our educational series on the FX Trading Revolution website, we will show basic facts and terminology that some traders will probably know. However, we will present these facts in the correct way.
In the article we will move on to the facts about Forex, which you probably do not know, but which you must know to trade in the financial markets profitably.
1) Forex stands for FOReign EXchange , and means trading with foreign currencies. It is the biggest and the most liquid financial market in the world. A daily turnover is currently more than 5.6 trillion USD.
2) Forex is an Over the Counter Market , which is not localized. Forex is a site for connected phone and other electronic systems. The site is based on supply and demand, and trades are executed. The system connects banks, brokerages, insurance companies, investment funds, corporations, and investors together (if we are talking about a true interbank market).
However, if we are talking about the trading conditions of 98% of all the regular retail traders – then their trading accounts are only connected to one single market maker. The market maker is a trader's broker, or they are owned or connected by a contract to an ECN / STP broker. One way or another there is a conflict of interest between the trader and his broker. You can read more information about this issue in the next articles from this educational series.
3) Participants of financial markets usually use financial markets to make a profit based on changes in the markets, or to insure their business risks (hedging). A special category are governments and central banks, which use financial markets to intervene and set monetary policy.
4) Speculative traders use various trading systems – algorithmic and high frequency trading systems; intraday, swing, or long-term trading strategies. Long-term trading strategies are usually based on fundamental analysis. Usually we can split retail traders’ approaches into manual and automated trading strategies (all trades are executed by a computer, and a trader only enters codes that are an algorithm based on his strategy).
5) You can trade Forex 24 hours a day, 5 days a week . Forex is considered to be one of the fairest types of investments in the world, because the market is not influenced by quarterly statements of classic stock companies. You can make money whether markets rise or fall.
6) Some traders mention that Forex trading is a zero sum game . This is correct – because every buyer needs a seller to execute his orders. However if all client orders are sent by your broker on the real interbank market without any conflicts of interest – you can then make a profit from trading financial markets.
The main problem is not a principle of financial markets – that they are considered a zero sum game. The most important problem is a conflict of interest between small retail traders and their brokers.
7) Based on statistics of financial markets, only 15% of trades are executed by corporations, governments, and central banks. The rest, as much as 85% of all transactions, are executed to make a profit based on a move in the markets. The main financial centers are London, New York, Tokyo, and Sydney – each center has its own trading hours. As many as 40% of all currency transactions are executed in London.
8) In the picture below you can see a true hierarchy of the Forex market from a view of the typical retail trader. For profitable trading results from financial markets, it is extremely important for a trader to choose a broker which will not execute all his trades at only one market maker (as the vast majority of ECN / STP brokers do).
9) The more trades and the shorter trades you execute , the more you compete with the most modern high frequency trading systems that are able to work in extremely short intervals, and it is required to keep going with these technologies. These traders usually have to use some type of automated trading. Intraday, swing, or long-term trading is suitable for manual orders.
10) A high volume bank and institutional orders are often executed at price levels of psychological numbers (100, 150, 1.0000, 1.1000 etc. - rounded numbers). Also, high volume orders are often executed at the price levels of important minimums or maximums of a market – there are often stop-losses of traders accumulated.
11) Please avoid all commercial expert advisors (automated systems), paid trading systems, indicators or services, and pseudo professionals that tell you that they will make you profits of hundreds or even thousands %. This is an absolute waste of your finances. At the same time, these services are totally against the principle of logic. If any of these sellers truly had a profitable system, they would never need to sell anything.
12) If you are searching for paid Forex help , only the following services make sense. Automated systems / indicators / scripts and coding based on your requirements - in this case, if you are trading through MetaTrader 4, you can take advantage of low prices from freelancers directly at mql5.com. At the same time, you will find various indicators, automated systems, and scripts for free at mql5.com. Coding services based on your needs could also be provided by your broker if he has an interest in getting good results for his clients.
13) In all the publications, you will probably read that the most important factors for successful trading are psychology, money management, and trading systems. These facts are very important, but more important is the choice of broker; to determine whether you will be able to achieve profitable results, or if you choose a low quality broker, you will lose your good opportunity for any potential profits.
14) Trading is a zero sum game - every buyer must have a seller , but that's not the main reason why traders lose in the financial market. Financial market traders lose because of conflicts of interest with market makers or ECN / STP brokers who only have one liquidity provider (market maker), and directly participate in the profits / losses of their clients. The main issue is not the principle of how the financial market works, the main problem for 98% of all traders is how the brokerage business for small traders works.
15) A fixed spread on the interbank market does not exist. On the interbank market, the spread is always variable. If you are trading with a fixed spread, you are not trading on the real market.
16) High leverage and deposit bonuses are the most common marketing distractions for beginning traders who will quickly wipe out their first trading accounts.
17) Brokerage advice and investment recommendations are another common way to a quick disaster for many beginning traders.
18) Slippage - inaccuracies in execution of trades should be both positive and negative. The vast majority of brokers across the world execute the trades of their clients only with negative slippage. You can read more about that in other articles in this educational series.
19) You will find out the quality of a broker only after tests on real accounts. The team FX Trading Revolution has done extensive and detailed tests of hundreds of brokers around the world on real trading accounts. On these tests spent not only a lot of effort, but also a lot of our financial resources. However, empty words and theories are what motivated us, especially because now we can also show retail traders unbiased information about the huge differences that actually exist between brokers.
20) The same trading strategy will always achieve different trading result on real accounts. For more information - read further the educational series or take a look at our Brokers Truth page .
Team FX Trading Revolution