How to make a deal in the Forex market: basics you should know
The Forex market is the world’s largest financial area with millions of traders around the world performing various types of trading operations: they range from short-term intraday speculations to automatic deals and passive income with the copying of transactions. In order to stay in the black or simply to mitigate possible risks, many traders resort to hedging their positions either by buying assets from different sectors or by using financial derivatives like futures, forwards or options.
Understanding all the processes can be challenging at first, but everything becomes clearer if you try trading on a free demo account for Forex trading provided by a reliable broker, and also turn to Fundamental and Technical analysis.
Let’s take a closer look at what hedging, speculation, and Social (Copy) trading for passive income are, their features, and their opportunities for a trader.
What is hedging in the Forex market?
Hedging in financial markets is a mechanism of trading risk management strategy through making additional transactions that cover possible losses from the main set of trading assets. Hedging is used when a market participant is worried that the assets they have bought/sold (for example, commodities or currency pairs) will become cheaper/more expensive, and instead of the planned gains, forecasted returns will turn into losses.
For example, a trader bought stocks of a company, and fearing that they would fall in price, he opened a short position on the same stocks for the same volume from another brokerage account. Now there are fewer risks for traders: with any change in price, the loss on one position is fully compensated by the gain on the other. Of course, this example is rather simplified, since it makes no sense to buy and sell stocks at the same time, since in this case there is not only a risk but also an opportunity to receive income. However, it does an excellent job of explaining the general approach to hedging. In order to apply hedging in real trading, it is necessary to select such assets for the second position, which will reduce the risk and leave the opportunity to close a deal with gains.
Hedging types in Forex trading
There are several types of hedging:
- In relation to the time of conclusion of the underlying transaction, there are:
- Classic hedging. A hedging transaction is concluded after the transaction with the insured asset.
- Anticipatory hedging. The conclusion of a term contract occurs long before the purchase or sale of the insured asset.
- By the value of insured risks:
- Full hedging. It involves the opening of multidirectional positions that fully insure the total loss. Such positions are the same in terms of volume, value, etc.
- Partial hedging. Allows you to insure only part of the funds. Relevant for low probable risks of developing a negative scenario.
- By type of counterparty:
- Buyer hedge. Insurance of potential trader risks that are associated with rising prices or deterioration in the terms of the transaction.
- Seller hedge. The same applies to the seller, only the risks associated with lower prices are insured.
- By type of asset:
- Cross hedging. It involves the conclusion of an insurance transaction for an asset other than the underlying one.
- Net hedging. This is understood as the conclusion of a hedging contract for the same asset, that is, for the underlying one.
- Under the terms of the hedging contract:
- One-sided hedging. For potential losses or gains from price movements, only one participant in the transaction – the seller or the buyer – is fully responsible.
- Two-sided hedging. Potential loss or income is shared between both parties to the transaction.
- By type of platform:
- Exchange hedging. Transactions are concluded only on exchanges and are characterized by the presence of a third party; contracts act as independent derivative financial assets and are subject to purchase or sale.
- OTC hedging. Contracts are concluded outside the exchange (directly or with the help of an intermediary), are one-time in nature, do not circulate on the market, and do not act as independent traded assets.
Forex hedging instruments
To hedge various risks in any market and with different assets, traders usually use a common set of instruments:
Futures hedging in the Forex market
After the appearance of futures contracts on the exchanges, they quickly became one of the main risk hedging tools for any assets. To limit possible losses, a trader can purchase a futures contract in the opposite direction for the required amount of the asset.
For example, a trader buys stocks of company N at $100 each. Fearing a fall in the value of the stock, he sells the futures at the market price of the contract, which is, say, $110. In the event that prices go down, and by the time of the planned exit from the position, the price of stocks falls to $95, and futures to $100. The trader makes the planned reverse transactions – sells the purchased stocks and redeems the futures. This results in a loss of $5 on the stock and a gain of $10 on the futures contract, so the total result is $5 plus.
The main advantage of futures hedging is that it is not required to spend the entire amount of funds for which the main one is opened to start an opposite position. When buying/selling a contract, it is necessary to pay only the guarantee, which, as a rule, is several times less.
Forward contracts hedging in the Forex market
Forward contracts (agreements with execution after a specified time) do not apply to exchange-traded instruments but are widely used, as a rule, when working with a real supply of assets.
Consider the example of buying company N stocks for $100 apiece, when a trader finds a counterparty who agrees to buy stocks from him, for example, 2 months after the end of the planned period at a price of $110 apiece. As a result, he will receive a guaranteed income of $10 per stock, regardless of the market movement of quotations. In this case, the counterparty assumed all the risk and agreed to buy back the stocks at a fixed price.
Forward contracts are often used by manufacturers of physical goods, especially if their prices are subject to significant fluctuations, such as seasonal ones. and their counterparties to expect a price increase, but with increased risks.
Options hedging in the Forex market
Another category of derivatives market instruments is options. An option is a right (but not an obligation) to buy/sell a certain amount of an underlying asset (for example, a futures contract) before a certain date in the future. There are two types of options: call options to buy assets and put options to sell assets.
This tool operates according to the following rules: in order to insure an asset against depreciation, you need to buy a put option or sell a call option. If an increase in the price of the asset is undesirable, then the put option should be sold, or the call option is bought.
However, it should be noted that hedging operations are not limited to working with futures and options. Other various assets can also be used to ensure the trader and investor.
Hedging with other assets in the Forex market
Hedging with other assets is a very common way to limit risks. Suppose a trader buys stocks in company N, an airline company. The analysis carried out allows us to conclude that these securities, as a rule, become cheaper when oil prices rise. At the same time, the stocks of oil company X in this case rise in price. It remains to calculate the number of stocks of both issuers that need to be purchased in order to make a deal with minimal risk.
The solution to such a problem is reduced to the usual calculation of the investment portfolio, the difference is only in the negative correlation coefficient between assets.
Hedging opportunities in Forex trading
The main goal of a trader in the Forex market is to make a deal by purchasing and selling assets, but the market sometimes can be unstable, and therefore the prices of currency pairs, commodities, stocks, and other instruments can change quite a lot, so traders prefer to use hedging in order not only to protect themselves from possible losses but also gain. Consider the main opportunities that hedging gives a trader:
- Price risks are minimized;
- Operational risks associated with the business cycle (delivery schedules, shipments, etc.) are reduced;
- The factor of uncertainty is eliminated, information transparency and predictability are growing;
- Increased financial stability;
- The management decision-making system becomes more flexible due to a wide range of counterparties, instruments, and transaction parameters;
- The cost of attracting capital and debt financing is reduced.
Speculation in the Forex market
Speculation is the short-term purchase of assets solely for the purpose of reselling them with a price difference playing both on rising and falling markets. Speculative traders are more likely to make decisions based on Technical analysis of market price behavior rather than Fundamental analysis of an asset or security. They also tend to be more active market traders, often looking for short-term price fluctuations. In this, speculators are fundamentally different from investors seeking to include long-term traded assets in their investment portfolio.
Speculators are not interested in whether the company issuing securities will continue to exist in the near future. The main instrument of the speculator’s work is financial instruments with a high level of volatility and transactions with deferred maturity.
Types of speculators in the Forex market
The goal of the speculator is not to buy and sell an asset but to earn on the difference in the value of transactions. Speculators are just distinguished by the type of transactions that they conduct, and by their behavior in the market. According to the chosen trading strategy, traders are divided into:
Bulls. A bull trader is one who expects the market price of a particular security or asset to increase. When this happens, the speculator sells the asset and gets the price difference.
Bears. A bear trader is one who expects the market price of a particular security or asset to fall. This speculator sells securities before the price drops, often in the hope of buying them back at an even lower price. If the trader is wrong and the price continues to rise rather than decline, he may lose from selling assets too early.
Speculation strategies in Forex trading
When speculating on the Forex market, traders use different strategies, the main of which are scalping, day trading, and swing trading.
- Scalping is a strategy when transactions are carried out from several seconds to several minutes. The principle is to catch the minimum fluctuations in the price of assets and make a deal on resale. Robots can be used in scalping, but more often a trader acts himself. Most often, this is a daily job, where a trader sits down at several monitors and controls the situation.
- Day trading is trading during the day or one trading session of 5-10 transactions. In this type of trading, robots are not used, and certain actions are carried out on the basis of a thorough analysis of the situation. Distinctive features are the sale of assets, regardless of the situation, before the closing of the trading session, and at the beginning of the next day, entering it again. A day trader operates within one trading session, i.e. inside one news background. Tomorrow there will be different news and the market may change and the risk management system does not allow the day trader to roll over positions to the next day.
- Swing trading is trading from two or three days to several weeks. This type of trading can also be considered speculative if a trader buys an asset in the hope that it will rise sharply in the coming weeks and he will sell it with a favorable price difference.
Speculation VS investing in Forex trading
One of the main differences between investment and speculation is the period of turnover of funds. Long-term deals are typical only for investors, while speculators work to make a deal as quickly as possible.
Very often, the return on investment is expressed in securities or dividends, and in the case of speculation, liquid assets that can be quickly disposed of are of the greatest value.
In addition, the most important difference between investments and speculations is risks. Speculators can take risks by investing their money in high-yield positions. In turn, investments are less risky, although they may be less efficient.
Best assets for Forex market speculations
To work effectively, traders need to use knowledge and certain tools to track market changes, select assets, and make decisions on them. There are two types of analysis that speculators use:
- Fundamental, which is based on immersion in the context of the market and understanding the work of paper issuers. In conducting such analysis, a trader should follow not only the constant movements within the exchange, but also monitor what is happening in the external and internal economy of the country, as well as the activities of the issuer and the statements of its managers;
- Technical, which includes working with the terminal. Traders in this case constantly monitor changes in securities quotes. On the charts, they try to find patterns that signal how the security will continue to behave.
In addition, it should be noted that the set of assets with which speculators work is quite wide:
- Currency pairs are one of the most popular assets. Due to regular active transactions in the foreign exchange market, dollars, euros, and other banknotes can significantly change their value during the day;
- Futures, from the point of view of speculation, are the most common and less risky asset;
- Stocks are a quite volatile asset and depending on the issuer, they can bring good speculative income;
- Bonds are an asset that prefers investors rather than traders, they bring coupons and they have the ability to redeem. However, a speculator can also play on them, especially if it is long-term security – during this time the interest rate may decrease, then the value of the asset on the market will rise;
- Cryptocurrency. Those who observe the Cryptocurrency market have probably noticed that each new Cryptocurrency grows in price during the first 3-7 days from the date of release. After that, demand drops. Accordingly, to make money on Cryptocurrencies, you need to follow the market news in order to have time to buy a Crypto at the lowest price on the first day of its release and resell it within 1-3 days at the maximum price.
Passive income with Copy trading in the Forex market
Copy trading is a way of passive income, which is one of the types of trading that involves copying on your trading account transactions carried out by experienced traders with transparent statistics.
Once a market participant connects to this feature, trading positions will be opened and closed at the same time as the traders he is copying. This type of trading allows you to mirror the deals of the traders you are following in proportion to your stake.
Two methods of copying are common among traders: by signals or through specialized software.
In the case of the first method, you should be ready to independently implement the signal in a short time. The more time passes, the lower the potential effectiveness of the signal.
The second way is to use copy trading tools or platforms such as for example eToro CopyTrader, which allows you to not only interact with other users but also automatically replicate their trades. You can choose from a variety of traders, differing in the degree of risk their trading strategy involves and the amount of leverage they use, the style and frequency of trading, the type of markets and instruments they use, and so on.
Copy trading with platforms like eToro is a great way to generate passive income without investing too much of your own time in researching, monitoring, and rebalancing your personalized portfolio.
In addition, advanced settings will allow traders that are copying to prevent the loss of a deposit and control their deals with risk management tools:
- Stop-loss allows you to automatically close an order if, after placing it, the price reaches a change in the opposite direction from the direction of the transaction;
- Take-profit gives you an opportunity to automatically close an order if, after placing it, the price reaches a change in the specified direction of the transaction and you can fix your earnings.
PAMM accounts for passive Forex income
Percentage Allocation Money Management, abbreviated as PAMM, is a procedure whereby two or more investors allocate funds to an experienced trader(s)/wealth manager in a certain proportion. The trader or money manager pays out the potential income from the trade to the investors at the conclusion of the trade, which can also be considered as passive income without making their own trades, but by entrusting the capital to an experienced market participant.
The popular European broker ForexTime (FXTM) offers its clients to get the maximum return on their money, saving time on market analysis, with the help of a PAMM portfolio that will be assembled and managed by real professionals with vast experience.
In order to receive passive income with FXTM, you just need to go from your personal account to the PAMM section, pass a test for compliance with a particular trading profile and top up your balance. The Portfolio Management Department will select only the best trading strategies and create a portfolio that meets your requirements so you can get the most out of your deposits.
The process of receiving passive income is shown in detail in the corresponding section on the broker’s website, where you can also find the rating of the best portfolios for the last month and register your account.
The opportunities of Copy trading
Automatic copying of trades is a truly efficient and useful feature that has a number of opportunities:
- Trading opportunity for newcomers to the market: you will be able to enter trades regardless of skill level, professional traders will make trades themselves, and you will follow their strategy in proportion to your budget.
- Trading style: you choose the signal provider whose trading style suits you best.
- More free time: you do not need to spend a lot of time monitoring the market.
- Multi trading: you choose as many strategy providers as you want. So you diversify risks, that is, reduce possible losses.
How to choose a Forex broker for Copy trading?
In order for Copy trading to be not only a diversification of your portfolio but also a source of passive income, you need to pay attention to several important factors with the strategy provider, namely:
- Trading history. If a trader closed deals efficiently and stably for a long time and has a large number of followers, then this indicates his reliability and demand. Such a trader will be able to provide you with effective tactics in proportion to your deposits.
- Risk diversification. It is necessary to check whether the trader does not exceed the maximum allowable risk for you on positions and whether he simultaneously opens positions on instruments with a high correlation coefficient. You should evaluate the trader’s strategy, how many trades he makes per day, and if he is a scalper, pay attention to whether his strategy is too risky for you at the moment.
- Drawdown level. In general, the lower it is, the better. If whale traders managing large amounts can afford to go into the red before making an efficient deal, for those who operate with a small portfolio, such a minus can be crucial. The maximum drawdown should not exceed 25-30%, and monthly income should be 15-30%.
- Return on investment (ROI). It is the ratio of gain and loss on this account in relation to the amount of capital invested on an annualized basis. If, for example, a trader has a 100% ROI within the last 3 months, then the rate of return will be 100%*4/4=400%.
Secure trading with VPN for Forex
When developing your strategies, hedging risks, and copy trading, it is important to be completely confident in your safety. In order not to worry about your funds or constantly spying on data, the best option would be to use top VPN services for Forex trading. With a VPN service, you can buy and sell assets, trade Cryptocurrencies, follow market trends, and remain anonymous to both other users and the government.
Click the button below to get the best VPN deal for Forex trading:
In addition, when a trader connects to the network and there is only public unsecured Wi-Fi nearby, strong encryption algorithms and data transfer protocols of VPN services will protect important information about the trading account from fraudsters.
Top trusted brokers for Forex trading
In order to make transactions on the Forex market as efficient as possible, traders need to take care of possible risks and hedge positions. It will allow growing your capital, even if you speculate on volatile assets. And if you are looking for a source of passive income, use Copy trading from the best Forex brokers described below with the ability to practice first using a trading demo account, and collect various Forex bonuses (like ones of up to 100% on your initial deposit) to fund your Social trading or to practice your deals on a new platform.
What else is important to mention is that experienced traders open several accounts with different Forex brokers in order not only to protect themselves from possible risks, but also to try their speculation strategies on one account, hedge risks on another, and make money on strategies of experienced traders on the third or have an additional PAMM account. With such a division of funds, you can always see which assets and trading methods bring you income while in adverse situations there is no chance of losing much.
Sign up, verify accounts and start trading with Top Forex brokers below to compare marketplaces, pick up multiple instruments, and compare order execution times.
Exness Forex trading
Exness is one of the popular online brokerage platforms that was founded in 2008 providing trades in many popular instruments such as currency pairs, stocks, indices, metals, energies, and popular Cryptocurrencies to clients all over the world.
It is especially convenient for users to cooperate with the broker since a comfortable working environment involves trading in the Meta Trader 1, MetaTrader 4, MetaTrader 5, or MetaTrader WebTerminal terminals. In addition, in order to follow the market movement without tiering yourself to the PC, Exness has developed a mobile app for iOS and Android. Also, those wishing to increase the speed of order execution can use the VPS service from Exness.
With a minimum deposit of just a few dollars, financial markets have become much more accessible to traders. Clients can register standard retail, and professional accounts, as well as a demo, to try trades with various instruments and create their own Forex strategy with a virtual balance without losing real money.
Exness has been licensed by regulators such as the FCA, CySEC, FSCA, FSC, FSA, and others over the years providing brokerage services. Try trading with Exness using our dedicated button below.
Plus500 CFD trading
Plus500 is one of the largest online brokerage companies based in Israel, which was one of the first to provide work with CFDs on various financial instruments including currency pairs, ETFs, stocks, commodities, and stock indices.
Plus500 provides its clients with attractive conditions and works on its own user-friendly trading platform with versions for PC installation, a web platform, and a mobile app. The low minimum deposit makes the offer equally attractive to traders with different amounts of funds. The free and unlimited demo trading account allows new players to practice before opening a real one. The platform has various risk management tools such as stop-loss.
Plus500 supports different payment instruments, the most reliable of which are Visa and Master Card. You can also use e-wallets such as Skrill and PayPal. In this way, you can top up your account in just a few minutes.
Plus500 works with traders worldwide and is regulated by FCA (UK), CySEC (Cyprus), SFSA (Seychelles), AFSL issued by ASIC, FSP issued by the FMA (New Zealand), MAS (Singapore), and Authorised Financial Services Provider license issued by the FSCA (South Africa). Try trading with Plus500 and apply hedging, and speculation strategies by clicking on our button below.
HF Markets Forex trading
HF Markets, also may be known as HotForex, is an excellent choice to try out all your trading strategies and hedge possible risks as the broker offers 1200 instruments, including Forex, energies, indices, commodities, ETFs, stocks, and bonds and provides special conditions for Forex Gold trading in particular low spreads, and an opportunity to trade precious metal against the USD and EUR.
Clients are not limited to choosing the account type they need as the broker has 6 of them: Micro, VIP, Premium, PAMM, and Demo. The last one has a virtual balance of $100 000 to get acquainted with the platform and all the given assets. Traders work on well-known MT4 and MT5 terminals which are available on desktop, web, and mobile versions for Windows, iOS, macOS, and Android. Also, HF Markets provides VPS service for stable unlimited connection and HFcopy trading platform to follow experienced traders and earn passive income.
The main HF Markets regulator is CySEC in Europe. In addition, the broker has FCA (UK), FSCA (South Africa), DIFC (Dubai), and SFSA (Seychelles) licenses, which ensure traders’ funds are safe and all transactions transparent.
HF Markets is one of the top brokers for trying scalping, day trading, hedging, and other strategies. It provides many bonuses and special offers such as if you make your first deposit you can get up to 100%. Click the button below and enjoy all the benefits of HF Markets trading.
NAGA Markets Forex trading
NAGA Markets originally from Germany is the broker well-known not only for its wide range of financial instruments (more than 950) but also for its copy trading feature – NAGA Autocopy which is a perfect tool for newcomers to mirror the strategies of colleges and for experienced traders giving access to their deals and earning that way.
NAGA offers its clients the MT4, MT5, and NAGA Web App platforms, as well as the NAGA iOS App and NAGA Android App for mobile trading. Among the accounts, market participants can find a demo account for practice with it for as long as they wish, a real standard account, the spread on which starts from 1 pip and no commission is charged, Professional for market masters, as well as VIP.
NAGA clients can replenish their trading account by bank transfer, using payment cards, through the electronic payment systems Giropay, Skrill, Neteller, Paysafe Card, and Klarna, as well as using Cryptocurrencies (Bitcoin, Ethereum, Dash, Litecoin, Bitcoin Cash, and NAGA Coin).
The company has been on the market since 2013, and during this time it has gained a good reputation among traders, which, in turn, is confirmed by NAGA Markets with licenses from proven and trusted regulators such as the FCA and CySEC. You can explore all the possibilities of the broker and get a special offer from TopForex.trade by clicking on the button.
AvaTrade Forex trading
AvaTrade provides traders not only with a wide range of financial instruments including currency pairs, commodities, Cryptocurrencies, indices, and options but gives you the opportunity to earn passive income with its copy trading platform AvaSocial. Except that traders can choose from MT4, MT5, AvaTradeGo, AvaOptions, and WebTrader platforms. Besides being fully motile there is an AvaTrade mobile app for you.
For newcomers or those who want to check a new strategy, AvaTrade has a special demo with a virtual balance of $100 000 where you can also try out various risk management tools such as Stop-loss order, and Take-profit, and then switch to a real account and start trading.
AvaTrade has a huge amount of educational resources on its website, including lessons, webinars, and videos to help you master your trading. Besides, to hedge against unexpected price fall for a selected period of time the company created the AvaProtect trading feature.
The brokerage company accepts clients all over the world and is regulated by international reputable organizations such as IIROC, BVIFSC, FSCA, ASIC, ADGM, FSA, and FFAJ. Click the button below and start earning using hedging, speculation, or getting passive income with the Copy trading platform.
eToro Forex trading
eToro is the largest brokerage company – especially favored in Europe – known for its Copy trading function, where market participants can not only have passive income but also communicate with other traders, learn from their experience, and discuss the latest market trends.
In addition to eToro’s CopyTrader, which copies the trades of specific people, the company has a CopyPortfolios feature that allows you to subscribe to an entire group of traders in one click, so you diversify your investment without spending time studying each account individually. CopyPortfolio follows a specific theme in its trading strategy so you can choose what to copy according to your preferences and needs.
eToro clients have access to a variety of trading instruments such as stocks, ETFs, currencies, and CFDs on metals, commodities, and other assets, as well as a wide selection of Cryptocurrencies, so you can widen your trading portfolio and hedge your risks if the market is unstable.
The broker offers its own user-friendly platform for work, which is available in the web version as a mobile application for iOS and Android. eToro’s personal account combines all the functions of the platform: account management, self-trading, and trade copying.
The company’s activity remains transparent and safe throughout its existence, which is confirmed by the obtained licenses from such world-famous organizations as the FCA (UK), ASIC (Australia), and CySEC (Cyprus/Europe).
You can enter the Forex market with the Copy Trading feature and apply your speculation and hedging strategies right now by clicking on our special button.
XM Group Forex trading
XM Group is a regulated online broker that offers over 1000 trading instruments including currency pairs, CFDs, indices, commodities, metals, energy, and stocks on the MT4/MT5 platforms. The broker has a user-friendly mobile app that allows you to trade with a single login on a demo or live account, and a free VPS service that allows them not to worry about internet connection or distractions.
The broker’s trading accounts have negative balance protection, good leverage, and tight spreads, and are divided into Micro, Standard, XM Ultra Low, and Shares.
XM Group enjoys a high level of trust among traders worldwide and is licensed by four financial regulators including the FCA, ASIC, CySEC, and IFSC. The company places great emphasis on educating traders by offering a variety of educational materials including Forex news, economic calendar, etc. These ideas will be useful to all traders, from beginners to experienced ones.
XM Group pleases its customers with a nice bonus on the first deposit of up to 100%, and also often holds various promotions, the latest information about which you can find out by clicking on the button.
How to make a deal in Forex market: hedging, speculation, and Copy trading - FAQ