Forex is one of the markets which you can trade on Olymp Trade. Some beginner traders will choose options over CFDs because trading them is quite simple and offer a steady profit. But let’s get familiar with forex. Maybe trading currency pairs will be something that will be more appealing to you.
Forex is the Foreign Exchange market (FX in short) that has grown into the largest market in the world, with a daily turnover of more than $1 trillion. On this market, you exchange currencies.
The foreign exchange market has evolved through trading and other financial operations executed between countries, institutions and individuals. The transactions are made on currency pairs. You are selling one currency and buying another. When you buy EUR/USD at 1.11086 it signifies that you are buying 1 euro for 1.11086 dollars.
Origins of the forex prices
There are few factors that influence the price such as governments, central banks or brokers. But the main factor is supply and demand. They play the biggest role in shaping the price.
Knowing how the prices are formed is important because it helps you in making the profit. You earn money on buying and selling particular currency pairs, but you do not necessarily have to own these currencies.
Earning money trading on the forex
As was already said, making a profit is based on selling and buying currency. Your object is to buy at a lower price and sell for a higher price in the future. Or, conversely, to sell for a high price in order to buy it cheaper later on.
Let’s say you trade EUR/USD at 1.1000. You can either buy 1 euro for that price or sell it. If you buy it, you expect it will exceed 1.1000 in the future. When you sell it, you hope its price will go down.
Your profit or loss depends on the difference between the price when you opened a trade and the price at which you have closed the transaction minus small commission.
For example, if you bought the EUR/USD pair for 1.1576 and then sold it for 1.1580 you earn $0.004.
It may seem to be a very small amount. But if you buy more currency, your profit will be naturally bigger.
The players on the forex market
There are many participants in the market. Some are bigger than others. You, as an individual, sometimes will have to compete with big actors such as governments and banks. But do not worry. None of the actors is strong enough to have control over the forex market.
Remember, that the Foreign Exchange market is mostly influenced by its supply and demand. Supply and demand are created by all market participants like central banks, commercial banks, hedge funds and also individual investors. With a high volume of transactions, it’s almost impossible to manipulate forex prices even by a large financial institution.
Forex trades through CFDs and digital options
Which is better to trade on? Which will bring you a higher profit?
We will now describe 6 main differences between trading FX through CFDs and Options.
No fixed expiration time on CFD
You have to determine the expiration time when you trade options. You decide is it 1 minute or 23 hours.
In forex CFD trading you have to close the trade, you cannot set expiry time. So you do it manually or you set a stop loss and then the trade will end when the price reaches the specified point. The situation looks similar in case of automatic take profit point (explained below.) Again, the time your trade is open can depend on your trading decisions.
This is a very useful tool which will help you to protect your account. It limits the amount of money you can lose while trading FX.
Let’s say you have invested $100 and you set a stop loss as a $100. If the market goes in the opposite direction to your prediction and the loss will reach $100, Olymp Trade will automatically end the trade. That way you don’t lose everything, in case the market is going further down.
The principles of the operation are similar to those in stop loss. The difference is that take profit automatically closes the trade in case it brings you the profit and not the loss.
That way, if you have invested $100 and you set take profit at +$150, Olymp Trade will terminate the transaction when $150 profit is reached.
This tool is helping you lock your profits. If the market reaches +$150 point, but reversed after, your potential profit would be lost. Moreover, you could even lose money on such a transaction. But with take profit set, you have just earned $150 and your trade is already closed.
Leverage allows you to multiply the profitability of each transaction. Let’s stick to the example of $100. With such an investment and a leverage of X50, you trade in fact, $5000. This means your profits will be 50 times higher than in the case of trading just $100.
Be careful while using the leverage. Yes, it can be a fantastic opportunity to boost your gains, but always use it together with additional tools like stop loss or take profit.
The end of the trade
The trade exit is fixed in the option market. Trading is straightforward. You enter 5-minute trade and after that time you know if you win or lose.
The situation looks different with fx trading. The trade exit will occur when the price hits your defined price (stop loss or take profit). This can happen after a few minutes, days or maybe weeks. Of course, on the Olymp Trade platform, you can always use the option to end the trade manually as SL/TP settings are not obligatory.
For that reason, many forex investors trade currency pairs with frequent price movements. In such manner, they can expect the price will hit their target price at some certain time. So it could be a good idea to trade currency pairs where the expected change in price is likely to happen during one session.
There is a fixed return for the transaction in option trading. And when you trade on the Foreign Exchange market through CFD, you can get the payout higher than 100% of the investment you have put. The rate of the return is correlated with the level the price reaches. The higher the better for your finance.
You can increase your potential profit by using a tool called multiplier, described earlier in the article. Now you are able to earn even 500%. The sky is the limit.
So here it is. Forex is a great market for large profits. But naturally, where there are advantages, there will also be disadvantages. You can win. But you can also lose a lot. More than you have invested. That is why you should always remember to set a stop loss if you are trading CFDs on currency pair.
Since you are now armed with the basic knowledge about the forex market, the next thing to do is to start trading! You might be also interested in our guide to CFD trading.
Have a successful trading experience!
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