Forex Trading Basics

According to the 2019 September report of the Bank for International Settlements, forex accounted for more than $5.1 trillion daily trading volume. So, what really is forex trading and how can you take advantage of it? Read on to find out.

What is Forex

Forex is a combination of the words, foreign currency and exchange. It involves the buying and selling of a currency in exchange for another. The forex market is the place where currencies are traded. Buying and selling of currencies are important to people for conducting foreign trade and business.

The unique thing about the forex market is that there is no central marketplace for it. This means that over-the-counter trading is the norm and transactions take place on computer networks all over the world. 

The market is open five and a half days a week, 24 hrs a day, and the major financial centers such as Sydney, Paris, Singapore, Hong Kong, Frankfurt, New York, Zurich, Tokyo, and London are where the currencies are traded. The distribution of these centers along the multiple time zones means that trading begins in Hong Kong and Tokyo as soon as it ends for the day in the U.S. 

A Brief History of Forex

The forex market is quite a new market as compared to other markets, such as the stock market that has its roots a few centuries back. In its most basic sense – of people converting one currency into another – forex has been around ever since civilizations and nations began producing currencies. But, the forex market is truly a modern invention. The value of the currencies floating freely against one another varies and this gave rise to foreign exchange trading and services. 

Various investment and commercial banks are responsible for the bulk of trading in the forex markets. However, many professional and individual investors also utilize speculative opportunities for trading one currency against another. 

How Currency Pairs Work

Before we move on, let us take a look at what are currency pairs and what they signify. The first thing you need to learn is that currencies are always traded in pairs. When you exchange US dollars for British Pound Sterling, two currencies are involved – one in relation to the other. The GBP/USD price, for instance, tells you how many US dollars it will require for you to purchase one pound sterling. 

Specific currency pairs are designated with symbols. U.S. Dollar is USD and British Pound Sterling is GBP, which is why the pound/U.S. dollar pair is given as GBP/USD. There are various common currency symbols that one should be familiar with.

Some of these include:

• EUR – Euro
• AUD – Australian Dollar
• CHF – Swiss franc
• CAD – Canadian Dollar
• NZD – New Zealand Dollar
• JPY – Japanese Yen

Every forex pair will have some market price that is associated with it. It basically tells how much of the second currency is required to buy one unit of the first. For instance, if the price of the GBP/USD pair is 1.28, then it costs 1.28 U.S. Dollars to buy one pound sterling. 

Forex speculation haven

There are various factors that affect the supply and demand for currencies and, hence, create daily volatility in the market. Some of these factors include but are not limited to, economic strength, geopolitical risk, tourism, trade flows, interest rates, etc. Traders are always on the lookout for opportunities to profit from changes that lead to an appreciation or depreciation in one currency’s value in relation to another. 

When one speculates that a currency will weaken is basically the same thing as speculating the other currency in the pair will gain strength, since currencies are always traded in pairs. 

How to Trade Forex

There are many ways to go about trading forex. It can seem quite daunting at first but with a few carefully crafted methods and simulations, you should be able to learn the art of forex trading successfully. Here we mention a few ways that will help you get a grip on the mechanics of trading forex. 

Try Paper Trading

Paper trading is a simulated training exercise that new investors and traders can utilize to practice buying and selling currency pairs without using real money. Think of it like using mock money, or ‘paper’ money to get a hang of forex trading. 

Even though paper trades can be done just by keeping track of the imaginary trading positions, paper trading simulations involve the use of trading software that can give you real-time data. As such, investors and traders get the complete trading facility using paper trading in a simulated environment with actual market conditions. 

Learn Technicals and Fundamentals

Fundamental analysis and technical analysis are the main methods that traders use to evaluate the securities of their trade. Let’s take a look at what they do briefly. 

Fundamental Analysis includes a thorough in-depth study and investigation of the ‘fundamentals’ such as valuation, revenue, growth, financial statements, and various micro and macroeconomic information. Technical Analysis, on the other hand, takes a mathematical route and helps traders look at the markets and speculate depending on the ‘technicals’. These technicals involve trend history, volume, price movement, order flow, resistance levels, and historical support., 

Investors utilize both forms of analysis to help them in their trading decisions. Though the two methods are quite different from each other, they offer valuable insight and forecasts for markets that are hard to predict. 

Use Indicators

Technical Indicators provide a lot of flexibility and freedom to the traders. There are various indicators that can be applied to price action in different ways. Oscillators and support and resistance levels are two of the most common methodologies. They both have their own set of functions and benefits for the forex trader. Some of the best oscillators (technical indicators) are as follows:

• Stochastics
• Relative Strength Index (RSI)
• Moving Average Convergence Divergence (MACD)
• Commodity Channel Index (CCI)
• Parabolic Sar

The support and resistance indicators are as follows:

• Bollinger Bands
• Pivot Points
• Average True Range (ATR)
• Donchian Channels

These are the top indicators that have proved to be the most useful for traders and investors in the forex market. 

Choose a reliable broker

Through brokerage accounts, you can also place bets on the world’s currencies. While choosing a forex broker, you have to figure out your own investment goals and the type of investor that you are. While choosing a reliable broker, you have to consider things such as the level of security provided, transaction fees, and regulation. 

What is Forex EAs and does it make sense to use a trading robot?

Forex Expert Advisor (EA) is also known as ‘forex robots’. It is basically a piece of software that automates certain trading actions, depending on the parameters that are defined by the programmer or trader. 

Using trading robots has immense benefits since the stop-loss and take-profit levels are set as parameters within the EA that enter and exit trades automatically based on limits. Another important benefit is that EA is void of emotions. This way the EA bases its judgment not on knee jerk reactions but limits and predefined strategies. 

The Bottom Line

Learning the essentials about forex trading is quite easy, but finding the trading strategies that lead to profits and successes take much practice and deliberation. It is not only important to learn the ins and outs of forex trading, but also to learn the strategies, the indicators, and the methods by which one can improve one’s trades.