Forex Trading: The Basics

Introduction to Forex Trading

Forex Trading refers to a type of trade on the financial market that involves the speculation in changes of value of one currency to the other. For instance, if you are expecting the price of the Dollar to increase the value in relation to the Euro, then you can purchase the USSDEUR currency pair at a lower market price and sell it at a higher market value when its high in demand to generate profit. Forex trading takes place on the Forex market where numerous banks, governments, investors, and traders take part in the trade by exchanging and speculating on the listed currencies.

The Forex market also referred to as the Fix market is the dominant and most liquid financial market in the world with a daily turnover of approximately $3.98 trillion as of 2018. Fix market is open 24 hours a day, five days a week with the most important trade centers located in New York, London, Zurich, Hong Kong, Singapore, Paris, and Sydney. Unlike the stocks market, the Forex market does not have a central marketplace; rather the trade is conducted online through various available broker platforms.

Forex Trading Basics

Forex trading is a lucrative venture with enormous potential to change your lifestyle. However, it’s not a walk-in the park as it can be very challenging with a high risk of losing your investment. Nevertheless, with the following sets of attributes and skills, you can effectively trade in the forex market and realize enormous profits.

• Dedication-Devote yourself to the forex trading by learning new facts every day.

• Logic-Analyze the forex markets intelligently from an unbiased and straightforward outlook.

• Discipline- The forex market has many tempting investment decisions, but you should remain calm and unemotional in a realm of constant temptation

• Realism- You shouldn’t be filled with greed to get rich quickly but understand the reality of the market and trading

• Savvy- Utilize any trading opportunity when it arises while being in constant awareness of what is happening at any given time.

• Focus- Always concentrate on the trading strategy you have decided

• Self-Control- Stick to your trading plan by not overtrading or over-leverage your trading account.

  Forex Pairs

Forex pairs refers to the pairing of currencies and allocated a particular exchange rate depending on their demand and supply. For instance, the currency pair EUR/USD means that the Euro is traded against the US-Dollar. In this example, the base currency is the EUR while the quote currency is the USD. Forex pairs can either be major or minor.

The major forex pairs consist of currencies from developed economies such as the U.S. and the Europe region. Major forex pairs are typically inexpensive to trade particularly because they are not that much volatile. The major forex pairs may include GBP/USD, USD/JPY, USD/CAD, AUD/USD, EUR/USD AND USD/CHF.

Minor forex pairs are also known as exotics are not usually traded and most highly priced. They are highly volatile and include currencies such as NZD, NOK, SEK, TRY and SGB and many more.

 Pairs and Pips

As mentioned above, all forex trading is done is done in pairs, unlike the stock market where stocks are bought or sold as a single unit. All currencies in the forex market are expressed as a pip or a percentage point to the fourth decimal place. A pip is, therefore, the smallest increment of trade and usually equals 1/100 of 1%.

One pip equals one micro lot and represents only 10 cents move in the price. A dollar equates to one pip in a mini lot. In a standard lot, one pip equals 10 dollars. A trader can choose to trade in micro or mini lots based on their trading decisions.

 Forex Brokers

To trade in a forex market, you will need a forex broker that provides you with the different prices of your currency pairs. After establishing a suitable trading broker, the next step is to open a trading account by submitting your details and depositing funds into your account to start trading. However, you may opt to start with a demo account offered by most brokerage platforms to practice forex trading before putting your finances at risk.

When choosing a forex broker, it is essential to consider the leverage, trading options, commissions and fees offered by the broker along with the supported currencies. 

Bid and ask price

The forex price index typically involves two separate prices for each pair, i.e., the bid and the ask price. The ask price refers to the payable cost when buying a trade while the bid price is the payable price when entering a sell trade. Usually, the ask price is always greater than the bid price. The difference between the ask price and the bid price is known as spread(bid-ask-spread). Spread usually signifies the cost of trading along with and the broker’s commission.

Different Ways to Trade Forex

There are some diverse ways to trade forex by speculating on the movement of different currencies.  Among the most notable Forex Trade ways include the spot forex, currency future, currency options and currency exchange-traded funds (ETFs).

  • Currency Futures– This is trade contracts to purchase or sell a particular asset in the future at a stated price. Currency future contracts are consistent and transacted on a centralized exchange thereby making the forex trade market transparent and well-regulated.
  • Currency Options- Currency options empower, and does not obligate a trader(buyer) to buy purchase or sell an asset at a specified price on the indicated expiration date. For instance, if a trader sold an option, then he or she is obliged to buy or sell an asset at a specific price on the expiration date.
  • Currency ETFs– This is a new trade option and provides exposure to a single currency or basket of currencies. ETFs are developed by financial institutions who purchase and hoard currencies in a fund.
  • Spot Forex Market– As the name implies, currencies are traded instantly in the spot market using the current market price. Spot Forex Market is highly liquid, simple, tight spreads with round-the-clock operations making them suitable for any avid forex trader.

Forex Trading Shifts

 It is important to note that Forex markets open and close at different times unlike other financial markets such as the stock market which have the same opening and closing time. This is because due to the differences in time. In forex trading, there are four main trading sessions:

  • Australian Trading Session (AUD, NZD)- In Sydney
  • Asian Trading Session (JPY)-In Tokyo
  • European Trading Session (GBP, EUR, CHF)- In London
  • American Trading Session (USD, CAD)- In New York

When choosing forex trading pairs to trade, always consider that individual currencies shifts during their allocated trading sessions. For instance, the USD/JYP shifts mostly during the New York (USD) and the Asian (JPY) session.

Importance of being Up to Date in Forex Trading.

Forex market is a highly volatile market influenced by political stability and macroeconomic events. It is, therefore, crucial for forex traders to keep track of important news events around the world to make a right investment decision. Below are ideas of how traders can use news events to come up with a productive trade decision.

1. Before essential news events such as a general election, do not take new trades

2. Always close your position prior to preserved influential news events Never gamble with your hard-earned gains.

3. Make sure to constrict the stop loss when you are trading. This is because in some instances of high market volatility, stops loss order may fail to halt trade during times market recesses. It may, therefore, be safer to close the existing trade positions before a news event.

4. At all times, wait for approximately an hour news has been released before placing a trade. In many instances, price volatility immediately after the announcement of news can be very erratic and unpredictable leading to costly trade decisions. 

5. Always be on the lookout for important economic information in news releases such as

• GDP (Gross Domestic Product)

• Unemployment Data particularly the US NFP

• CPI (Consumer Price Index) showing the level of inflation

• Interest Rate Decisions

• Central Bank Meetings (FED, ECB, BOE, SNB, BOJ, and RBA)

Conclusion

Forex Trading markets are highly volatile and therefore it’s important for any devoted forex trader. The currencies in the market move in accordance to supply and demand just like the stock market. For instance, when the world requires plenty of dollars, the value of dollars shoots up and vice versa. Other market forces in the forex markets include interest rates levels , emerging economic data  and geopolitical tensions among other factors.

To be a perfect trader in the forex markets, you must practice extensively and come up with winning trading strategies. Additionally, you must be disciplined and exercise self-control to manage your funds effectively. The crucial point to consider when handling your money in Forex trading is at all times to consider the exact amount of funds you are comfortable to risk before placing a trade. This way, you will be able to avoid unnecessary financial problems while still earning from your trade.

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