Forex (FX) is known as Foreign Exchange or Currency Trading.
Foreign exchange is the process of changing one currency into another for various purpose, usually for business, trading, or tourism. FX is one of the most actively traded markets in the world, with individuals, companies and banks carrying out average daily turnover of $7.6 trillion According to a 2022 report from the Bank for International Settlements.
The FX market is open 24hrs 5days a week with most important world trading center being located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Paris and Sydney. Called Trading Sessions, discussed on the future topic
Forex Trading?
Is similar to the currency exchange you may do while traveling overseas but the only difference is that Forex Trading require trading of currencies from different countries into pairs (sell or buy a currency pair) and the exchange rate constantly fluctuates based on supply and demand.
Forex trading is conducted over the counter (OTC), meaning there’s no physical exchange address, this means that all trading occurs via computer networks among traders worldwide rather than on one centralized exchange.
Who trades Forex?
Forex trading was very difficult for individual investors until it made its way onto the internet. Most currency traders were large multinational corporations, hedge funds and Banks because forex trading required a lot of capital. On the rise of the internet online forex brokers are now able to offer trading accounts to individuals and retail traders
Commercials banks are one of the most important participants in the foreign exchange market. They trade on their own behalf, but also provide a channel for their clients to participate in the market. A few Examples of banks include Citi, JPMorgan, UBS, Barclays, Deutsche Bank, Goldman Sachs, HSBC, and Bank of America.
Hedge funds are the most prominent members of the group of speculators and can handle huge positions in the market and are important participants.
Just like companies, national governments participate in the forex market for their operations, international trade payments, and handling their foreign exchange reserves. Central banks intervene in the market when their currency becomes a problem for the domestic economy, by either being too strong or too weak. This applies to all exchange-rate regimes – the floating, pegged and fixed.
Governments and central banks, such as the European Central Bank, the Bank of England, and the Federal Reserve, are regularly involved in the forex market too.
This group includes various corporations, like multinational firms or exporters/importers. For instance, Apple must first exchange its U.S. dollars for the Japanese yen when purchasing electronic parts from Japan for its products.
Individual traders who usually access the market through broker. Given the small amount of money needed to open a trading account, retail traders have access to utilize leverage.
Electronic Liquidity Providers (ELPs) are specialized firms that have grown to be major players in the foreign exchange (FX) market by using advanced technology and trading algorithms to provide liquidity to market participants.
Brokerage firms that allow retail forex traders to access the FX market. They can be market makers, STP brokers or an ECN. Full details about broker on next topic.
A forex pair is a combination of two currency that are traded against each other. Example Currency pair EUR/USD Means Euro against US-Dollar.
There are more than 180 currencies worldwide the U.S. dollar is involved in a majority of forex trading. Some of most popular pair include the euro against the US dollar (EUR/USD), the US dollar against the Japanese yen (USD/JPY) and the British pound against the US dollar (GBP/USD).
There are three TYPES of currency pairs
Major pairs are the most widely traded currencies in the foreign exchange market that include the US dollar (USD), which currently holds the position of the largest economy in the world. There are seven major currency pair as listed below
Minor or crosses currency pairs, are pairs that do not include the U.S. dollar, but do include at least one of the world's other three major currencies. the Japanese yen, British pound and the euro
Japanese Yen Crosses
British Pound Crosses
Euro Crosses
The most traded minor pairs
Exotic currency pairs are the third most traded in the forex market. These pair include the combination of one currency from seven major currencies and a currency from a developing or emerging economy such as Brazil, Mexico, Chile, Turkey, Hungary, Singapore, Sweden, etc.
Understand that these pairs aren’t as heavily traded as the “majors” or “crosses pair,” so the transaction costs associated with trading these pairs are usually bigger.
Some of Exotic Currency Pair below
The base currency is the first currency in any currency pair is also known as the transaction currency.
The quote currency is the second currency in any currency pair known as the counter currency.
Quote currency show many units of the quote currency they will need to exchange for one unit of base currency.
Example; EURUSD pair
EUR is base currency and USD is quote currency
Here is a list of basic terms you will often hear within the FX trading industry:
PIP is an acronym for percentage in point or price interest point. It represents the change in value between two currencies. A pip it is the last 4 decimal place in the currency price
PIPETTE are fractional pips. It is 1/10 of a pip, usually calculated using the 5th decimal (in JPY pairs, it is calculated using the 3rd decimal).
BID AND ASK PRICE
Bid - The price at which the market maker/broker is willing to buy the base currency in exchange for the counter currency. The value of the underlying currency pair affects the Bid price.
Ask - The price at which the market maker/broker is willing to sell the base currency in exchange for the counter currency. It is also based on the value of the underlying currency pair.
Here is a brief explanation
Leverage Is the ratio applied to the margin amount to establish how big a trade is going to be placed. Leverage is a way for traders to borrow capital to gain a larger exposure to the FX market. With a limited amount of capital, they can control a larger trade size. This could lead to bigger profits and losses as they are based on the full value of the position.
Leverage is written into ratio starting from 1:1, 1:50, 1:1000 it depends broker to broker, some broker offers maximum leverage up to 1:500 other offer up to 1:2000 so you choose the leverage according to you are needs. Choose the leverage wisely to reduce the risk, the more the leverage more risk
NOTE; Actual required margin would change based on currency pair
| LEVAREGE | AMOUT TRADED | REQUIRED MARGIN (CAPITAL) |
| 1:1 | 100,000 | $100,000 |
| 1:2 | 100,000 | $50,000 |
| 1:50 | 100,000 | $2,000 |
| 1:100 | 100,000 | $1,000 |
| 1:200 | 100,000 | $500 |
| 1:400 | 100,000 | $250 |
LOT SIZE A lot in forex trading is a standardized unit of measurement used to describe the volume or size of a particular trade. A lot represents the amount of a currency bought or sold in a trade. Foreign exchange traders tend to offer different lot sizes that can be used to enter the market.
Important to understand lot size in forex:
Account management. Forex brokers typically require a minimum deposit to open an account, and the lot sizes available may vary depending on the account type. Understanding lot sizes could help traders determine which account type is best suited to their trading style and account size.
Trading strategies. Different trading strategies may require different lot sizes. For example, a day trading strategy that involves opening and closing trades within one day may consider smaller lot sizes, while a long-term strategy may involve larger lot sizes. Understanding lot sizes could help traders choose a lot size that aligns with their trading strategy.
TYPES OF LOT SIZE
| LOTSIZE | UNIT | VOLUME/LOT | PROFIT IN $ PER ONE PIP |
| STANDARD | 100,000 | 1 | $10.00 |
| MIN LOT | 10,000 | 0.1 | $1.00 |
| MICRO LOT | 1,000 | 0.01 | $0.10 |
| NANO LOT | 100 | 0.001 | $0.01 |
SHORT AND LONG You’ve probably heard about going long or short in a currency pair. SHORT Means SELL and LONG means BUY
Traders will go Long when they expect that the price of the currency pair will rise and they go short when they expect that the price will fall.
BEAR/BEARISH MARKET A bear is a trader who believes that prices will fall or sell and bearish market is when the price is in a downtrend, marked by lower highs and lower lows.
BULL/BULLISH MARKET a bull refers to an investor/trader who believes that the price of a market will rise or buy and Bullish market is when the price is in uptrend momentum market by higher highs and higher lows.
SWAP Is the interest that you pay for a trade that you held overnight in forex market.
There are two types of swaps
Swap long interest charges for keeping long positions open overnight and Swap short interest charges for keeping short positions open overnight
POSITION means single opened trade.
What is difference between trade and position?
If you only have one trade open, position and trade are the same. However, if you have various trades open simultaneously, a position will be made up by the combination of all these trades.
MARKET ORDER is an order to buy or sell a currency pair at the market's best available price through broker’s trading platform.
Types of Order
Two types of pending order
What is Buy Limit? order to buy at or below a specified price
What is Sell Limit? order to sell at a specified price or above
Once the market reaches the “limit price” the order is triggered and executed immediately
What is Buy Stop? Order to buy at a price above the market price, and it is triggered when the market price touches or goes through the Buy Stop price
What is Sell Stop? Order to Sell at a price below the market price and it is triggered when the market price reached the sell stop price.
STOP LOSS ORDER - A market order used to close a losing position once it has reached a certain level.
CLOSE AT PROFIT ORDER( take profit) - A market order used to close a profitable position once it reaches a certain level.
META TRADER 4 (MT4) Is a platform for Forex traders to trade a wide range of assets. It is the gateway between you and the trading markets. it gives traders the ability to conduct a wide range of trading activities, including charting and technical analysis, monitoring the markets, and automating trades through Expert Advisors.
The MT4 can be downloaded for free and provides an effective tool for trading forex, futures markets and CFDs online, both from a PC as well as from tablets and smartphones. CLICK link to download for free https://www.metatrader4.com/en
Is somebody who buys and sells currencies in the global foreign exchange market. Forex traders can be full-time professional traders who earn a living trading forex or part-time investors dabbling in forex for a side-income.
Types of Forex Trader OR Trading styles
SCALPER Scalpers are short-term traders focusing on holding positions for timeframes as small as a few seconds to a few minutes. Scalping is a style of trading that aims to profit from small price changes in financial markets. Instead of buying and holding positions over a long period of time, scalpers make fast profits off a high volume of shorter trades, often lasting just seconds or minutes.
DAY TRADER An individual who opens and closes all of his or her trades before the end of the trading day, no open positions are maintained overnight. Day traders aim to utilize intraday market price action by executing multiple long and short trades, looking to capitalize on temporary supply and demand inefficiencies in market pricing. Day Trading is a strategy or style used by Day Trader.
SWING TRADER Are trader who hold onto trades for longer than a single day, and up to perhaps a couple of weeks. Over this short timeframe, swing traders will typically favor technical analysis over fundamentals, although they should still be attuned to the news events that can trigger volatility.
POSITION TRADER Are trader who hold trades for longer periods of time, from several weeks to years. As the longest holding period among trading styles, position traders are less interested in an asset’s short-term price fluctuations and more concerned, naturally, with the performance over more sustained timeframes. Position trading is a strategy wherein a trading position is held for a long period (generally weeks or months) to achieve profit.
ALGORITHMIC TRADER refers to trader who use automated trading wherein investors and traders enter and exit trades as and when the criteria match as per the computerized instructions. The systems are coded with instructions to undertake trades automatically without human intervention. It saves a lot of time for investors who can take more and more trades due to their quick execution time.
EVENT DRIVEN TRADER Traders examines the social, political, and economic indicators that might affect the price and performance of a financial asset before making investment decisions. They’ll seek to benefit from spikes caused by political or economic events, such as Non-Farm Payroll data, GDP, employment figures, and elections.
TREND TRADER Are traders who looks for trends in the movement of an asset, and builds a trading strategy around that analysis, known as a trend following strategy. If a trend trader believes a price is in an upward trend, they will buy. Similarly, if they spot a downward trend, they would sell.
In Forex, time is money, literally. The forex market is open 24 hours a day during weekdays, but this does not necessarily mean that you should trade forex assets at any time, or all day. Volatility varies during different times of the day because of different forex trading sessions. To establish the best times to trade as well as the best forex assets to trade, it is important to understand the different forex trading sessions.
When is the Best Time to Trade Forex?
The best time to trade will depend on you – the trader. Your availability, your time zone, or your trading style. For instance, if you want to target just a few pips in a low volatile environment, the Asian trading session will suit your well. But if you want high volatility and big price movements, it is best to trade during the London session or the early hours of the New York session. Your time zone and availability will also determine the best assets for you to trade.
Example, during the London session you are better trade EUR and GBP pairs. And New York session better trade USD pairs for better volatile.
The forex market can be broken up into four major trading sessions
AREA | OPENING (GMT +3) | CLOSING (GMT +3) |
London session | 10:00 AM | 6:00 PM |
Tokyo session | 3:00 AM | 12:00 NOON |
New York session | 3:00 PM | 00:00 MIDNIGHT |
Sydney session | 3:00 AM | 10:00 AM |
Frankfurt session | 9:00 AM | 5:00 PM |
There are generally four main trading sessions: the Sydney session, Tokyo session, London Session, and the New York session. Both the Sydney and Tokyo sessions are customarily referred to as Asian sessions. This is why Forex is usually referred to as the 3-session market: Asian, London, and New York.
The time frame in forex trading represents the duration or interval of a specific chart that displays price data. Based on the time frame strategy, trading can be long-term, medium-term, and short-term. Chart time frames in the MT4 trading platform are M1, M5, M15, M30,1H, 4H, Daily, Weekly, and Monthly. M1 means one minute, M15 stand for fifteen minutes, M30 stands for thirty minutes, 1H stand for one hour, 4H stand for four hours. Example if you open M30 chart, means each bar or candlestick representing an interval of thirty minutes so every 30 minutes a new candlestick is formed.
Traders use different time frames to analyze and interpret market trends, make trading decisions, and determine the appropriate trade entry and exit points.
The use of time flame to traders