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Forex – Meet the Foreign Exchange Market

FOREX is a decentralized financial market destined for the foreign exchange market, being the largest market in the world! It moves more than $5 trillion on a daily basis. It is the largest market in terms of financial volume and liquidity.

Hello, traders! In this post we will explain everything about the currency market known as forex.

If you intend to be a forex trader and want to understand what this market is, read it to the end.

We will also explain the question of the legality of forex Brazil.

Good reading!

Index:

  1. What is Forex
  2. How the market works
  3. Risks for Forex trader
  4. What Affects Forex
  5. Sending money
  6. The legality of Forex Brazil
  7. Income tax
  8. How much is possible to earn on Forex
  9. Conclusion

What is Forex

Forex derives from the acronym Foreign Exchange,which in English means foreign exchange market.

This is the largest market in the world and is intended for currency transactions.

Its liquidity is huge and its daily traded volume almost beats the 5 trillion dollars.

How the Market Works

In this market, currency pairs are operated, for example, dollar vs. real.

In Forex this pair is given as USD/BRL, where USD (dollar) is the base currency (currency) and BRL (real) is the quoted currency.

Let’s say the price of this pair is 3.8000, what does that mean? It means that to buy a base currency (1 dollar) you need 3.8000 of the secondary currency (or 3.8000 reais). And that’s how you read the currency quotes.

An interesting feature of this market is that it is fully decentralized,that is, anyone from anywhere in the world can operate in the market.

Another point that makes this market very dynamic is the fact that it is open 24 hours a day during the five working days of the week (Monday to Friday).

What are PIPS

In Forex the pip is the smallest possible variation of the currency pair.

Usually the pairs are expressed with four decimal places, the fourth being the pip.

There are currencies, however, that are expressed in two decimal places, such as the yen x dollar pair (JPY/USD). In this case the pip would be the second decimal place.

In the example used above, if the USD/BRL pair goes from 3.8000 to 3.8010 we say that it varied by +10 pips.

PIP in English is an acronym for percentage in point,or point percentage in Portuguese.

Who participates in this market

The participants are many: big banks, multinational companies, governments, central banks, financial institutions.

Small investors like retail traders are the smallest part of this market.

How to participate in the Forex market

The trader who wishes to be a part of and trade Forex has to do so through a broker or bank, as in the Brazilian market.

However, stay tuned: there are no Brazilian Forex brokers. The investor has to register with a broker outside the country.

There is a list of brokers on the DailyForex website with broker rating, reviews and the broker’s website.

Platform

Of course, the trader will need a platform to carry out his operations.

A very popular platform used in Forex is the MetaTrader platform. If you already operate in the market you must have seen it, it is very popular here in Brazil.

Another well-known platform is NinjaTrader platform.

It is worth remembering that, depending on the broker, the options will be different. Some even offer the platform itself.

The suggestion we give is that you download each one and test before deciding for any. And, of course, seek information from users of them.

There are videos of tutorials on YouTube on the platforms. Don’t stop checking there, too.

Risks For Forex Trader

There is a lot of talk about risks in the foreign exchange market. And it’s not for less, let’s go to them.

Volatility

The foreign exchange market is a very volatile market, suffering large fluctuations over the course of the week.

Depending on the currency pair traded and the events on the day, there may be variations of more than 100 pips.

Brokers

Because it is an unregulated market there are risks of operating by a non-resemable broker.

To mitigate this risk, always operate through better-known brokers with more market time.

There are regulations in the countries of origin of brokers to protect the investor who sends money there.

Countries with a tradition in Forex brokers are the USA and UK.

Leverage

Brokers operating in this market offer their clients a lot of leverage, reaching numbers such as 200:1, i.e. the trader trades a position 200 times higher than his capital.

The fascination caused by the possibility of turning a dollar into two hundred causes many novice traders to break down in the early days of trades, believing in easy money.

The trader must wisely use the leverage offered to him.

Spread

As in any market the book of offers is expressed in bid and ask (buy and sell).

However, when trading Forex the trader will notice a large spread (distance between the best buy offer and the best offer to sell) at the time of an order.

The spread is determined by the market maker,in this case the broker.

Look at the following image:

Forex

In the image above we are seeing the EUR/USD pair (euro x dollar).

Note that if the trader wants to enter the purchased market will have to pay 1.06649, at the same time if if he wants to enter sold he will have to pay 1.06637.

Thus, the spread is 1.2 pips (remembering that 1 pip equals the fourth decimal place).

That is, the trader starts the trade already “losing” 1.2 pips (considering that will enter and exit the market).

Depending on the currency pair the pips can reach 5 or more.

There are traders who can “circumvent” the spread by entering and exiting trades with limited orders.

There are brokers that work with fixed spread and others with variable spread.

To go deeper into the knowledge of spreads we recommend reading on the Babypips website and Babypips forum. The site is in English, but for those who have difficulty with the language the Google translator does a good job.

What Affects Forex

Like all other markets, the foreign exchange market is affected by various economic data.

Payroll, sale of new homes in the Usa, Trump speeches, decisions of central banks, Bolsonaro posting thing that should not on social network and etc.

That is, any factors that affect the political and economic issues of the countries.

Remember that the market is highly emotional and speculative, if there was the slightest expectation of certain event it will be reflected in the prices of assets around the world, including currencies.

Sending Money

Sending money to brokers outside the country is in different ways.

They love to use Western Union to send the money.

It can be sent by exchange offices and commercial banks.

We particularly prefer to do it for our banks, where we can do it by our computer without the need to go to some physical store.

On the exam site there is a story about sending and receiving money abroad that better clarifies this issue.

The Legality of Forex Brazil

Because it is a deregulated market, CVM does not allow Forex operations in Brazil, and any broker or bank is prohibited from offering this type of service to its clients.

So be careful if any broker or independent investor offers you this, there are scams being applied to unsuspecting traders.

How the illegality of these brokers works

In fact these brokers are “companies” that offer the investor “high returns” on the invested capital.

They set up a website and do the whole theater to look like a serious investment firm.

There are cases where such a company was a natural person operating Forex in Brazil from a notebook.

Taken from the Insper website:

In one of the best-known cases, the Company MDD maintained a website on which it suggested it was a New York brokerage, but, “in fact, it was only a person operating from a notebook from a residence in the city campos de Goytacases, in Rio de Janeiro”, as reported by cvm itself.

The case was tried by the municipality in 2009, as the conclusion of a case resulting from complaints received in 2005. According to the agency, “at the time, inspections were carried out on site that proved that the said company was developing fundraising activity from popular savings, with a promise of income of up to 3% per day.”

The owners of MDD received a fine of R$ 95,000, corresponding to 10% of the funds raised in the scheme, according to the documents of the process, which results in an amount identified by the investigation of almost R$ 1 million.

After all, is forex trading in Brazil legal?

Yes! What is not legal is any broker or bank offer this service to their clients.

Thus, any trader who has an account at an overseas broker can legally trade Forex.

Second CVM publication of July 2018:

Considering that to date (May 2018) there is no offer related to the Forex market registered with cvm, or broker authorized by the municipality to operate in this market, any offer made in Brazil is ILLEGAL. This includes, but is not limited to, offers made by foreign institutions through the Internet.

Note that people domiciled in Brazil can invest abroad, in Forex or in any other type of asset,but, of course, it is necessary to pay to follow the rules of the Internal Revenue Service and the Central Bank in relation to the appropriate procedures for sending and receiving funds and collecting taxes.

In short, any Brazilian can invest in Forex abroad and not in Brazil.

Income Tax

We must not forget that any and all capital gains have to be declared.

Darf

The DARF to be filled for this is 8523 (IRPF   – Capital gain in the disposal of   assets and rights and in the liquidations and redemptions of financial investments, acquired in foreign currency).

To fill out the tab it is necessary to download the program ‘Sicalc’ on the website of the Irs.

IR Statement

For the declaration the trader must go to the item “Movable Rights/Goods” and correctly fill in the items.

For more information on completing the IR and DARF the forexmais website has a post on tax return with gains in forex that is very complete and detailed.

How Much Is Possible to Earn on Forex

Like any other asset that works leveraged it is possible to make a lot of money in Forex.

Of course you can also lose everything with leverage.

It is very common for novice traders to lose everything in the vain hope of quick and easy money.

So, following what we believe of not deceiving people with false promises,we will say the obvious: few earn much, many lose everything.

Conclusion

Although it is a very large market and with great chances of gain, one cannot ignore the issues of spread and leverage.

Many traders because they do not understand how the spread works in practice end up zeroing their trades at a loss, because they forget to put them in the account.

High leverage coupled with lack of knowledge leads countless traders to bankruptcy.

In Brazil the offer of this service is illegal, although traders can operate abroad legally, so it is always good to be alert with the offers of easy money with scammers.

We hope this post has helped elucidate some issues regarding Forex.

Any comments, questions or suggestions comment or send an email to us.

A hug and good business!