The foreign exchange market is one of the most well-known markets in today’s financial industry.
There are some things that everyone should know before entering this vast market. You can learn about forex trading by reading this article.
Chapter 1: Basics of Forex Trading
The Forex Market
The foreign exchange market, more commonly known as forex or FX, is famous for being one of the most exciting markets that exist in this day and age.
It boasts a fast-paced market that sees trades being completed left and right without the hassle of needing to meet each other in person. The forex market is the “place” where currencies are being traded.
It wasn’t until recently that forex trading in the currency market has been made up of only those belonging to large financial institutions, corporations, central banks, hedge funds, and individuals who have more than enough wealth to sustain them.
Ever since the emergence of the internet, the markets have begun to change. Now, even the average investors are capable of buying and selling currencies easily with a mere click of a button through their own trading accounts set up in various online brokerages.
In the forex market, the daily currency fluctuations are usually very small with most currency pairs moving less than one cent per day. This makes foreign exchange one of the least volatile existing financial markets.
With this, many currency speculators depend on the availability of enormous leverage in order to increase the value of any potential movements.
Forex brokers offer leverage of up to 1:400 giving clients, who have an account balance of 10,000, the ability to control 4,000,000 and the opportunity to open bigger or more deals. You should still keep in mind that the higher the leverage is, the higher the risk.
The forex market’s extreme liquidity and the availability of high leverage urged the market’s rapid growth and have turned it into the ideal place for a lot of traders. You can also choose to open and close your position within minutes or you can keep it open for months.
It’s not easy to manipulate the value of the currencies seeing as it greatly reliant on objective considerations of supply and demand. Additionally, the size of the market also acts as an obstacle, making it impossible even for the large players such as the central bank to manipulate the currency prices.
Investors are presented with numerous opportunities once they enter the forex markets. But like with everything else, you still have to familiarize yourself with the basics behind currency movements in order for you to be successful in the field.
Chapter 2: How to Trade Forex
Breaking down Forex Trading
Forex trading is one of the most popular types of trading there is in the financial field. Currencies hold a certain degree of importance to almost everyone in the world, whether they are aware of it or not. This is mostly because currencies are the medium being used in order to conduct foreign trade and business.Forex trading can already be seen in a person’s daily life. For instance, if you wish to buy a product from a foreign country you would normally go to a store near you in order to purchase or order it, right? But for that to be possible, the store would have needed to import the goods from that foreign country.
During this transaction, the money you used to buy the product, which is in your local currency, would need to be exchanged to the equivalent value of the foreign country’s local currency. This exchange could be between U.S. dollars (USD) and euros (EUR) or any other currency pairs found across the globe.
There is no central marketplace where foreign exchange is being conducted. The trades are being completed electronically over-the-counter or OTC. This means that all trades are conducted through computer networks that connect traders all over the world.
Investors have varying reviews and opinions regarding the foreign exchange market. Other people’s experiences, whether good or bad, can be read in the reviews they write on various forums and websites.
The market is also opened 24 hours a day, five days a week, and almost every brokerage firm offers its services during this time period.
You can easily conduct the trades in major financial centers of London, New York, Zurich, Paris, Tokyo, Singapore, Sydney, and Hong Kong – across almost every time zone.
With this, even if the trading day in the U.S. ends, the forex market in Tokyo or Hong Kong begins anew. You can then see that the forex market is active almost any time of the day with the constantly changing price quotes.
Forex Trading Styles and Strategies
There are several trading strategies you can use when it comes to forex trading. Some have been known to be more effective when compared to others.
You should research well about these various strategies in order to find out which one will fit you best. Here are some of the most popular strategies you can choose from:
- Day Trading Strategy: Trades set using this strategy are normally exited before the day comes to an end. This can prevent you from taking damage from any negative events that can happen overnight.
- Trend Trading Strategy: As a trend trader, you’re bound to follow the trend in order to determine the direction that the prices have been taking.
- Swing Trading Strategy: This strategy is usually used for trades that last through the period of one day to one week.
There are also various trading styles that depend on the time frame and holding period of every trade. This includes intraday trading, position trading, swing trading, trend trading, technical trading, and fundamental trading.
Chapter 3: Currency Pairs
What is a Currency Pair?
Basically, a currency pair is what you call the quotation and pricing structure of the currencies being traded in the forex market. The value of the currency is a rate and is determined by its comparison to another currency.Forex trades involve the purchase of one currency and the sale of another at the same time. But when you look at a currency pair, you can easily think of it as a single unit, an instrument you can buy or sell.
An example of a currency pair is the euro (EUR) against the U.S. dollar (USD) or most commonly shown as EUR/USD, also known to be one of the widely traded currency pairs.
In this pairing, the first listed currency (USD) is referred to as the base currency, while the second currency (EUR) is referred to as the quote currency. The currency pair will indicate the amount of the quote currency you’ll need in order to purchase one unit of the base currency.
If you decide to buy a currency pair, you are buying the base currency and will be selling the quoted currency. Meanwhile, when you sell the currency pair, you will be selling the base currency and will be receiving the quote currency.
The buy price of a currency is called the “bid” while the sell price of the currency is referred to as the “ask”.
The “bid” for the currency pair will tell you the amount of quote currency you’ll need in order to obtain the base currency.
On the other hand, the “ask” for the currency pair will tell you the amount you will receive in the quote currency for selling one unit of the base currency.
Chapter 4: Types of Currency Pairs
Types of Currency Pairs
There are three types of currency pairs available across the globe; these are the major currency pairs, minor currency pairs, and exotic currency pairs.
You should keep in mind that there are as many currency pairs as there are currencies in the world. The total number of existing currency pairs changes alongside the currencies that come and go.
Brokerage firms offer you the opportunity to trade any existing currency pair in the world. All of the currency pairs are categorized according to the amount of volume being traded on a daily basis as a pair. We will be discussing them further in detail below.
Major Currency Pairs
All of the existing major currency pairs have the U.S. dollar (USD) on one side, either as the base currency or the quote currency. They are considered to be the most traded pairs in the foreign exchange market.
The major currency pairs also offer the lowest spread and are known to be the most liquid. The EUR/USD pair actually holds 30 percent of the entire trade volume of the foreign exchange market.
The major currency pairs include:
|EUR/USD||Euro Zone / United States|
|GBP/USD||United Kingdom / United States|
|NZD/USD||New Zealand / United States|
|USD/JPY||United States / Japan|
|USD/CAD||United States / Canada|
|AUD/USD||Australia / United States|
|USD/CHF||United States / Switzerland|
Minor Currency Pairs
The minor currency pairs are also commonly referred to as cross-currency pairs or simply “crosses”. These currency pairs do not contain the U.S. dollar. Minor currency pairs are known to have slightly wider spreads and are not as liquid as the majors but still sufficiently liquid markets.
In the past, in order to obtain the desired currency, you will first have to convert your currency into U.S. dollars and then into the other currency you wish to obtain.
With the introduction of the minor currency pairs, there is no longer any need to conduct such a long process. The most actively traded minor currency pairs include the three major non-U.S. dollar currencies which are the euro, the UK Pound, and the Japanese Yen.
The minor currency pairs include:
|EUR/GBP||Euro Zone / United Kingdom|
|EUR/AUD||Euro Zone / Australia|
|EUR/CAD||Euro Zone / Canada|
|EUR/CHF||Euro Zone / Switzerland|
|EUR/NZD||Euro Zone / New Zealand|
|EUR/JPY||Euro Zone / Japan|
|CAD/JPY||Canada / Japan|
|AUD/JPY||Australia / Japan|
|NZD/JPY||New Zealand / Japan|
|CHF/JPY||Switzerland / Japan|
|GBP/JPY||United Kingdom / Japan|
|GBP/CAD||United Kingdom / Canada|
|GBP/AUD||United Kingdom / Australia|
|GBP/CHF||United Kingdom / Switzerland|
|CAD/CHF||Canada / Switzerland|
|AUD/CAD||Australia / Canada|
|NZD/CHF||New Zealand / Switzerland|
Exotic Currency Pairs
The exotic currency pairs are made up of those in the emerging markets. There is a huge difference in the liquidity of this type of currency pair when compared to the other two. The spreads of exotic currency pairs are also much wider.Exotic currency pairs are usually made up of one major currency and one currency of an emerging economy, such as Hong Kong, Singapore, or Mexico.
The exotic currency pairs include:
|USD/SGD||United States / Singapore|
|USD/HKD||United States / Hong Kong|
|USD/THB||United States / Thailand|
|USD/SEK||United States / Sweden|
|USD/DKK||United States / Denmark|
|EUR/TRY||Euro Zone / Turkey|
|JPY/NOK||Japan / Norway|
|NZD/SGD||New Zealand / Singapore|
|AUD/MXN||Australia / Mexico|
|GBP/ZAR||United Kingdom / South Africa|
Chapter 5: Risks and Tips every Forex Trader Should Know
Risks Every Forex Trader Should Know
There are different types of risks that you should be aware of as a forex trader. Here are some of them.
- Leverage Risk: Leverage can prove to be both beneficial and risky. The higher your leverage, the better your profits. Despite that, you should also keep in mind that your losses can also increase the higher your leverage gets.
- Interest Rate Risk: The moment a country’s interest rate rises, the currency will strengthen. The boost in strength can be attributed to an influx of investments in that country’s assets since with a stronger currency, higher returns can be more likely. But if the interest rate falls, the currency will weaken, which may result in more investors withdrawing their investments.
- Transaction Risk: This risk is an exchange rate risk that can be associated with the time differences between the different countries. It can take place sometime between the beginning and end of a contract. There is a chance that during the 24-hours, exchange rates might change even before settling a trade. The currencies might be traded at different prices at different times during the trading hours. The transition risk increases the greater the time difference between entering and settling a contract.
Tips for Beginners in the Foreign Exchange Market
Here are some tips that everyone in the foreign exchange industry could use to help them succeed in the field.
- Learn as much as you can about the foreign exchange markets before you use your own money
- Don’t push aside the task of finding a reputable broker; it might as well be the make-it or break-it point of your trading journey.
- Never forget to use a practice account
- Once you’re able to successfully create your trading account, protect it.
- Start small when you think you’re ready to go live.
- Keep your charts and records clean.
- Trading is not just another pastime, you can treat it as a business.
There are multiple reviews on the internet that can help you find out more about what you can’t understand as well as teach you new things you didn’t know existed before.
These reviews can prove to be helpful during your journey in the field of forex trading; you can learn a lot of things from other people’s experiences and mistakes.
You can hone the forex trading strategies you developed to meet your every expectation, just don’t forget to always have a safety net that you can fall back on in case something does not go your way.
The foreign exchange market may be a vast market but it does not mean that it will be impossible for you to navigate the place. You simply have to learn as much as you can about the process of forex trading in order to find your way around its market.