Why is currency trading so profitable

Forex Trading For Beginners: What You Should Know

By far the largest market in the world is the foreign exchange market. On average, currencies worth 4.8 trillion dollars (around 4.2 trillion euros) are traded around the clock, five days a week. An unimaginable sum. For comparison: the sum of all goods and services produced in Germany (the gross domestic product, GDP) is a good three trillion euros - annually. It attracts high chances of winning.

We answer the most important questions about Forex trading for beginners and give tips.

Foreign exchange is understood to mean all means of payment in foreign currency, with the exception of cash. Similar to stocks, you can make money with foreign exchange, a lot of money. With luck, high returns can be achieved within a few hours.

Forex trading used to be for professionals only

Worldwide foreign exchange trading (English Foreign Exchange or Forex FX for short) was only available to professionals (banks and institutional investors such as hedge funds) until the turn of the millennium. Deutsche Bank dominated the segment as the world market leader until 2013, but recently slipped. Citigroup is now the leader in foreign exchange trading with a share of around 13 percent. The banks mediate the business primarily for companies (such as exporters and importers) to hedge against currency fluctuations in international orders.

According to the Euromoney FX Survey 2016, the largest forex traders are the following banks:

Largest Forex Traders According to Euromoney Ranking 2016:

  1. Citigroup
  2. JPMorgan
  3. UBS
  4. Deutsche Bank
  5. Bank of America Merrill Lynch
  6. Barclays
  7. Goldman Sachs
  8. HSBC
  9. XTX Markets
  10. Morgan Stanley

Who is Forex Trading Suitable for?

A small fraction of the global trillion business has also been available online for some years to private speculators who want to earn a lot of money in a short period of time. Malicious traders are often called gamblers. As practically everywhere on the stock exchange, it is important to note: The high chances of winning also stand high risk of loss across from. Everyone has to be aware of that. Anyone who may shy away from the risk of trading stocks should definitely refrain from foreign exchange.

Tip: Anyone who dares to enter the foreign exchange market should only do so with a very small part of their savings. The money invested could - if things go wrong - quickly and completely "gambled away".

How does currency trading work?

Currencies are exchanged around the world around the clock - similar to what German tourists do on overseas trips: euros are exchanged there verbuys the vacation currency gebuys. On the foreign exchange market there are always currenciescouples acted. Each base currency that is bought is offset by a quote currency that is sold. By far the most traded currency pair online is Euro / US dollar (abbreviated EUR / USD). This is followed by USD / JPY (Japanese yen) and USD / GBP (British pound). Subsequently, the Australian dollar (AUD), the Canadian dollar (CAD) and the Swiss franc (CHF) also play a notable role in the global online currency exchange concert.

The exchange rates are determined every second by the respective supply and demand ratio. However: Via Crossrates, other exchange rates also have an impact on the respective currency pair. Important: Interest rate decisions, political decisions, assassinations and accidents can also influence exchange rates.

How can you make money in forex trading?

An example - very simplified: You buy a EUR / USD at an exchange rate of $ 1.1355 and sell the pair at 1.1389 a few hours later. Then you made a profit of $ 0.0034, or 0.3 percent. (That's probably already more than the bank is currently paying you in interest per year.)

In order to be successful in forex trading, one must watch the market very carefully and have some experience.

Tip: Observe the stock market reports in the relevant media and the respective movements in the foreign exchange market over a longer period of time - before you invest your money.

Basically: Exchange rates are subject to unpredictable ones Fluctuationswhich can also take on considerable proportions in the course of the day. Remember the sudden detachment of the Swiss franc from the euro or the pound turbulence surrounding the Brexit vote.

If you then take into account that foreign exchange transactions with one lever of up to 500 can be made, profit and loss opportunities quickly become clear. The price changes are reflected in forex trading in Pips (in the example above: 34 pips) and the unit of the trade amount is this Lot. Later more.

Who Offers Forex Trading?

Foreign currencies are not traded via a central exchange, but only electronically. While the banks are networked with one another, private traders need a forex account in order to trade forex. A good two dozen specialized Forex broker offer their intermediary services with trading platforms in Germany. Tip: Choose an FX broker that is based in Europe and is regulated. Black sheep are also sometimes hiding among foreign exchange brokers.

Every broker has its own conditions and costs and if you want to be sure to find a suitable provider, you can hardly avoid a forex broker comparison (also with a demo account). Plus500, GKFX and AvaTrade as well as Admiral Markets are well suited for beginners - according to a test by deutscheFXbroker.

What fees does a forex trader have to expect?

The forex broker earns money on the spread between the bid and ask rates (bid / ask) of a forex pair. In German trading, one speaks of bid and ask rates. Due to the high liquidity in foreign exchange trading, these spreads are usually quite narrow, usually to the fourth decimal place (pip). The range depends on the currency pair, the liquidity and the degree of fluctuation. The more often a currency pair is traded, the lower they are Spreads. The tightest bid-ask spreads are around one or two pips for EUR / USD, for more exotic currencies (e.g. Mexican peso) it goes up to six pips.

The spread is usually also used to cover the transaction costs that are due for every purchase and sale. They are lower than in stock exchange trading with stocks or derivatives.

What is the minimum amount of a forex order?

The forex brokers require different minimum deposit sums: from zero to 10,000 euros. But: so-called lots are traded in the foreign exchange market. A standard amount Lot of currency units corresponds to 100,000 units of the base currency. For the EUR / USD currency pair, one lot corresponds to 100,000 euros. In addition to standard lots, most brokers can also use Mini lots (10,000 units of base currency) or Micro lots (1000 units) are traded. This means that you do not have to raise the full amount of capital required for an order.

That is more important than the minimum amount Security depositthat the trader must deposit for his foreign exchange order: the so-called Margin. The deposited security deposit can be viewed as a deposit for trading with a higher currency amount. The minimum amount of margin can be a decisive criterion when choosing the right forex broker, especially for beginners.

How does leverage affect the profit and loss opportunities?

The thing about that lever: Most FX brokers offer to trade with significantly more money than is used by the investor. With the lever (also called leverage), the debt financing options vary from 1:10 to 1: 500.

An example: The trader contributes 1000 euros himself and receives from the FX broker the opportunity to participate in Forex trading through borrowed money with 100,000 euros. This corresponds to a leverage of 100. The greater use of capital in the market can result in large profits, but also large losses if the bet does not work out.

The minimum amount can be a decisive criterion when choosing a forex broker, especially for beginners.

Can you lose more in Forex than you put in?

Yes! The leverage effect can mean that the margin deposited in the forex transaction is insufficient to cover the accrued losses. A Obligation to make additional payments and possibly even one Duty to make additional claims surrender. That would be a so-called margin call.

An example: The trading volume of a foreign exchange order is 10,000 euros (mini lot) with a deposited margin of 100 euros. If, contrary to expectations, the rate of the currency falls by one percent, the security deposit would already be used up - the total loss of the capital invested. This happens if the EUR / USD in the example above falls one percent (114 pips) from the buy price at 1.1355 to 1.1241 dollars. If the euro slips even further, the forex trader has to pour more money into the forex broker.

How can excessive losses be avoided?

However, the FX broker usually ensures that the position is automatically closed when the margin is used up. The forex trader, in turn, should have a loss limit in the form of a Stop loss set up. Then the position will be closed much earlier - e.g. at the round mark of $ 1.13. Only half of the money invested is lost instead of all.

If, on the other hand, the EUR / USD position increases by one percent or 114 pips to 1.1469, the stake would have doubled, i.e. the trader would have achieved a return of 100 percent.

Tip: Beginners in forex trading should only need one little lever choose from 1:10 to 1:30. Greed is not a good advisor. Chart technique can help in finding the right stop loss level.

What is the use of a demo account in forex trading?

Most forex brokers offer their customers a free demo account. This means that future forex traders can practice speculating under real conditions with virtual money for a limited period of time. This practice is practically indispensable in order to be successful with foreign exchange orders later. With a demo account you can learn how the foreign exchange market “ticks”, try out different strategies and stop-loss orders without risk and ultimately determine whether you are “the right person” for such a speculative investment. Special webinars provide additional theoretical tools.

Tip: The trading systems of various FX brokers can also be tried out using a demo account. This makes it easier for you to choose a suitable currency broker.

In addition to money, luck and expertise (information!), A good portion is also recommended patience and discipline to be successful as a forex trader. Because you often have to wait a long time for good trading situations.

How is Forex Trading Taxed?

Profits from foreign exchange trading are taxed like other profits from sales transactions. All profits from Forex trading are subject to the Withholding tax. All types of investment income have been taxed this way since 2009. Accordingly, 25 percent of the realized profits are paid to the tax office plus 5.5 percent solidarity surcharge. If the trader pays church tax, the profit is reduced by an additional 8.0 percent.

Tip: Split your annual Exemption for investment income and also place a partial exemption order with your forex broker.

Anyone who opts for an FX broker abroad who does not automatically pay the tax to the German tax authorities must report their profits to the tax office themselves. Increased international account inquiries from the tax authorities are intended to uncover tax evasion. That can then be expensive, as Uli Hoeneß felt on his own body.

More on the topics

  • Economy,
  • Stock exchange,
  • Traders,
  • Foreign exchange market,
  • Hedge funds,
  • Investment,
  • Withholding tax,
  • Forex trading,
  • Money,
  • Euro,
  • Investment income,
  • Swiss franc,
  • Tax office