Forex Trading 101
Everything you should know about Forex Trading
If you have ever wondered what Forex Exchange is, and how you can make some extra dough from it, then you have come to the right place. This article will give you the basic information that will get you started in your Forex trading journey.
What is Forex Trading?
The Forex Exchange Market (Forex, FX, or Currency Market) is a world financial market that trades on the world’s currencies. It involves buying, selling or exchanging currencies at a set price. It is by far the largest market in the world with a turnover of over $5 trillion per day!
Traders in this market usually include International corporations, banks, governments, insurance companies, professional traders, and amateur retail traders.
Characteristics of the Forex Market
- It is the most liquid financial market in the world with huge trading volumes
- It operates 24 hours a day from Monday to Friday
- There are various factors that affect the exchange rate
- You are able to buy and sell, therefore, betting on the rise and fall of prices
- There are various players involved in the Forex Market including International corporations, banks, governments, insurance companies, professional traders, and amateur retail traders.
- There is a low margin of profit compared to other markets with fixed income.
What is a currency pair?
Currencies in the Forex market are traded in pairs. This means that if you want to buy a certain currency, they will exchange it with another currency. For instance, one of the common currency pairs is EUR/USD. EUR/USD pair means that you trade the Euro against the US-Dollar.
The currency that appears first (in this instance the EUR) is known as the base currency, while the second currency (USD) is the quote currency. Therefore, the EUR/USD means that you are using the US-Dollar to buy the EURO. A currency pair helps to determine how much quote currency is needed to buy one base currency.
Bid and Ask Price
In Forex trading, currency transactions involve a BID and an ASK price. A bid refers to the price that the base currency is being sold, and quote currency being bought, whereas an ask refers to the price at which the base currency is being bought and the quote currency being sold. The ask price will always be more than the bid price. That difference between the two prices is called a spread.
What determines the Forex Prices?
Forex spot rate is determined by the supply and demand of a currency. Banks around the world are always buying and selling different currencies to suit their customers’ needs for trade or to exchange one currency to another.
For instance, a bank in American receives a deposit from a bank in Great Britain on behalf of their client, who needs to buy an item in America. The British buyer who has pounds will have to pay the US supplier in dollars. Therefore, the British buyer will request his bank to exchange the pounds into US dollars and transfer the money to the American supplier. If the bank does not have any supply of dollars, it will buy them from another bank and sell the pounds.
The more banks are selling and buying the US-dollars, the more it will create a supply and demand chain for the US-dollar. Therefore, if the demand for the dollar rises, then it will appreciate against other currencies in the market, but, if the demand drops, the dollar will depreciate against the other currencies in the market.
Major Currency Pairs in the Forex Market
In forex trading, currencies that are most stable in terms of political and economic conditions are usually in demand. Due to the fact that the US economy is the strongest, then the US-Dollar is normally considered as the base currency for quotes, and it is also the most traded currency in the world.
The most actively traded pairs are known as major Forex pairs and are usually cheaper to trade and more stable. The table below shows some of the major currency pairs in the market.
|USD/JPY||US-Dollar/ Japanese Yen||USA, Japan|
|GBP/USD||British Pound/ US-Dollar||Great Britain, USA|
|USD/CAD||US-Dollar/Canadian Dollar||USA, Canada|
|AUD/USD||Australian Dollar/US-Dollar||Australia, USA|
|USD/CHF||US-Dollar/Swiss Franc||USA, Switzerland|
The minor forex pairs, often known as exotics, are the less traded currencies and are usually unstable and expensive to trade. These include the Norwegian NOK, the Turkish TRY, Iraqi Dinari, Uruguay Peso, and others.
Is Forex Trading Risky?
Yes. However, you can use various tools and techniques to help you reduce the risk. These are market analysis, trading systems, Forex robots, and others.
It is, however, better to avoid high risks in Forex by educating yourself about the Forex market before you start to trade real money. Also, experts highly recommend that you use a demo account for a while before risking your money.
Choosing a good Forex Broker
There are quite a number of online Forex brokers available in the market. They include some good brokers and some not so good ones. Getting a good broker is an important step to joining the forex market. A broker provides you with the prices of various currency pairs and also facilitates your trades. Before you sign up with any particular broker, take your time to read the numerous reviews available online. Check out our comprehensive review for the different online forex brokers in the market.
There are various characteristics that you should look out for in a broker including their website, customer support, trading platform, platform’s features, trading spreads, etc. It is very important that you exercise due diligence to avoid falling victim to various online Forex scams. You can start by reading our detailed Forex brokers review.
Forex trading is an excellent way to make some real cash at the side. It is easy to get started and you don’t have to break the bank to start trading; you can trade with small accounts which don’t require much.
Take advantage of the demo accounts which are offered by most online Forex broker to practice and perfect your trading skills before investing your own money.