Is forex legal in the US
Forex: Dangerous Business or Harmless Trade?
Trading currencies has a long history. Foreign currencies were already traded in ancient Greece: At that time, traders from the Middle East exchanged their currencies to buy goods from European partners and vice versa. This still relatively simple currency exchange was usually based on the weight and material of the respective currency. Large trading families like the Medici in Italy or entire trading nations like Great Britain shaped the foreign exchange market in the 16th century.
An institutional form of foreign exchange trading developed towards the end of the 19th century. At that time it was possible for the first time to have your own account abroad and have amounts credited there in the respective local currency. With the introduction of the International Monetary Fund, the World Bank and the Bretton Woods Agreement, fixed exchange rates between the currencies were established during the Second World War.
After the central banks initially agreed to intervene in the event of strong exchange rate fluctuations, this restriction was gradually lifted so that exchange rates can rise and fall freely today. However, major national crises have shown that the central banks or states themselves intervene to compensate for sharp price declines.
What is the forex?
Forex is an abbreviation for the English term "Foreign Exchange Market" and is translated into German as foreign exchange market. The terms currency market and FX market are also used synonymously. Forex is the largest financial market in the world. Over $ 5 trillion in sales are made there every day.
In the foreign exchange market, traders can buy and sell foreign currency. The principle is similar to a currency exchange on vacation. If a vacationer from Germany travels to the USA and exchanges 100 euros for dollars before starting the trip, the amount of dollars received is calculated using the exchange rate. When the vacationer comes back to Germany, he can exchange his dollars for euros again. If the exchange rate is higher, he will benefit from the exchange. If the rate is lower, he will lose money when he is exchanged again.
Anyone can act
Forex is not tied to a fixed place or very fixed times. Except on weekends, traders can buy or sell currencies almost 24 hours a day. The forex trade differs from stock trading, which is linked to the respective exchanges and the opening times of the exchanges.
In principle, anyone can start trading forex from anywhere in the world, provided they are connected to the Internet. However, trading forex is associated with very high risks. The FX market is therefore less suitable for laypeople.
In Forex, for example, traders need to keep in mind that a weak euro makes it weaker against all currencies. If a trader has now bought foreign exchange in different currencies, he must expect losses everywhere.
The trading hours
There are four main trading hours in Forex. The opening times of the market in New York, London, Tokyo and Sydney count. For German Forex traders, this results in a possible trading time from Sunday, 10 p.m. to Friday, 11 p.m. The markets are closed on weekends. Due to the time difference and the respective opening times of the countries, traders can trade forex almost 24 hours a day during the week.
Particularly worthwhile trading hours are weekly on working days between 1:00 p.m. and 5:00 p.m. During this period, the US and European markets are open at the same time.
The four main trading hours
- Sydney time: GMT + 1
- Tokyo time: GMT + 9
- New York Time: GMT - 4
- London time: GMT + 1
The forex currencies
The exchange rate is how much one currency is needed to buy another currency. The synonyms for exchange rate are also foreign exchange rate or FX rate. Forex usually uses two different forms of exchange rate. The “spot rate” is the current exchange rate at a specific point in time. The forward exchange rate includes today's rate that will be used for a future foreign exchange transaction.
Exchange rates change when the demand for a particular currency rises or falls. Demand can rise, for example, because a country exports many products. These are paid in the respective local currency.
For example, a trader buys $ 1.30 for $ 1.00. If the euro rises, he can receive more dollars when he buys again, but he can only exchange the US dollars he has already bought for euros at a loss.
In forex trading, a currency pair denotes the currency from which one is exchanged for another. The first-mentioned currency is referred to as the base currency, the second as the quote currency. The base currency is the currency that is bought.
Currency pairs mostly consist of the US dollar and other currencies because the US dollar is the most widely traded in the currency market.
If a currency pair consists of two main currencies without the US dollar, one also speaks of currency crosses. For example, currency crosses with euros, yen or pounds are possible.
The currency pairs are displayed in the so-called "chart". For example, if it says EUR / USD 1.35, a trader must pay 1.35 US dollars to receive one euro.
The top 5 currency pairs in Forex are:
- EUR USD
- USD / JPY
- GBP / USD
- USD / CHF
- USD / CAD
This is how the forex trade works
The biggest players in the Forex market are banks, industrial companies or professional forex brokers and trading houses. However, private currency traders can also participate in the market.
Make money on the forex
There is no general statement of how much capital a trader needs to trade forex. Ultimately, the capital employed depends on how much profit is to be made. Entry into the forex trade is possible with just a few hundred euros.
The return in Forex trading consists of the difference with which a currency is bought and later sold again. In principle, the calculation of the return in Forex trade is not as easy as with a conventional investment, for example with fixed-term deposits. The fees for forex brokers, through which access to the foreign exchange market is only possible, must also be deducted from the return. It should be noted, however, that this income must be taxed.
Those who invest a lot of money can achieve high profits, but forex trading is not intended as a substitute for an income from a regular job. However, private traders can use Forex trading to supplement their income.
Requires a lot of time
Forex trading is time consuming. For this reason, too, beginners should consider beforehand how much time they can spend on their foreign exchange transactions. Forex brokers help develop strategies and thus can generate profits. However, the high risk of Forex trading remains. However, the average forex beginner will usually make losses initially, as trading currencies is very complex and subject to significant fluctuations.
It is therefore advisable to start with a demo account with a forex broker to get a feel for the foreign exchange market. After initial attempts at losing and winning, beginners can move on to investing real money in forex trading.
If you want to get into the Forex trade responsibly, you should adhere to fixed principles. This includes that a trader only invests as much as he could actually bear as an actual loss. In addition, the motto “Buy low, sell high” has proven itself. For example, if the dollar is very low relative to the euro, traders should buy dollars. Due to the generally increasing demand for the cheap currency, the rate is expected to rise again. The trader can then sell his forex and make big profits.
Important technical terms
- Forex broker
They are the link between the private currency trader and the currency market. Private traders can buy and sell currencies through them. Forex brokers can now also be so-called trading platforms in the form of software. These programs are used to organize the buying and selling of currencies.
This allows very high returns to be achieved in forex trade. The leverage multiplies the profit when the share price rises after the purchase. The broker offers traders various levers that they can use. Depending on the size of the leverage, appropriate collateral (margins) must be deposited. However, the lever also works in the opposite direction and can lead to high losses.
This is a kind of fee that the broker charges for every trade. The spread is calculated from the difference between the buy and sell value of a currency.
The margin is a kind of security deposit that a trader deposits with a broker for a trade. The margin defines how high the maximum leverage can be. If the margin is one percent for a stake of 10,000 euros, the trader must deposit 100 euros with his broker.
- Pip (price interest point)
The pip is a unit used for forex trading. With it the price change of a currency pair can be indicated.
The lot is a trading unit in the FX trade. A lot usually stands for 100,000 units. If two lots are traded on the USD / EUR currency pair, the stake is 200,000 US dollars.
There are a variety of tools on the market that can make forex trading easier. These tools are available as software for PCs or as online-based systems. In addition, some FX tools can also be used as a browser plug-in or smartphone app. Due to the large number of products, a clear recommendation is difficult. It's a good idea to simply test a few tools to find the best for you.
Pros and cons of Forex trading
|High liquidity in the market||Knowledge of the market is essential|
|Trading takes place directly between market participants||Very high risk as it is highly speculative|
|Trading hours are flexible as trading is possible 24 hours a day||Long training period|
|No big start-up capital required||Strong fluctuations in profits|
|High return opportunities||Leverage can also be negative|
|Flexible and possible from anywhere via the Internet|
The forex trade is primarily intended for professionals who work deeply into the subject. At the same time, forex traders must be aware that they can achieve high profits, but also very high losses. The risk in forex trading is high even with extensive market knowledge!
questions and answers
What tools are there to develop the right trading strategy?
If you want to develop a trading strategy, you can create a trading journal. On the basis of his previous data, new strategies can then be derived. In addition, chart analysis is another important part of developing a meaningful strategy. Appropriate trading software can also help with the advance calculation of rates. Demo accounts are ideal for training.
What is a trade journal?
All executed trades are recorded in the trading journal. Based on this data, traders can analyze past actions and thus gain important insights for new trades. In this way, for example, avoidable errors that have led to losses can be discovered. Successful strategies can also be optimized with the help of the trade journal.
What data should you include in your trading journal?
The more data is recorded in the trading journal, the more precise the evaluations the trader can make. For easier processing, it is advisable to create the trading journal as an Excel table. This table can contain the following data:
- Currency pairs
- Open and Close (with date and time)
- Open and Close (courses)
- Lot size
- Stop loss
- Take profit
- Gains and losses
- Daily charts
- Important key figures
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