Forex trading is one of the most popular ways of making money today. It provides a platform that allows you to make additional income trading on exchange rates while you get time for other things.
While the thought of making cool money trading from your bedroom may be fun, forex trading can sometimes be tough, especially for beginners. This is usually as a result of unrealistic expectations that are common among beginners.
What you should understand is that forex trading is not a get-rich-quick scheme. Therefore, there are some fundamental aspects you should know and fully understand to become a profitable trader. This article provides a strong knowledge base to make your trading path as seamless as possible.
What is Forex?
Forex (or FX) is a shortened form of the term foreign exchange, and it represents the largest financial market in the world. According to data from the Bank of International Settlements, the forex market accounts for more than 5 trillion US dollars every day in trading, which dwarfs all other financial markets in comparison.
This large daily trading volume in the forex market comes from the large number of market participants, which include governments, central banks, commercial banks, large investments, individual traders, and investors.
What Is Forex Trading?
Forex trading can simply be referred to as the act of buying and selling currencies to make profits. Same with stock traders who lookout to buy cheaper stock and later sell it at a higher price to make profits. Also, forex traders want to purchase a currency at a cheaper rate and sell it thereafter for profit. They can also profit from a fall in price by short-selling the currency.
What Are The Common Forex Terminologies You Should Know
Now you know what forex is and the working system of Forex trading, let us look at some of the fundamental terminologies you will encounter on your way from a beginner to becoming a pro trader.
Pips: A pip is the smallest increase a currency pair can change in value. It represents an exchange rate’s fourth decimal place. Often, in cases like in pairs with Japanese yen (which could be the base or counter currency), a pip is located at the second decimal place. One-tenth of a pip is known as a pipette.
Spread: A spread is the cost of a transaction for opening a position. The spread is basically the difference between the buying and selling price of a currency pair (this is known as the Bid and Ask prices), and this is the fee paid for trading forex.
Position Size: This refers to the size of your trade and represents how much base currency you will like to buy or sell. The standard position size is called a standard lot, which is 100,000 units of the base currency. For example, when you buy one standard lot on the EUR/USD pair, you are buying €100,000 and selling the same amount of dollars. You can also determine how large your position size will be since most brokers offer mini lots (which is 10,000 units of base currency) and micro lots which is (1000 units of base currency).
TP and SL: Two highly important concepts in forex trading are Take Profit and Stop Loss. With a Take Profit order, you lock in profits once price hits a certain level by closing your open position automatically. A Stop Loss order is used to prevent large losses by automatically closing position once the price goes against you by a specified amount. For all your positions, always use Stop Loss orders, or you will eventually blow your account with a single losing position.
Leverage: This concept is quite popular in forex and is one of the main reasons many traders are attracted to Forex trading. Leverage is a loan obtained from your broker, which lets you open a much higher position than allowed by your trading account balance. Leverage is expressed in ratio like 50:1, 100:1, and so on.
Margin: A margin is basically collateral for a loan provided by your broker. When trading on leverage, a small portion of your trading account is allocated as margin for a leveraged position by your broker.
Timeframe: Timeframes represent how much time is incorporated in one bar or candlestick on the chart. It is closely related to price charts of currency pairs. Some timeframe examples are 1-hour, 4-hour, and daily timeframes.
Currencies Traded On Forex
Currencies traded on forex can be categorized in a variety of ways, but we will be focusing on the major currencies and exotics. US dollars, Euro, British pound, Canadian dollar, Swiss franc, New Zealand dollar, Australian dollar, and Japanese yen are the major currencies in the forex market and the most traded in the world. Exotic currencies are the least traded currencies in the forex market. They include Turkish lira, Czech krona, Mexican peso, and Argentina peso, to name a few. These currencies have lesser liquidity than the major currencies.
However, traders can't trade on single currencies, only on currency pairs. Pairs that include the US dollars as either the counter currency or the base are referred to as major pairs. In fact, about 80% of all forex transactions are done in US dollars, which shows how significant the US dollars is in Forex trading. Some examples of major pairs are EUR/USD, USD/JPY, and GBP/USD.
EUR/GBP, AUD/NZD, and GBP/JPY are examples of cross currency pairs. These are currency pair that don't have the USD dollar but includes the other seven major currencies.
What Time Best For Trading Forex?
The Forex market is an over-the-counter market with currencies traded during forex trading sessions, which stretch across all significant timezones.
London, New York, Sydney, and Tokyo session are the most important forex trading sessions. However, the London session has the highest trading volume, next to the New York session.
This implies that traders will always look out for the largest price movements during these trading sessions, particularly when the London and New York session overlap from 1:00 PM to 4:00 PM (GMT+1).
The New York and London overlap is seen as the most effective time of the day. At this time, currency pairs exhibit the largest price swings. This time of the day is always very productive and cost-efficient for day traders and scalpers to place orders.
You Need Forex Training
As a beginner, before you start trading forex, first of all, learn how to analyze the market properly. If you don’t do this, and properly, there is a huge chance that you will amass a large number of losses. To prevent such unpleasant occurrences, learn how to trade and in turn gain some experience. You can conveniently do this when you open a demo trading account.
A demo account allows you to get familiar with the market without risking real money. It can be used to build your trading plan and strategy, test several trading strategies, or to get used to your trading platform’s charting tool.
In addition, you would also benefit from good books about forex, and also join an online trading course which covers the major trading concepts in a concise and user-friendly way.
Use Forex Trading Indicators
You will discover through your training that it can be difficult trading on the forex market. However, you can still join a large number of traders who are able to make profits almost all the time. They do this by using forex trading indicators.
The forex market can act in certain ways under some kind of condition. This behavior repeats itself, which means that certain price patterns will occur time and again. The right forex indicators attempt to recognize such patterns as they form and helps you quickly gain an edge by exploiting that knowledge to predict trends.
Forex trading indicators are used to analyze and predict price changes in the currency market. By using forex indicators, you can make decisions about market entry and exit. Psychological forex indicators enable you to identify market participant sentiment and based on this, attempt to define possible price movements. The oscillators are used to verify the force of the trend or the time when a change in the tendency is to take place.
The best forex currency indicators will be the one that fits your psychology and trading style. Regardless, there is no single Forex best indicator that suits all trader styles. Fortunately, there is a broad variety of forex indicators available today. A good one you can download and start using right away is from ForexProfitWay.
Conclusion
Forex trading is not as tough as it appears. By now you know what forex is and learn some fundamental concepts crucial to get started. However, before opening a real trading account, build yourself with a demo account first, and learn the basic market terminology you will come across with time. Try to concentrate on the most volatile part of the day for now, which is the New York-London session overlap. Finally, use forex trading indicators to analyze price changes on the currency market and to verify the force of the trend.
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