What is Forex? The Ultimate Beginner’s Guide
The Forex market offers high liquidity and margin opportunities for you to trade and potentially profit off of exchange rates of currencies. With a daily volume of more than $6.6 trillion in 2019, it is the largest financial market in the world. Forex, also known as foreign exchange trading or FX trading, is defined as the process of changing one currency into another, for various reasons like commerce, tourism, and economic health. It includes a network of buyers and sellers who transfer currencies among each other at an agreed price. If you apply the right trading strategy, you may be able to make Forex trading your full-time profession.
What is Forex?
The Forex market is a worldwide, decentralised marketplace that allows you to trade currencies from different countries. It is open 24/5, and each transaction is done through a global network of financial institutions and banks.
What is Forex trading?
Forex trading is the process of buying or selling a particular currency to gain profit from another. For example, you want to trade EUR for USD, so you sell your base currency of EUR to buy more USD at the exchange rate in the market. The exchange rates for each currency is determined by multiple factors, which is regulated by the country’s government through central banks.
Understanding Forex currency pairs
Since currencies are traded in pairs, each transaction includes a quote currency and a base currency.
- The base currency is the sell price and appears on the left side of a currency pair
- The quote currency is the buy price and appears on the right side
- Currency pairs have exchange rates that are based on their bid and ask prices.
- The bid price, also known as buying price, is the amount a broker (buyer) is willing to accept in exchange for a currency or asset.
- The ask price, also known as the offer price, is the amount a trader (seller) is willing to accept in exchange for a currency or asset.
- The difference between the bid price and the ask price of a currency pair is called a spread.
Forex traders buy the base currency and sell the quote currency in exchange. Similarly, you can buy currency pairs from different countries and also sell them in the Forex market. You can also convert them for international investment and trade. For example, the value of EUR as base currency will be quoted against the value of USD as quote currency. This depicts how much USD is needed to purchase 1 EUR.
The different types of currency pairs include:
- Major currency pairs: These are responsible for about 80% of Forex trading. They are highly liquid and associated with financially sound and stable economies. The four traditional major currency pairs are EUR/USD, GBP/USD, USD/JPY, and USD/CHF.
- Minor currency pairs: These pairs do not include the US Dollar and are less frequently traded. They are less liquid than the major currency pairs, some examples are EUR/CHF, and GBP/JPY.
- Exotic currency pairs: These currency pairs include a currency from a developing country paired with one of the major currencies. They are less liquid and more volatile. Some of the popular exotic currency pairs are GBP/ZAR and AUD/MXN.
- Regional currency pairs: These pairs are classified according to their particular region. Some examples include EUR/NO, AUD/SGD, and AUD/NZD.
How Forex trading works?
The Forex market is a 24-hour market, offering the opportunity to trade according to different time zones. The market is closed from Friday evening to Sunday evening. The four market sessions are:
- London: 3 AM EST to 12 PM EST
- New York: 8 AM EST to 5 PM EST
- Sydney: 5 PM EST to 2 AM EST
- Tokyo: 7 PM EST to 4 AM EST
Top Forex terminologies you should know
A foreign exchange broker is an individual or a company that sells and buys currency pairs on behalf of the Forex trader. A Forex broker usually acts as a middleman in trading and most charge a fee for their services.
Liquidity in Forex refers to how well a currency pair can be traded in the market without witnessing a drastic change in its exchange rate. The most liquid currencies are the major currencies, which can be bought or sold in significant sizes without much variance in their price level.
Volatility in the Forex market is the frequency and the level of change in a currency pair’s value. Volatile markets involve more risk, but experienced traders choose to trade volatile markets as drastic movements may result in potential profits. However, this could also result in significant losses.
PIP or price in percentage is a unit that measures the movement of a Forex pair. It is the smallest amount by which any currency quote in the Forex market can change. A pip is equal to single-digit movement in the fourth decimal place of any pair. This means that if EUR/USD moves from $1.00061 to $1.00071, it has moved a single PIP.
The spread is a difference between a currency pair's buying and selling price in the Forex market. Whenever you trade a currency pair, you are given two prices. The first price is the buy price which is used to buy more of the currency pair if you wish to open a long position. The second price is the selling price which is used to sell more of the currency pair when you wish to open a short position. The difference between these two prices is the Forex spread.
Currency pairs are traded in lots, which can also be called batches. A lot refers to how many currency units are being offered for sale or are available for purchase. Lots can vary in size; a nano lot is 100 units of a base currency, a micro lot is 1,000 units, a mini lot is 10,000 units, and a standard lot is 100,000 units.
Leverage in Forex refers to gaining a larger market exposure without investing the entire trade value in the market. You only have to deposit a percentage of the total trade value to hold positions with leverage.
Margin is related to leverage in a sense that it is your initial deposit to open a leveraged position. The margin requirement depends on your Forex broker and can change anytime. For example, your broker’s margin requirement is 10% to hold a $10,000 position. This means that you only have to deposit $1,000 (10% of 10,000) to open a position.
A long position is an executed trade where you buy more of the currency pair, expecting it to increase in value. A trader going long on a currency pair that increases in value may earn profits.
A short position is a trade execution when a trader sells the currency pair, expecting it to decrease in value. A trader going short on a currency pair that decreases in value may earn profits.
There are mainly two types of orders in a Forex market: a market order and a limit order. A market order is when you buy a currency pair at its prevailing market price. A limit order is executed by your broker once the market price reaches a specified level.
Stop-loss is a function that brokers offer to mitigate losses of their traders, especially during volatile market situations. They allow you to set a stop-loss level which can be triggered if the market does not move in your favour.
What are the different ways to trade Forex?
Trading Forex in the spot market involves trading currency pairs based on their real-time exchange rates. The rates are based on the supply and demand of the currency pair in the market.
Trading in a forward market means executing a position at a later date. This is done by entering into a private contract with another trader. The contract locks in an exchange rate for both parties to exchange a specified amount of currency pairs on a pre-decided date.
You can also opt for a standardised contract to sell or buy a currency pair. The trade takes place at a future date with a specific exchange rate discussed upon the contractual agreement. All futures market Forex transactions happen publicly on the foreign exchange platform.
How to trade Forex: Steps to make your first trade in Forex
1. Open a trading account and select a currency pair
The first thing to do is to create a trading account with a Forex broker you can trust. Next, research and decide on which currency pair you want to trade.
2. Analyse both currency’s market and economy
Once you have decided the currency pair you want to trade, conduct proper research about it. You can look at the currency pair’s historical and current charts, monitor the economic and political situation of their respective countries, and keep a close eye on all economic announcements.
3. Develop a trading plan
After studying your desired currency pair, you can move forward with reading the currency pair’s bid and ask prices. From then, devise a trading plan which includes identifying entry and exit points, order types, lot sizes, and risk management. Test your trading plan with a demo account first.
4. Open a long or short position
Once you are satisfied with your trading strategy, it is time to open a position in the live market. Remember to keep an eye on your trades as the market can experience changes that may or may not be in your favour. You may also factor in how long you plan on holding your position. If you are a short-term trader, you may need to check your trades multiple times a day as small price movements may affect your trades. Alternatively, long-term traders may check their trades once a day or in weekly intervals as they aim to earn profits from significant market movements as opposed to minute price changes.
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Habits of Forex Traders
Forex trading requires discipline, focus, and a strong understanding of market trends.
Forex Trading Opportunities When Markets are Closed over Weekends
The forex market can be operated 24/7 Monday to Friday.
How to Calculate Forex Position Sizing
Each trader in the forex market defines their position size before moving forward with a trade.
Understanding Forex Risk Management
The forex market is the most liquid and largest market in the world. However, like any other financial market, the forex market can also be risky during times of high volatility.
Hedging in Forex: How to Hedge Currency Risk
Forex hedging or currency hedging allows you to open multiple trade positions to offset any possible currency risk associated with your current position
What Is PIP in forex trading?
PIPs are essential in forex as they tell the traders about the size of profits or losses that can be made from a particular currency pair.
What Is Gap Trading?
Gaps in the Forex market help traders identify price movement clues, entry and exit signals, and trend reversals.
Top Swing Trading Indicators
Swing trading is all about profiting from market swings. It is a popular speculative strategy where traders tend to buy and hold their assets hoping to profit from expected market movement.
What are Support and Resistance Levels
Support and resistance levels in the Forex market allow traders to understand the market direction and predict future prices to consider in making trade decisions.
MT4 vs MT5: Which is Better?
MetaTrader is one of the most popular online trading platforms used globally and its two main versions are MetaTrader 4 and MetaTrader 5. But between MT4 and MT5, which is one best for you?
What is Margin trading?
Margin trading is one of the most common derivative strategies used in financial markets. It can also be considered tax-efficient as it allows you to choose the size of your wager and exempts profits earned from stamp duties and taxes.
What is Leverage in Forex
Leverage allows traders to hold large positions in the Forex market with fewer capital. With leverage trading, traders can borrow money from a broker and hold larger positions, which in turn could magnify returns or losses.
How To Set a Stop Loss Order in Forex Trading
A stop loss order is used to prevent extensive losses, especially during severe market dip situations. By placing a stop loss order, you can automatically close your position if the market moves against you.
MetaTrader 5: The Complete Guide
MetaTrader 5, the powerful automated trading platform, offers advanced tools for successful trading analysis and trades in the financial markets. Aside from Forex, the MT5 platform helps you trade Stocks, CFDs, and Futures.
What is MetaTrader 4: The Complete Guide to MT4
An advanced trading platform, MT4 has become a norm for seasoned Forex traders as it helps them execute their trades even when their machine is off. It comes with a user-friendly interface, numerous technical analysis tools for forecasting market patterns, real-time currency price data, and much more.
What are Long and Short Positions in Forex?
In Forex trading, you can take long or short positions based on expectations of the market rising or falling. Long or buy positions are maintained when traders expect currency pair prices to increase in the future.
What is a Spread in Forex?
A spread is a cost built into the buying and the selling price of all the currency pairs. In most cases, Forex spreads depend on your Forex broker.
What is a Currency Pair in Forex?
The foreign exchange (Forex) market is the largest financial market in the world. With a daily average volume of about $6.6 trillion and worth over $2.4 quadrillion as of 2021, Forex is a decentralised global market for trading currencies.
How do you trade forex?
Many people want to get into Forex trading and make quick profits, but only a few even know how to start. While trading Forex online has now become easier than ever because of powerful platforms like Blueberry Markets, it can still feel incredibly overwhelming to get started with it.
When Can You Trade Forex?
In case you are wondering is Forex trading profitable, the short answer is yes. But many opt for Forex traders to make fast profits since Forex markets are operational 24 hours for five days a week.
Who trades forex?
Major players in the Forex market are financial institutions including commercial banks, central banks, money managers along with hedge funds. Many global corporations also trade in Forex to hedge currency risk.
Why trade forex?
As the largest financial market globally, Forex trading is one of the most popular investment avenues for many. The liquidity and huge trading volume make Forex trading an option worth exploring.
Forex Margin & Leverage
Forex trading usually provides much higher leverage compared to other financial instruments like stocks. This is one of the primary reasons why so many people are attracted to Forex, and more and more people have started to enter the Forex trading market.
Key steps to making your first trade in Forex
Making your first trade in Forex successfully requires in-depth knowledge about trading basics and Forex trading strategies. The learning curve to trading currencies can seem overwhelming and complex, but when you have the right information by your side, it can make the entire process all the more easier.
How is Forex regulated?
There are several Forex brokers in the Forex market, and amidst those thousands of Forex brokers, it can become nothing less than challenging for traders to find the best brokers.
When you hold a currency spot position overnight, the interest you either earn or pay is the rollover amount. Each currency has a different overnight interbank interest rate, and because you trade Forex in pairs, you also deal with two different interest rates.
Tips for Forex trading beginners
In terms of trading volume, the Forex market is the largest financial market in the world. It is also the only financial market that operates round the clock every day.
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