FOREX, the largest financial market has not always been accessible to ‘small investors’

In the not-so-distant past, currency trading was reserved for banks (central and commercial), investment funds, money managers, and very wealthy individuals, with a minimum deposit to start trading ranging from 10 to 50 million US dollars. With the development of the internet, and the efforts and vision of smaller financial companies known as brokers, trading became accessible to ‘small’ investors – individuals, marking the beginning of a new era in currency trading – ‘retail’.

Retail trading or retail exchange operates in such a way that large banks trade on the spread (the difference between the buying and selling exchange rates, between BID/ASK values), which brokerage companies widen and resell to individuals – traders, thus making a profit. There are two types of brokers in the market – independent and market makers. An independent broker charges for its services through the spread (the difference between the buying and selling exchange rates), while a market maker can be found on the opposite side when closing positions, at which point your losing position becomes their profit.

On the global financial scene, there are a large number of brokerage companies offering their services, and ‘small’ investors find it increasingly difficult to decide whom to choose and what traps to watch out for when selecting. A top-notch platform with quality charts, a smaller spread, low initial stake, good customer support, and security for deposits are just some of the factors you need to consider before making a final decision. Thousands of ‘small’ investors engage daily in the business of the century, aiming to achieve high rates of return, and retail trading is becoming an increasingly important factor in the future development of currency trading, which today exceeds 5 trillion US dollars on a daily basis.

Unlike other financial markets, Forex does not have a location but is ‘over the counter – OTC’, and operates through a networked electronic system of banks (central and commercial), investment funds, hedge funds, brokerage companies, money managers, and individual investors, which brings us the following advantages:

1. High daily volumes ensure high liquidity and the ability to execute trades (realize positions) at any moment.
2. 24-hour trading, 5 days a week (from Monday to Friday), unlike stock and bond markets which are centralized and can only be traded for 8 hours a day.
3. Profit can be made when the value of a currency rises – long position and when the value falls – short position, depending on whether you predicted the future direction of movement correctly.
4. Leverage is an important element in currency trading, allowing investors to trade with amounts much larger than the deposited money in their account. For example, a leverage of 1:100 allows you to control an amount of 100,000 USD with an invested amount of, say, 1,000 USD.
5. Low entry costs – a computer, internet connection, and depositing funds into an account (from 100 USD and up).

When choosing a broker (service provider) and platform, every investor should keep in mind that online (via the internet) currency trading is pure speculative trading, whose ultimate goal and purpose is to quickly achieve profit from the rise or fall in the value of a particular currency.

One of the greatest speculative traders of today is undoubtedly George Soros, who on September 16, 1992, shorted the British pound, earning over a billion USD in a short time, and causing a severe headache for the Bank of England. The British called that day ‘Black Wednesday’, and shortly thereafter, the pound was withdrawn from the European Monetary Union, as per the agreement, the value did not remain within the agreed limits of 6.00%. Soros actually took a significant risk at that time, as the situation could have gone in the other direction, and the largest historical gain could easily have become the largest loss.

Chart – ‘Black Wednesday’ – the day the British pound collapsed (source: Metastock)

To get involved in the fastest-growing business, you must first educate yourself. The two most common questions in my business practice are – how much time do I need to learn to trade and how much money do I need to start? It is very difficult to suggest a time frame, as it all depends on the individual and their desire to master the basics, and later advanced trading techniques. The recommendation is to try a demo account before starting real trading, and only then invest real money, which at this stage you should again consider as an investment in education. Successful trading on a demo account does not guarantee successful trading with real money!

There are three phases that every positive trader goes through: 1. education, 2. proving, and 3. successful trading. Most traders neglect the first phase, which is actually the most important, so remember that everything that can bring you profit is not free. Entering the second phase without fundamental preparation puts you in a trap that is hard to escape from. You think you know something, but you are still far from those positions where you calmly and realistically make decisions, which are actually the foundation for survival in the FX market. Remember, there is no quick wealth, and to become a successful currency trader, you need a lot of time, a steel will, and of course, money that you will invest in your knowledge. If you want to learn how to become a sustainable and profitable currency trader, you can sign up for one of the seminars or interactive workshops organized by the Trading Room.

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Author: Zdenko Grđan, analyst and intraday FX trader