What is Forex

Forex trading is an increasingly popular discipline of online trading. No wonder, it’s THE biggest market in the world which has a lot to offer which quite logically attracts new traders each and every day. And all of them want to “grab” their fair share of luck in the markets. So if you are also wondering what Forex is and how to start trading on Forex, this article is for you.

How Forex works

Also known as the foreign exchange market or just FX, it is an international decentralized market in which participants (mainly banks, funds, insurance companies, and other financial institutions) exchange one type of currency for another. Since it is not only the currencies of the world's largest economies that can be found here, Forex is the market with the greatest liquidity in the world (i.e. a huge amount of money is "traded" here every day - about 5 trillion US dollars). You can see for yourself that there really is a lot to choose from, for example, by viewing the Forex currency pairs on offer at Purple Trading.

 

However, investors and retail traders (our clients) enter the Forex markets for speculation. For them, the goal of Forex trading is to correctly predict whether the price between two particular currencies (for example, EUR/USD) is more likely to rise (the euro appreciates at the expense of the dollar) or fall (the dollar strengthens, the euro weakens). However, traders do not need to have a stock of foreign currencies in their own account to engage in Forex trading. Everything works on the basis of so-called CFD contracts.

What are CFDs

The full name is Contract for Difference. Sometimes they are also called financial derivatives, the reason being that the price of CFD-based instruments is only derived from the price of the actual underlying asset. This sentence might sound a bit incomprehensible so let's humanize it.

 

Basically, it means that if you trade, for example, the EURUSD pair mentioned above, you are not exchanging real euros for real dollars, but only speculating on the price of a financial derivative that is derived from the price ratio between these real currencies.

 

Thus, if you click on the "BUY" order you are not exchanging real euros for dollars, but only speculating on the evolution of the value ratio between these currencies, upwards (downwards again for the "SELL" order). This is essentially a kind of betting, except that instead of betting on the results of two different sports teams, you are betting on the results of two different economies.

How to start trading on Forex

Before you can start trading, there are a few steps you need to follow, and we've briefly outlined them for you below.
 

  • Choose a broker

    In order to enter the interbank market and engage in Forex trading, you need a broker representation. This serves as an intermediary between you and the aforementioned interbank market, to which the broker sends your trades and matches them with the counterparty. There are many brokers and many characteristics by which to choose a good one. Here are some reasons why to trade with Purple Trading.

  • Open an account

    Once you've chosen your brokerage, it's time to open an account. The ideal Forex trading account for beginners is a demo account. On this, you trade Forex (and any other instruments that the broker offers) with virtual money that is not real, and so it costs you nothing to trade. With a demo account, you have the opportunity to try out Forex trades and learn how to navigate and control the trading platform all this in a save environment. Moreover, setting up a demo account is completely free and you can trade on it for as long as you want. When you feel that you are ready to trade with real money you can open a real account.

  • Learn, learn, learn

    Since it takes some time to become familiar with the basic methods of Forex trading, you will need to delve into the depths of self-study. Fortunately, if you know where to look, your studying doesn't have to cost you a penny. At Purple Trading, we write educational ebooks or articles for those interested in Forex trading, focusing on both theory and practice.

Conclusion

Now you know that you don't need a stock of foreign currencies in your bank account to trade Forex, but you do need a quality brokerage, a trading (demo) account, and access to educational materials. So if you are really serious about trading, we definitely recommend you to check out our website and especially the how to trade section. Here you will find valuable information to help you get started with trading, especially in the beginning.

Experience the benefits of trading with Purple Trading


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FAQ

What is a brokerage house?
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It is a legal entity which conveys access to the capital market to its clients, therefore buys and sells stocks or other financial instruments on behalf of the clients and offers other related services. Brokerage house receives orders from clients and executes them on their behalf, which differentiates it from a dealer, which conducts trades on its own account. 
In the Czech Republic, the CNB  grants permission for this type of activity. Companies may only become a brokerage house via an investment firm or an investment tied agent. Purple Trading / L.F. Investment Limited has a tied agent registered in the Czech Republic. 
What is market maker broker, Is Purple Trading market maker, what is the difference between STP and market maker broker.
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Market maker broker is an individual market participant, that quotes buy and sell prices on its own. Market maker broker is on the opposite side of each trade. The goal of market maker broker is to make a profit on their clients based on a spread and the price of the instrument, that he creates. 
 
STP broker is not an individual market participant. All orders are routed to the brokers' liquidity providers, therefore, he is not on the opposite side of the trade and he is not creating prices by himself.
 
Purple Trading is an STP broker. As we believe that this is the right way to ensure a transparent and fair environment for all of our clients.
Who may open a trading account by Purple Trading?
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In accordance with the License conditions, any individual (at least 18 years old) or legal entity who fills out a registration form, accepts the Terms and Conditions and provides the necessary documents for registration including a document proving the postal address in EEA may open an account. Due to the decision of the Belgian regulator, it is not possible to accept Belgian clients. The restriction applies to residents of Russia, Great Britain, Switzerland, France, Great britain and Gibraltar as well. 
Broker
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A broker is an intermediary between the forex market and a client. The broker's clients are retail or professional traders.
Day trading
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It is a strategy where a trader enters a trade on one day and exits the trade on the same day.
ECN broker
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ECN is the name for a broker that sends client orders directly to an interbank liquidity facility. In this case, the broker is the intermediary for the client.
Forex
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Forex is a global market on which currency pairs are traded. The name Forex is derived from Foreign Exchange. The Forex market is the largest and therefore one of the most liquid markets in the world.
Market Maker Broker
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It is the designation for a broker that makes the market for íts clients. Such broker is often the counterparty to its clients. Purple Trading is not a market maker broker.
Non Dealing Desk Broker
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Non Dealing Desk broker is an ECN or STP broker. They transmit their clients' orders directly to liquidity providers or to the interbank market. Purple trading is an STP broker.
STP broker
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The STP broker has one or more liquidity providers that will settle the broker's clients' order.
Trading
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Trading is an activity aimed at the appreciation of funds through short-term trading. Instruments are held for a short period of time, in some cases a few minutes. Depending on the length of time an instrument is held, trading is divided into position trading (positions are held for several months), swing trading (trades are held for several days to weeks), intraday trading (trades are opened and closed within a day) and scalping (trades are held for several minutes).
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.60 % of retail investors lose their capital when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.