On this page, you’ll find everything you need to know about forex if you’re just a beginner or here to refresh your mind. This beginner’s guide will have it. In due course, you’ll be able to understand what forex is and how the forex market works in depth, with many currency pairs and key market movers.
What is Forex?
The foreign exchange market, known as forex, is an over-the-counter “OTC” that involves the trading of currencies. Forex is usually referred to as trading currency pairs.
What is Forex Trading?
Forex trading, or as some may call it, “FX,” involves trading currency pairs by selling a currency pair while buying another. It stands for foreign exchange as it allows the sale of 2 currency pairs for an agreed price, such as EUR/USD, involving buying the Euro and selling the US dollar.
What is the Forex Market?
The Forex exchange market is a global market for trading currencies. It is the largest financial market in the world, where it settles a market price of one currency against another. E.g., USD against the CHF, JPY, and GBP.
Is Forex Legit, or is it a Scam?
The Forex market is a legitimate foreign exchange market. It’s also the largest financial market in the world by volume of $6.6 trillion, according to a 2019 survey. The forex market includes more than individual retail participants but large banks and institutions. That play both roles of buyers and sellers.
How Does Forex Trading Work?
Geopolitics, economic growth, interest rates, and trade affect currencies’ supply and demand mechanisms. Monetary policy decisions will create high volatility toward currencies. Since they are traded in pairs, there will be a higher demand for one of the pairs.
How Does Forex Affect the Global Economy?
In general, price movements are made up of factors that can fluctuate market prices and increase volatility, such as Market sentiment, which drives currency prices to move based on other positive or negative news. Investors then start to speculate on the direction of price movements.
Central banks announcements or speeches are also a critical factor in moving not just the forex market but the global financial market, for instance when the Federal reserve bank of the United States announces tightening the monetary policy or, in contrast, being more accommodative, there will be a significant trend change of the US dollar, and of course, it will affect other currency pairs. Any major or minor announcements from governments worldwide will also project market moves.
In real news, other information will be reflected in price movements regarding trading. Positive news will encourage investments, so prices will fluctuate in some assets. Negative news can divert investor investments in safe-haven assets.
Another factor is business earnings and forecasts. A pickup in earnings or stronger-than-expected earnings would also create volatility in the markets.
Commonly used terms in forex
- Margin, provide
- Lot, standard lot, mini lot, micro lot
- Leverage
- Financing
- Long vs. short
- And etc.
Occasionally, investors use leverage in forex trading because it’s unlikely that the value of an asset or a currency pair (major currency pair) will dip to zero quickly. It is also easy to get higher leverage in forex pairs because they fluctuate much less than stocks and commodities. Brokers occasionally allow 30 to 1, but some brokers can go up to 1000.
Leverage allows you to make more significant trades without actually having this amount as your initial amount, so with a small amount of capital, you gain exposure to more prominent positions. Traders use leverage to significantly multiply the returns on their investments. It allows you to manage a large volume of the amount placed.
The amount of leverage you are trading should be determined by what it is you are selling. Major currencies are usually dealt with higher power than minor or exotic currencies, which can be extra volatile at once. Therefore, leverage is vital when it comes to forex trading. But here’s the thing: to decide on the power you want to use, you need to also decide on the risk percentage you can afford to lose on each trade, the maximum drawdown.
How to calculate leverage?
(Position value/used margin = the leverage ratio)
Now, let’s talk a little about lots and spreads. As they are essential terminologies commonly used in forex trading.
A spread is the cost of trading a currency is called a spread, which is the difference in the price of the forex pair. Its cost depends on the brokerage spread and lot sizes. The spread price ranges between high and low due to market volatility or liquidity. Usually, emerging market currencies have a greater spread than significant pairs.
A high spread means a significant difference between the bid and the asking price, while a low spread means a slight difference. Traders definitely prefer lower spreads.
Currencies are traded in lots which is the number of currency units bought or sold. The standard lot size is 100,000 units of currency. There are also mini, micro, and nano lots available, with sizes equivalent to 10,000, 1000, and 100.
What is the Trading Hour or Market Hour for Forex?
The forex market is open 24 hours a day because it operates in international time zones except on weekends. The busiest time zone is between New York and London by volume.
What are the 3 Most Common Currency Pairs in Forex?
- Major
- Secondary
- weak currency pair
A currency pair comprises a base currency and a quote currency. The price of a team is made up of how much one unit of the base currency is worth in the quote currency. The base currency is the currency you buy from the pair, while the quote currency is the one you sell from the team.
Currency pairs are categorized into major, minor, exotic, and regional teams. Major currency pairs are the most traded, taking up almost 80% of the forex market.
Major pairs
Include GBP/USD, EUR/USD, USD/JPY, and USD/CHF. There are also 4 major currency pairs known as commodity currency pairs, which include USD/CAD, AUD/USD, and NZD/USD.
Minor pairs
Include EUR/GBP, GBP/JPY, and EUR/CHF.
Exotic pairs
Include a significant currency vs. a smaller economy, such as USD/TRY, GBP/MXN, USD/MXN, and EUR/CZK.
Regional pairs
Include AUD/NZD and AUD/SGD.
In an example of trading, one of the most common currency pairs like EUR/USD – the Euro here is the base currency while USD is the quote currency. Currently, the EUR/USD stands at 1.2000, so to buy 1 Euro, you need $1.20 (one dollar and 20 cents).
How to Start Trading in the Forex Market for Beginners?
- Get familiar with forex and trading: Take online courses that will deepen your knowledge of forex trading and understand the fundamental triggers of the market.
- Open an account with a brokerage: You can open a demo account before starting with a live version to practice how it works. This will give you a virtual experience without risking your capital.
- Develop a trading strategy: Place reliable forex strategies that include objective entry and exit conditions. And for better and more profitable execution, you should backtest it to prove efficient first.
- Avoid distractions such as emotions: Emotional biases can influence a trader’s decision-making and increase risk.
Learn how to become a trader.
8 Tips you need to know before trading
- Understand the forex and stock market
- Make up your mind on what you want to trade
- Find a user-friendly trading platform
- Setup a trading plan
- Practice with a demo account before you invest in protecting your capital
- Setup a live account
- Calculate the risk/reward ratio for your trades to manage risk
- Use a stop loss and take a profit
How to Get Started in Forex Trading?
We offer the popular MetaTrader 4 (MT4) platform, which you can fully customize. This popular trading platform is well respected and has many features and benefits.
The platform gives you quick and easy access to a range of markets and allows you to trade on the move with its mobile app.
You have all the features and benefits of MT4 and our complementary tools, which offer you a great trading experience when combined. These include Trading Central, Dow Jones News, and Autochartist, to name a few. Learn how to use MT4.
ATFX was recognized as the most transparent broker by World Forex Awards in 2019 and has been ranked 3rd in the world for FX and CFD trading volumes on MT4 / MT5 platforms based on Finance Magnates’ Q3 2020 Report. As well as being the best institutional forex broker in 2020 from the fintech awards in 2020.
