The Forex Market (also referred to as the ‘FX ’, ‘Foreign exchange’ or ‘Foreign currency’ market) is one of the largest, most liquid decentralized markets in the world with a daily turnover that exceeds $5 trillion. It’s the marketplace where banks, businesses, companies and investors come to exchange and speculate on currencies. In our brand new post you will find out how to trade forex successfully.
How forex trading works
The process of trading forex consists of you buying a currency by selling another currency. Basically, it’s the speculation on the price of one currency against another. The one that you sell or spend is called the base currency, while the one that you purchase is known as the quote currency; together they form a currency pair.
So, when you trade forex, there are two activities involved: selling and buying. The selling price is known as the bid, while the buy price is the offer. The difference between the bid and the offer is called the spread which represents the cost of the trade.
Types of currency pairs
There are three types of currency pairs: major, minor and exotic.
Major currency pairs are the most frequently traded and because of their huge liquidity, they usually have low spreads and brokerage costs. Their main characteristic is the presence of the US dollar as one of the currencies in all the pairs. This category includes:
- EUD/USD (Euro/US dollar);
- USD/JPY (US dollar/Japanese yen);
- GBP/USD (British pound/US dollar);
- USD/CHF (US dollar/Swiss franc);
- USD/CAD (US dollar/Canadian dollar);
- AUD/USD (Australian dollar/US dollar);
- NZD/USD (New Zealand dollar/US dollar).
Minor currency pairs, also known as crosses, do not include the US dollar as one part of the currency pair. The most-traded crosses are the ones that have the Euro, British pound or Yen on one side. This category includes:
- EUR/GBP (Euro/British pound);
- EUR/AUD (Euro/Australian dollar);
- GBP/JPY (British pound/Japanese yen);
- CHF/JPY (Swiss franc/Japanese yen);
- NZD/JPY (New Zealand dollar/Japanese yen);
- GBP/CAD (British pound/Canadian dollar).
Exotic currency pairs are not as traded as majors or crosses. The fact that they are less liquid makes their spreads higher. These pairs are usually formed from a major currency and a … well, an exotic currency from a country with a developing economy. This category includes:
- EUR/TRY (Euro/Turkish lira);
- JPY/NOK (Japanese yen/Norwegian krone);
- USD/HKD (US dollar/Hong Kong dollar);
- NZD/SGD (New Zealand dollar/Singapore dollar);
- GBP/ZAR (British pound/South African rand);
- AUD/MXN (Australian dollar/Mexican peso).
Picking the right currency pair that suits your level of trading experience is crucial. If you’re a beginner, start with the most-widely traded currencies, in order to find lower spreads.
Types of orders
An order works as an instruction that you give to the broker to open or close a position at some point in the future when prices reach a pre-specified level. They have a big influence on your trades, as they minimize your loss risks and maximize your chances of gaining profit.
A limit order is a free instruction you can give to the broker to close a trade when the price is better than the current market level. The order can only be filled if the price reaches a previously settled limit. In case the price moves away from the limit price before the order has been filled, other trading opportunities can be missed.
A stop-loss order is also a free instruction placed with the broker that exits the trade once the specified price is reached. This order is designed to limit an investor’s loss in one trade.
A trailing order is a stop order that allows you to gain better control of your trade by adjusting the stop price at a fixed percent below or above the market’s price of a stock. This order is also known as profit protecting stop.
A market order is an order given to your broker to buy or sell at the best available price.
Apart from these standard orders, there are also advanced conditional orders which can complete even the most complex trading strategies. They are composed of multiple variables, like volume, percentage, price or time and can be combined in various ways. The most used are one-cancels-other (OCO) when multiple conditional orders are placed and other orders are canceled once one has been executed and order-sends-order (OCO) when a placement of an order sends other orders.
Types of traders
The forex market is open 24 hours a day – this means that currency prices never sleep and you can trade whenever you want. There are 4 main categories of traders: scalpers, day traders, swing traders and position traders.
- The scalpers are the impatient ones. They usually hold their trades for a few seconds or minutes.
- Day traders do not hold their trades overnight and they usually place the trade at the beginning of the day.
- Swing traders don’t have time to monitor charts all day long, so they keep trades for several days at a time.
- Position traders are the ones who probably put the biggest efforts in analyzing the market. They hold on to trades for weeks, months or even years.
Other fundamental forex trading terms
Understanding the basic forex terminology is essential, as you’ll bump into all kinds of terms while trading. Apart from what we’ve already covered above, here are other important terms:
- The exchange rate tells you how much you will spend on a currency to purchase the quote currency.
- A pip helps you measure the change in value between two currencies and it is the smallest unit of price for any currency.
- A pipette or a fractional pip represents one-tenth of a pip.
- The lot represents the standard number of units in a security that you are buying or selling.
- The leverage enables you to use a much bigger capital than the one in your account. It depends on the forex broker you choose!
- A margin represents a percentage of the full amount of the position. It can be calculated by multiplying the size of the trade by the margin percentage.
Keep in mind that choosing the right broker is the first and most important step for your trades. Make sure it provides the entire standard trading tools (Economic calendar, advanced charts, graphs and indicators etc.), professional and flexible customer support services, and other advantages that fit your level of experience.
On the other hand, it’s your duty as a trader to stay informed and check out as many news websites as you can. Be aware of what’s happening across the globe because something that affects the value of currencies happens on a daily basis and it’s definitely going to have an impact on your trades.