Forex trading can be tough and complex without the right knowledge. From learning terms and definitions to knowing how to execute actions and analyzing the market, traders have to build a firm base to have a successful trading career.
Brief history of forex trading
Forex, short for foreign currency exchange, is simply the exchange of one currency for an equivalent amount of another for various purposes. The disparity in exchange rates gave rise to traders making tidy profits from trading currency pairs. Over the years, forex trading has gone from being exclusive to major financial institutions to becoming the largest market open to individuals today with a daily trading volume of over $5 trillion. Whenever you see the words Forex, FX, FX market or currency trading, they all refer to the forex market or forex trading.
What is Traded in Forex ?
The items traded in forex are currency pairs. They are called pairs because two different currencies are paired together and traded against each other. For example, the U.S. dollar can be paired with the Canadian dollar and traded as the USDCAD. There are hundreds of currency pairs. Examples are the EURUSD, GBPCAD, USDJPY, USDCHF, GBPUSD, AUDUSD, NZDUSD, etc.
Three-Letter Abbreviation for Currencies
You will notice for the currency pairs written above, that each currency is represented by a three-letter code. Currency pairs are written as three-letter codes, with the base currencies (the most popular and powerful currencies) listed first and the counter currency listed on the right. For example, USD, CAD, AUD, GBP, and JPY represent the US Dollar, Canadian Dollar, Australian Dollar, British Pound and Japanese Yen. Other minor pairs (less-powerful currency pairs) and exotic pairs (a mix of a major and minor currency) are also available to trade.
Also Read: Best Currency Pairs to Trade For Beginners
Commonly used orders for trading are the Market orders (Buy and Sell), Limit orders (Buy Limit and Sell Limit) and the Stop Orders (Buy Stop, Sell Stop). Executing one market order on one pair automatically executes an opposite order on the second pair. For instance, if you buy the USD, you are simultaneously selling the CAD. The aim is to profit from holding the USD if the value goes up, against the CAD whose value is going down relative to the USD.
Getting Started in Forex Trading
In order to explore the opportunities in the forex market, you need the following:
- A brokerage account: Forex Brokers are recognized financial companies that offer a platform for people to trade the financial market. They provide access to the global forex market and also act as custodians of the trading funds used for trading on behalf of their clients. Choose a broker that offers the following: low spreads, low minimum deposit and withdrawal, low fees/commission, tools for technical and fundamental analysis, all-round customer support and strong market repute. Recommended Brokers to Open Account Forex
- Good internet connection for fast executions.
- Forex education.
- Capital: Of course, capital is necessary. You need money to trade currencies. Remember to only trade with what you can afford to lose.
Types of forex markets
In forex, traders can trade three basic markets; the Spot Market, the Forwards Market and Futures Market.
- The Spot Market: In the spot market, traders can enter or exit a position, or buy and sell currency pairs at the current market price and get instant settlement on transactions. The current price is usually influenced by the demand and supply, economic and political news and other factors. Once a trade is completed, it is called a “spot deal”.
- The Forwards Markets: The forward market allows two parties to enter a trade by purchasing or selling a contract through an over-the-counter agreement. The contract is binding and can only be modified by both parties.
- The Futures Market: In contrast, a futures market allows traders to buy and sell ‘currencies’ based on their predictions of their prices at a certain future date. The final settlement is made in cash.
The forex market is traded 24/5. There are different trading time zones based on the countries’ time zones. These are the Asian (Tokyo, Sydney, Singapore), London (UK and Europe) and New York (US, Central and Latin America) time zones. On any given day, there are two periods where the time zones overlap. These are the periods of maximum volatility.
Also Read: Forex Trading Market Hours
Definition of terms
The following some common terms in forex trading:
- Market orders: A market order is a specific instruction to buy or sell at the prevailing market price. The types of market orders are:
- Buy or Long: This executes a buy action on the chosen currency pair.
- Sell or Short: This opens a sell action on the chosen currency pair.
- Entry orders: These are orders used to take a position on the currency pair.
- Limit orders: Limit orders are used by traders to enter or exit a trade at a price that is less expensive than the market price. There are Sell limit and Buy limit orders.
- Forex quotes: Quotes in forex are used to show the prices of currencies in a pair. For example, when you see GBP/USD at 1.483745/1.483912, it tells you the bid and ask prices of the currency pairs.
- Bid and Ask price: The bid price is the price at which the dealer buys a currency from a trader, or the price at which the sell order of a currency pair is executed. The Ask price is the value at which the buy order of a trader is executed by the dealer.
- Stop orders: There are two types; the stop loss (protection stop) and the entry stop order. These are used to exit a position at losing price (stop loss) to prevent further losses, or to execute an entry at a price that is more expensive than market price (buy stop or sell stop).
- Spread: The spread is the difference between the bid and ask price.
- Lot: In forex, a lot means the size of each trade. There are micro, mini and standard lot sizes, corresponding to 1000, 10,000, and 100,000 units of your currency respectively.
- Bull and Bear (Bullish and Bearish): A bull or bullish market is one in which prices are going higher while a bear or bearish market is one in which the prices are crashing.
- Pip (Percentage in Point): A pip is the smallest difference between prices at two specific points in a market exchange. It is the smallest move a price can make per trade. It is equivalent to 0.0001 points.
- Leverage: Leverage allows traders to place trades on funds “borrowed” from their brokers.
- Analysis: This is the use of tools and insights to examine the market and identify its movements and potential points to make profit.
Placing a trade
Placing a trade is quite simple;
- Determine the market direction and trend.
- Open a new order ticket
- Set your parameters such as stake amount, take profit, and stop loss.
- Hit the buy or sell button.
As a beginner the following rules must guide you:
- Never involve your emotions. Open and close trades purely on the result of your analysis. Only trade when conditions are satisfied.
- Use appropriate lot sizes. Lot sizes are important so traders do not risk more than they should. Choose a lot size that corresponds with your capital.
- Find your strategy. No strategy is 100%. Therefore, find one that works best and stick to it.
- Apply proper money management. Protect your capital.
- Learn market analysis. You are only as successful as your analysis.