What is Forex Trading?

What-is-forex-trading
Forex Trading

The name Forex is derived from the words for(eign) ex(change). It is often abbreviated FX, and at times referred to as the currency market. FX is a global decentralized market, often referred to as OTC (Over-the-counter) for the trading of currencies. OTC means the currency exchange is done directly between two parties without the supervision of an exchange. FX is the biggest market in the world and this is the most traded market globally, because of its liquidity.

Traders speculate the value of one currency compared to another, in hopes of making a profit. FX in terms of volume is the most traded followed by the Credit Market (Bond Market or Debt market). The market determines the foreign exchange rate, a comparison of two currencies. There are a number of big companies participating in this market, but the largest participants are the big international banks.

Forex is always traded in pairs, an example would be with a EUR/USD – in this case, EUR is the base currency. Always keep in mind that the first currency that appears on a pair is the base currency, and the second currency is the term currency often referred to as the quote currency.

When trading, remember that the base currency is worth 1 (one), and one unit of the base currency is worth the quoted price on the term currency. Traders either GO LONG (BUY) or GO SHORT (SELL).

BULLISH VS BEARISH

In Forex, there is always a buyer or a seller – with the EUR/USD example, if the trader believes the EUR is going to be stronger in currency value compared to the US Dollar, The trader may buy the euro, in this case, the euro is bullish whereas the US Dollar is bearish.

However, if you believe the euro will weaken against the US Dollar – the trader may sell the euros, in this case, the euro is bearish whereas the US dollar is bullish.

It is important to understand that whether you buying or selling, the action that is taken to enter a trade always applies to the base currency. When you sell EUR/USD – you selling euros and buying US Dollars, when you buy EUR/USD, you buying euros and selling US Dollars.

The Forex Market

Bonds and Stock markets around the world have a daily volume of billions in dollars, but the forex market has a volume of over US$4 trillion and thus making it the biggest in the financial market. Forex is open 24 hours a day and 5 days a week, however, it is apparent that, at 5 pm ET on Sunday Evening, the market opens in the Pacific (Japan, Australia, New Zealand, and other Asian Countries), as they close, the Middle East and Europe opens, in the mid-session of Europe, American financial markets open. The opening and closing of the market around the world provide around the clock access to traders.

You can trade any currency when it’s convenient for you – any time of the day when the market is open. However, when it comes to trading types of currency pairs, it will depend on what your broker offers.
As many currency pairs, we have, newbies are advised to stick to the most popular traded currencies.

The currency codes are always identified as 3 letters with an exception of euro as it is used in multiple countries of the European Union. The first 2 letters represent the Country and the last letter is the name of the currency, for example, ZAR. ZA – South Africa, R – Rand.

BUYING AND SELLING

A trader buys currency in hopes that it value strengthens compared to another currency that you are selling when you sell, you hope the currency you selling loses its value compared to the currency you bought,

Don’t get any confused. As I said before, any action taken on a pair, whether you buying or selling, it applies to the base currency (Which is the first currency that appears on a pair, e.g EUR/USD) – Thus when you buy EUR/USD, you sell USD, when you sell EUR/USD you buy USD.

Taking a step ahead

Now that you feel comfortable with forex it is always best to dwell a bit deeper to understand the depth concept of forex trading. There are a lot of risks involved in forex trading and hence it’s best to understand what you risk, what you doing, and what is the purpose of my doing.

You need to understand terms used in forex, the grasp the basics of trading. Understand LOT sizes, leverage, and pips.

In forex, the currency pairs’ prices are usually displayed with 4 (four) decimal point’s, and some display 2 (two) decimal points, such as the Japanese Yen.

Note that, in Forex, your earned profit or losses are calculated through points or known as pips. Pips are calculated by looking at the very last 2 (two) digits behind the decimal.  a LOT is a standard unit of measurement, and one standard lot is 100 000 units. however, you do not need to have $100 000 to trade 1 standard lot because forex is leveraged.

Leverage is one of the benefits of the market, leverage is usually in ratios, and get up to 500:1 if not more. This means you can control $500 000 worth of currency with a small amount of $1000. You invest $1000 while your broker invests $500 000 for you, it’s that simple – and the higher the leverage the more profit you will earn, understanding the risks of leverage is also important because the higher the leverage – the higher the risk.

MAKING YOUR FIRST TRADE

Forex Trading is all about exchanging the value of one currency for the other foreign currency. You buy one currency while selling another or sell one currency while buying another. You need to choose a currency pair that you want to trade. There are 1000s of currency pairs to choose from depending on your dealer – the choice is all yours.

You need to understand the importance of analyzing the market, either through research and/or using tools (such as Indicators) that can easily be accessed in MT4 and/or MT5 (Read more about these trading platforms)

You will have to understand how to read quotes in forex. There will always be a buy price and a selling price, and the difference between the two is called a spread. This is used by a dealer to charge you for making a trade – these spreads differ among dealers.

You can speculate the currency pair on up and down movements and still make a profit it’s in your favor. A buy position is placed when you believe the base currency will strengthen (BULLISH) and a sell position is placed when you believe the base currency will weaken(BEARISH).

Forex trades are extremely risky, you need to know how to handle the risks and the importance of making a trading plan.

In Forex, you need to learn how to protect your position with a stop loss and other order types. The market needs to be analyzed (see Technical Analysis and Fundamental Analysis) to minimize the risks thereof.

AUTHOR’S NOTES

Forex is not a game, it is not a get rich quick scheme – it is a professional field that needs you to be updated with the world’s economy. I would suggest you follow an Economic Calendar, learn and see how news announcements impact the currency pair movements.

It is also important to have a demo account as a beginner to learn risk-free. The number one factor for a trader is to profit, and once you’ve found a strategy that works for you, stick to it and make money with forex.
Forex isn’t guesswork, even in speculation, there’s work-hard involved behind before placing a trade like mentioned before. Understand the concept of Supply-Demand, get involved in forex seminars by brokers – interact with traders, seek advice and remember not to be scammed. Be careful who you trust your money with.

There are a lot of fake testimonials online – do not fall for them, make a thorough research about people you trust with your money. That is why, it is so important to choose a trustworthy broker – as the number one priority before you can think of anything else.

Let’s trade – and I’ll keep you informed.

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Founder and Writer of iBusiness Blog, (born June 28), a South African aspiring Actor and Blogger. A native of Ventersdorp, Mogopa Village (SA), often referred to as Zack. Let's talk iBusiness.
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    Updated on October 22, 2019

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