What is forex trading? The word “Forex” has been thrown around in different spheres lately. It’s almost like any random discourse you find yourself; you could be sure someone is about to bring it up.
Forex this, Forex that, it’s almost exhausting! The best way to go around the awkwardness of not knowing about this is to understand what it is.
Forex is the buying and selling of different currencies for a profit. That’s it! That’s the long and short of it. Forex, or the foreign exchange market, is a place where buying and selling different currencies takes place.
The term ‘Forex’ is simply an abbreviation for Foreign Exchange. So, rest assured that whenever you hear the word ‘Forex’, someone somewhere just got tired of saying ‘Foreign Exchange’ and decided to make life easier for himself.
Forex, FX, and Foreign Exchange all mean the same thing. So be clear! That’s about the basics. So let’s get into the nitty-gritty.
What is Forex Trading?
Forex trading takes place every day and almost every time around the world. 99% of the time, we all have dabbled into Forex at some point in our lives.
Yes, including you. It may be with something other than using a sophisticated trading system like we all know it to be. It could be a physical exchange.
The year is 2012, and you’re travelling from Canada to Singapore. Luckily for you, there isn’t a global pandemic, so you travel without hassles.
You’re travelling for a short vacation and are there to lavish. To make this possible, you must spend Singapore dollars, right? Well Yes! Nobody is spending Canadian Dollars in Singapore, so the intelligent thing to do would be to get your hands on some Singapore dollars.
To make this a reality, the only thing to do is walk into the Singapore exchange and sell your Canadian Dollar using the exchange rate. This right here is Forex summed up — the buying and selling of currency.
Of course, this is not the entirety of it. Other people make a living off trading currencies; if you ask me, that’s where the REAL Forex market is.
This market, although seemingly complicated, doesn’t completely differ from the idea of a physical market. Only a tiny percentage of currency transactions happen in the ‘real world’, like the example above. When it comes to where the majority of forex transactions take place, the Global Financial Market carries magnitude.
The Global Financial Market is a decentralized marketplace where huge
Volumes of currency transactions take place. While their Central Banks regulate each of these currencies, the Global financial market, in general, is controlled by no one!
Now you might be wondering, “When did all this start?” who started all this” How long has this been going on, and all sorts of curiosities. So I’d be answering all those in the following subheading.
A History of Forex – A walk down memory lane
Since the beginning of time, systems have been put in place as methods of Exchange, ranging back as early as 6000 BC; the Mesopotamian tribes introduced a barter system.
Of course, it wasn’t as sophisticated and robust as it is now, but people got along just fine. This system involved exchanging commodity goods like salt and spices to facilitate transactions. Keep in mind that these commodities were as valuable as valuable can be, so it’s not exactly a far-fetched idea.
Huge ships would sail to other countries to trade, with their store of value being these spices. This system went on for a while up until the 6th century, when the first gold coin was minted.
The idea behind using Gold as a medium of Exchange (aside from the apparent reason) was that Gold was limited in supply, durable, uniform, and generally accepted.
General acceptability is usually characteristic of being legal tender. And Gold coins did just that. This continued for a while and even to relatively recent times.
Until, well, it wasn’t. People started complaining that Gold was too heavy to carry around and needed an even more durable way of carrying their money.
Imagine being asked for a financial favour, and you claim not to have any money, but people can hear your pockets jingle. Yikes. Well, this was the case for people, especially the rich.
Therefore, in the 1800s, countries had already adopted Gold as the standard. This Gold guaranteed that the Government back then would be able to redeem any amount of money for its value of Gold.
This worked fine until World War 1, where European countries had to suspend the Gold standard to print more money to pay for War.
Gold entirely backed the foreign exchange market at this point, and during the early 1900s, countries traded with each other because they could convert the currencies they received into Gold. The gold standard, however, could not hold up during the world wars.
When can I trade Forex?
Yes, another huge perk about the forex market. The trading hours. The market works almost round the clock. Its call is rarely closed. Unlike other financial markets (NYSC, LSE, stock bond, etc.)
The Forex market is open 24 hours a day, five days a week. Making it easily accessible whenever. Although there are still times when the market may be “better” to trade than other times.
When the market is active, with a significant number of forex traders starting and closing positions, the optimum time to trade is when there is a high volume of trades.
Simply put, trade when other traders are trading. It helps create volume, and those vast volumes can translate to profits or losses, depending on if you’re a good trader.
It would be best if you strived to trade when at least more than one trading session is open. But to be more specific, here are the trading sessions and when they trade:
- Sydney is open from 9:00 pm to 6:00 am UTC
- Tokyo is open from 12:00 am to 9:00 am UTC
- London is open from 7:00 am to 4:00 pm UTC
- New York is open from 1:00 pm to 10:00 pm UTC
What are currency pairs?
If the foreign Exchange were to be a fruit market, the currency pairs would be the fruits traded in that market. Currency pairs on a forex platform depict the value of a unit of a currency compared to a unit of another currency pair.
The currency used as the reference is called the base currency, and the currency quoted in relation is called the counter currency or transaction currency.
For example, if you take a foreign currency pair like EUR/USD, the base currency, in this case, is EUR. So you are buying or selling EUR. That’s the base.
The counter currency is USD. You are quoting EUR in terms of USD. That is one EUR costs 1.15 USD or whatever.
What moves the forex market?
Forex is an actual global marketplace, with buyers and sellers from all corners of the globe participating in trillions of dollars of trades each day.
Foreign exchange trading has become such a global activity, so macroeconomic events play a more significant role in Forex than ever before.
Traders no longer have to stick to popular currencies, but they are an excellent place to start.
Can I make living trading forex?
If you’re new to trading, you might wonder if it’s really possible to make a living from currency trading, given that most small traders do not.
The short answer? YES! It’s possible to make a consistent income from Forex trading.
What do you need to trade Forex?
Forex traders can have little capital to trade because they can only trade a percentage of their capital.
The average Forex broker requires at least $100 to open an account and start trading.
You’re good to go with a good core i5, core i3 laptop, or even a smartphone with stable internet as long as you’ve gathered knowledge on how to open and close orders, read the market, and understand the platform you want to trade with.
How to start trading Forex?? 5 Easy Steps to Trade Forex
You can take the following steps to prepare yourself to start trading Forex:
Connect a device to the internet.
To trade Forex, you’ll need access to a reliable Internet connection with minimal service interruptions to trade through an online broker.
You’ll also need a smartphone, tablet, or computer to run a trading platform. If your internet drops while you’re trading, that can result in undesirable losses if the market moves against you.
Open and fund a trading account.
After you’ve decided on a broker, you can deposit funds into a trading account.
Most online forex brokers accept many ways to fund an account, including bank wire transfers, debit card payments, or transfers from electronic payment providers like Skrill or PayPal.
Obtain a forex trading platform.
You will need to download or get access to an online forex trading platform supported by your broker.
Most forex brokers either offer a proprietary trading platform or support a popular 3rd-party platform like MetaTrader4 and 5 (MT4/5) from MetaQuotes.com or NinjaTrader.
After completing all of the previous steps, you now have a funded Forex account and are ready to trade.
You can also usually open a demo account funded with virtual money to test the broker’s Forex platforms and services before going live.
Demo accounts are also beneficial for testing trading strategies and practising trading without risking funds.
These trading platforms are brought to you by brokers. They are middlemen who make their money by earning money from transactions carried out by you and me on the forex market. These little profits are called the spread.
Forex Brokers and why you need them
Forex Brokers, like many other intermediaries in business, are vital solely because of their ability to bring buyers and sellers together through a platform.
Many individuals cannot possess the license to be a broker or have the ability to jump through all the many regulatory requirements a broker would have to go through to provide brokerage services.
We need them because they have access to these markets, which many people are not privileged to. Examples of reputable forex brokers include Icmarkets, IronFX and Capital.com Review – By An Expert Forex Trader
Forex Trading Software/ Platform explained.
But this was flawed because of the rigours it took for smaller institutions to get their hands on this currency. The 1990s then brought about the advent of recent-day technology, and that of course, meant technology for every other thing.
Around 1998 a currency trading system introduced in the United States allowed individuals and not just institutions to trade currencies at the spot market in foreign currencies.
With more Technological advancements, these trading systems/ platforms were optimized to meet up with new tech. Subsequently, it evolved into what we have today.
Knowledge – how to trade – buy and sell currencies What is buying and selling in Forex?
Buying and selling in Forex is speculating on a currency pair’s upward and downward price movements with the hopes of making a profit.
All forex trading involves buying one currency and selling another, which is why it is quoted in pairs. So you would buy the pair if you expected the base currency to strengthen against the quote currency, and you would sell if you expected it to do the opposite.
The price of a forex pair is how much one unit of the base currency is worth in the quote currency. For example, if the price of GBP/USD is 1.32000, it means that £1 costs $1.32.
Long/Short: Long or Short, simply put, is your trade direction. It means that the trader is currently buying or bullish. So, imagine a trader say, “Hey Donald, I’m long EURO/DOLLAR” It simply means that the trader is predicting the market to go up so that he can make a
The direct opposite is the same for “short”. If a trader says he’s short “EURODOLLAR,” it simply means he’s predicting the market’s decline. He’s selling EUR/ USD.
Bullish: The term is similar to the term “long”. A Currency Pair is bullish when the price is continually shooting up or increasing. A trader also says he’s bullish when predicting the market to increase or move to a higher price.
Bearish: This is directly akin to the term “short”
Leverage: Leverage simply means how much larger you can trade relative to your account size. It’s better explained in an example:
Ok, imagine you fund a trading account with $10,000, and the broker (i.e., the middleman providing you with the service of trading on their platform) allows you a margin of 1:50. It simply means that the broker is allowing you to trade $500,000 worth of currency. Leverage is calculated by multiplying your capital by the second digit on the right side of the ratio. In this situation, $10,000 x 50.
Pip (Point-in-percentage): A pip is the smallest price in the forex market. Also better explained with an example. Imagine a pair like EUR/USD is trading at 1.0012 and then increasing to 1.0015 in the day. The market is said to have moved up three pips. Pips are calculated by calculating the difference between the old and new prices.
Bid: This is the price that you can sell at.
Ask: The asking price is the price you can buy at. Imagine buy EUR/USD at 1.0015 and immediately wanting to sell. You typically would have a price lower than that. Maybe 1.0014. That is because of the broker. The buying price or ask price is usually the price the broker is willing to sell you his currency and the bid price is usually the price the broker is willing to buy the currency back from you. The difference is called the spread.
Spread: The spread is the difference between the ask and the bid price and is how the broker makes his money.
Forex Trading Strategies
Forex traders globally have decided that trading on the forex market requires some sort of strategizing, planning, and analysis.
Several methods and approaches towards achieving an equilibrium that guarantees consistent profits and balance have been created by several brokers, and they can be generalized into some categories.
They are “Grid trading, Arbitrage trading, Trend trading, Martingale. Scalping and hedging.
Grid trading is when orders are placed above and below a set price, creating a grid of orders at incrementally increasing and decreasing prices.
Arbitrage Trading: Arbitrage is trading that exploits the tiny differences in price between identical assets in two or more markets.
Trend Trading: Trend trading is a trading style that attempts to capture gains through the analysis of an asset’s momentum in a particular direction.
Martingale: The Martingale system is a system of investing in which the dollar value of investments continually increases after losses or the position size increases with the lowering portfolio size.
Scalping: Scalping is a trading style that specializes in profiting off of small price changes and making a fast profit off reselling.
Hedging: Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset
These strategies are created to provide solutions to different market situations. They have different approaches and require different levels of expertise. Because of how vast these strategies can be, they are challenging.
However, I’ll be creating a separate pdf on how to trade Forex using different approaches and techniques.
The answers to the frequently asked questions about the Forex market are presented in these FAQs:
Short Answer? No. The foreign exchange market is backed by numerous regulatory bodies of several countries’ Central Banks and other institutions, including the securities and exchange commission of different countries. Not only is it Legal, but it is also encouraged.
Is forex trading just gambling?
By using various strategies and tools, a trader can dial the odds to their advantage and be ahead of the market and other traders.
Unlike gambling, there is no “house” in Forex trading. Your competitor on the market is another trader who has his/her interests. In short, trading Forex is more like a zero-sum game where some people win and some people lose.
But more importantly, the real adversary in this sense is yourself: you have to think before you make a decision and don’t let greed get the better of you.
Can forex trading make someone rich?
Forex Trading is NOT a Get-Rich-Quick Scheme. Forex trading is a SKILL that takes TIME to
learn. Skilled traders can and do make money in this field. The truth is that even expert traders with years of experience still encounter periodic losses.
Here is a true story you should learn from: How I Crashed My Trading Account; The Lessons
How long does it take to learn Forex?
It takes around one year for someone to learn to trade Forex. The technical side can be learned within a few weeks, but risk management and psychology will take around a year to come to grasp.
Most traders give up before ever learning to trade the markets consistently.
What currency pairs can I trade in?
When trading in the forex market, traders have a wide range of currency pairs to pick from.
Any currency combination, including the US dollar (USD), currently the world’s largest economy, is considered a major currency pair.
The foreign exchange market’s most widely traded currencies are major pairs. The following are the seven most popular forex pairings in the world, all of which may be traded using spread bets and CFDs:
- The euro and US dollar: EUR/USD
- The US dollar and Japanese yen: USD/JPY
- The British pound sterling and US dollar: GBP/USD
- The US dollar and Swiss franc: USD/CHF
- The Australian Dollar and US dollar: AUD/USD
- The US dollar and Canadian Dollar: USD/CAD
- The New Zealand dollar and US dollar: NZD/USD
Seventy-five per cent of all forex trades are made on the big pairings. In the forex market, the majors are the most liquid and widely traded.
They account for the vast bulk of all FX transactions. Because these pairs have the most buyers and sellers, their bid (buy) and ask (sell), spreads are often the smallest.
The difference between the buy and sell prices is known as the spread. Most traders would agree that the top seven major forex pairs are the most profitable to trade.