Table of Contents
What is forex?
What is Forex? Forex in full is foreign exchange. Majority prefer to shorten it as just forex or others just FX and from the name foreign exchange, Forex is defined as exchanging one currency to another.
If you have been on a holiday in a different country and had to exchange from your country’s currency to the currency of that country that you have visited, you have ever participated in Forex or foreign exchange because from the definition we did say its the exchange from one currency to another.
another example can be if you do purchase products or services from a different country and you have to pay for the products or services using a different currency other than the currency of the country that you live or operate in, that’s is also participating in forex.
Forex impacts our day to day lives as it cuts across most activities that we engage in like purchasing ,travels, food, government proceedings, etc. thus this makes it to be the largest and most liquid final market as it involves trillions daily
Open an account with one of these brokers that are regulated and award winning, CLICK HERE
What is the forex market?
The forex market is a global decentralized market where currencies of different countries are exchanged. Its not like other types of markets which we shall list later like the stock exchange market where there is a centralized entity responsible for the occurring.
forex is conducted through a network of banks in major financial centers world wide and this is done over the counter[OTC].forex prices fluctuate rapidly can be per second or even per micro second with computerized systems facilitating the accuracy in the rates in the exchanges and also it is open 24/5 only excluding the weekends of Saturday and Sunday.
The reason why the forex market is open almost 24/5 is because the different financial market centers are in different countries in different parts of the world causing interlocking in operating hours or difference in opening and closing of operational banking hours and this is illustrated below. In the illustration, we use GMT+3time zone so you can adjust to your location time zone
Also note that due to summer and winter there is usually a variation so ,both have been included
Below is sessions during winter
How does the forex trading work?
Just like any other business venture, forex involves two parties of which one is the buying party and the other is the selling party hence the saying that for a buyer there should be a seller.so in this case one party is buying a currency like USD while the other is selling the USD
Each currency has its own ISO allocated code or symbol that represents it, for example the euro currency that is used in the euro zone is represented by the symbol EUR, Canadian dollar is represented by ISO symbol of CAD, Japanese’s yen is represented by JPY, British pound by GBP, etc.
Also its important to note that for a trader, you will not trade these currencies independently, lets say you trade EUR alone, no. You will have to trade them in pairs, thats why you will notice that they will be quoted or listed in pairs resulting into what we call a currency pair for example EURUSD,GBPUSD,USDJPY,ETC
forex pairs
As earlier stated that you will not trade these currencies independently, You will have to trade them in pairs. this means that you will simultaneously be buying one currency while selling the other, just like when you have EURO and you want USD ,you give in your EUORO and are given the USD in exchange for your EURO
So, what is a forex pair?, a forex pair is a combination of two currencies that are traded against each other. there are very many pairs to choose from when trading though the most common ones include EURUSD, GBPUSD, AUDUSD, USDJPY, etc.
Types of forex pairs
There are three main types of forex pairs as listed and defined below
1.majors forex pairs
These are pairs that include the American dollar i.e. USD as either their a base currency or quote currency
2.minors/Cross forex pairs
These are pairs that do not include the USD in them either as a base or quote currency
3.exotic forex pairs
These are forex pairs that include atleast one major currency like the EUR,USD,GBP,etc and one from an emerging nation like southafrican rand i,e, zar,mexican peso i.e. mxn,etc
Forex terminologies?
pip,
A pip is the smallest change in price of a currency pair, we already mentioned earlier that forex is traded in pairs ,so each pair will have price.Its also important to note that the price can change from fourth decimal or second decimal depending on the currencies involved in the pair.
Most have price changing on the fourth decimal but pairs that have JPY in them do have price changing on the second decimal. Some brokers will write most the pairs to four decimals while other could do five decimals and the JPY pairs they do three decimals instead of two.
Here you can either ignore the fifth and the third decimals or calculate the change of the fifth and third in JPY pairs as pipette not pips
Pip movement on JPY pairs example below
lot,
A lot in forex is a unit of measurement in forex trading. Since forex involves buying and selling ,there is quantity involved i.e. a lot is like the quantity in trading. The quantities include Standard (100,000 units), Mini (10,000 units), Micro (1,000 units), and Nano (100 units).
Base currency and quote currency
The first currency in a pair represents the base currency while the second currency in the pair represents the quote currency. Forex market is always quoted in pairs and usually the price stated is how much of the quote currency it costs to buy one unit of the base currency
Spread,
This is the difference between the bid and ask prices. Bid and ask prices are 2 prices that you will see displayed by brokers on your trading platforms
leverage,
Usually you are given choices to select the leverage you want to use while trading just as you register with a broker, so lets say you select a leverage of 1:500, this means that with capital of 100 dollars, you can open positions or trade to an amount of 50,000 dollars. In simple terms you multiple leverage selected by the capital you have,
therefore leverage is like an extended loan that is offered by the brokers to traders to be able to trade with higher capital and size compared to what they actually have .
margin,
This is the amount of money that you as a trader requires to open a position.
margin level,
This is a ratio and is always expressed in percentage form, and its the the ratio of your equity to your used margin. You require this percentage to always be high, because when it lowers leads you closer to a margin call
position,
When you place a trade by clicking buy or sell, the out come is termed as a position, in this case it is an open position. You can also have closed positions when you close your trades that you had opened whether in loss or profit
bid and ask,
These are prices that are displayed by the brokers, there are usually 2 one on the left as the first price which can also be considered the buying price while the other is on the right as the second price considered at there price the broker is willing to sell at
CFDs[contract for difference],
this is when traders speculate on prices of an underlying asset without actually owning the asset
Long,
buying an asset with expectation it will increase in value
Short,
selling an asset with expectation that it will decrease in value
main forex participants?
There are three categories of participants in market that is commercials, non commercials and non reportable
Non reportable;
under this category we have traders like you and me who really do not have impact in the market
Commercials;
This category is made of majorly producers and manufacturers who are in the market to hedge their interests in their various industries
Non commercials;
This category does include asset management firms, commercial banks, hedge funds, etc.
What moves the forex markets?
Just like any activity that involves transactions or market, the forex market is highly dependent on the forces of demand and supply. Under forces of demand and supply, the following directly affect and move the forex market
Economic news,
this is also commonly known as fundamental news and is a major catalyst or contributes a lot to both short term and long term movements of prices in the forex market. We said that forex is traded in pairs earlier so each pair is made up of a currency of a country or region ,so fundamental or any release /report that comes from that country or region affects the currency Some of the news that real impact movement in the forex market include GDP, interest rate, employment rate, CPI, etc.
Market sentiments,
This can also be termed as sentimental analysis because this fully focuses on views or how the different market participants and those involved in trading do think will happen i.e. Either it will go up/be bullish/long , it will go down/be bearish/short or be indecisive/range/consolidate
Central banks,
Since forex pairs contain a currency from a country or region ,the central bank of that country or region has a huge say/impact through its decisions on how the currency will perform through how it manages the exchange rates of the particular currency in relation to other currencies. Most notable from the central banks is how they control economy by hiking or cutting interest rates, one of the ways to manage the economy
The advantages and disadvantages of trading the forex market
Forex being the largest market being traded world wide ,it will have many advantages and disadvantages. Lets start with the advantages
advantages
Leverage, before leverage was introduced in forex trading, only few individuals would be able to afford to trade in the financial markets ,but now due to leverage ,one can be able to open trades even with little funds
High liquidity due to very many participants, meaning you can easily buy and sell off easily without delays since its highly liquid
Open 24/5,the forex market is open for 24 hours and 5 days in a week due to the different interlocking timeframes of different global markets
Its easy to buy and sell in the forex market, where you do not need to sign documentation, or look around to be able to transact
Its also cheap to start trading as it requires less cost due to already existing cushion of leverage provided by the brokers
No hidden charges, brokers do benefit by charging spreads and commission only, there no other costs are involved making it easy to engage in
Disadvantages
Leverage [double edge sword],this can work for you or against you as a trader, in what way, it makes the profits or losses much bigger. that’s why it is referred to as a double edged sword because it can work both ways
Volatility, by nature the forex market is very volatile as many key players are involved. This can also be caused by the reports and fundamentals that fuel moves in the market
Requires time to learn, without out knowledge there are risks of losing capital
How to become a forex trader/how to start forex trading
Forex trading or being a forex trade is highly paying though comes with huge risks and input of work.it takes focus and commitment for one to be able to master the game and be consistent.one needs to acquire proper knowledge before being involved in the forex markets, follow the following steps
- Acquire knowledge, learn much about the markets from basics to structure and fundamentals not forgetting the basics
- Choose a broker, Even at this stage do not go live, be on demo first as you practice the knowledge you got. Choose a broker that is regulated, has a number of platforms to choose from to use for trading proper customer care and above all efficient payment options and methods
Below are some of the brokers you may consider
3.Prepare your rules and get used to them ,these include entry rules, exit ,risk management and pairs or securities that you would like to trade.
Now that you understand what is forex, create a practice account/DEMO account with any of the following brokers that do meet standards below