The Basics of Forex Trading
The Foreign Exchange or Forex or Fx is the global market where governments, banks, corporations, and traders meet to exchange currencies.
What is the Foreign Exchange or Forex market?
The currency market is the world’s largest and most liquid financial market with an average daily turnover of over 4 trillion US dollars.
These are some facts regarding the Forex Market:
-The Forex market is open 24/5
-The most important currency trading centers are London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, and Singapore
-Currency trading uses the ECN network (Electronic Communicational Network)
-The most traded currency is the US Dollar and the most traded pair is EURUSD
Different Instruments for Trading Forex Currencies
There are more than 100 different currencies worldwide. However, most transactions involve four (4) currencies (US Dollar, Euro, Yen, and the British Pound Sterling). Other key currencies include the Swiss Franc, the Australian dollar, the Canadian dollar, and the New Zealand dollar.
Forex currencies can be traded using a wide number of different financial instruments:
- Spot transactions
- CFDs (Contract for Difference)
- Futures Contracts
- Currency Forwards
- Currency Swaps
- Currency Option Contracts (American, European, Binaries, etc.)
Spot trading (1) and CFDs (2) are the common financial instruments used by retail Forex traders. Gaining access to currency derivatives (3, 4, 5, and 6) is considerably difficult for non-institutional traders.
Trading Styles
These are the main Forex trading styles:
- Intraday Trading (very difficult and very risky)
- News Trading (demanding, requiring the use of top technology)
- Swing Trading (an efficient way for retail traders to trade the market)
- Carry-trade (can be very profitable, requiring good timing)
- Position and Long-term Trading (requiring a perfect understanding of the macroeconomic environment
- Automated Trading (very demanding, requiring the use of top technology)
Basic Forex Trading Terms
These are the basic terms when trading Forex:
- CURRENCY PAIR
A currency pair includes two currencies and shows the value of a currency by its comparison to another currency.
- BASE CURRENCY
The base currency is the first currency quoted in a currency pair. For example, EUR is the basic currency of the EURUSD pair.
- QUOTE CURRENCY
The quote currency is the second currency quoted in a currency pair in the forex. For example, USD is the quote currency of the EURUSD pair.
- ECN FOREX
ECN means Electronic Communication Network and refers to a bridge between retail traders and liquidity providers through an ECN Forex Broker.
- PIP
Pip is the smallest price change in an exchange rate. As most Forex pairs are priced to four decimal places (0.0000), the smallest price change happens to the last decimal point (0.0001). That means 1 pip equals 0.0001. Note that the smallest price change in Forex pairs including the Japanese Yen (JPY) is the second decimal point (000.01).
- FOREX MAJORS
The Forex Majors are the most traded Forex pairs including the US Dollar (EURUSD, USDJPY, GBPUSD, USDCHF, USDCAD, AUDUSD, and NZDUSD).
- CROSS-CURRENCY PAIRS
Cross-currency pairs or else Forex crosses are currency pairs that do not include the US dollar. For example, EURGBP, EURJPY, GBPJPY, and EURCHF.
Key Forex Trading Recommendations
Foreign Exchange trading is very demanding and it is not suitable for all traders. Here are some key recommendations:
(1) A Demo Account is a Great Start
If you are a newbie, start with a Demo Account, and trade for at least 2-3 months to test your skills in every market condition. Then move to a micro-lot or a mini-lot account type, not a standard-lot account.
(2) Trade Small Sizes
Trading small sizes is very important, especially for not-advanced traders. Small-sized trades can be easier to maintain and allow traders to run their profits without anxiety. Furthermore, small-sized trades limit the overall portfolio risk and leave room for losses.
(3) Run Your Profits
The general rule is that 80% of the annual profits are generated by 20% of all trades. To be profitable in the long run, you must let your positions grow. You can use mental stops or trailing stops to secure your profits.
(4) Trading Leverage can be a Disaster
Trading leverage sounds like an opportunity, but actually, it increases your trading risk and at the same time your trading cost. The trading leverage is useful only for intraday traders who really know what they are doing.
(5) Select Carefully your Forex Broker
Select an ECN/STP broker that is regulated and headquartered in a serious country. Mind your trading cost, not your trading bonus.
Fx Currency Symbols
A currency symbol is a graphical symbol representing a form of money. This symbol is usually unique to a specific country. This is a List of all popular Forex Currencies and their Symbols.
FOREX CURRENCY |
ISO |
CURRENCY SYMBOL |
Argentine Peso | ARS | $ |
Australian Dollar | AUD | $ |
Bahraini Dinar | BHD | n/a |
Barbadian Dollar | BBD | $ |
Brazilian Real | BRL | R$ |
British Pound | GBP | £ |
Canadian Dollar | CAD | $ |
Central African CFA franc | XAF | n/a |
Chilean Peso | CLP | $ |
Chinese Yuan | CNY | 元 |
Czech Koruna | CZK | Kč |
Danish Krone | DKK | kr |
East Caribbean Dollar | XCD | $ |
Egyptian Pound | EGP | £ |
Estonian Kroon | EEK | kr |
Euro | EUR | € |
Hong Kong Dollar | HKD | 元 |
Hungarian Forint | HUF | Ft |
Icelandic Krona | ISK | kr |
Indian Rupee | INR | ₹ |
Indonesian Rupiah | IDR | Rp |
Israeli Sheqel | ILS | ₪ |
Jamaican Dollar | JMD | J$ |
Japanese Yen | JPY | ¥ |
Jordanian Dinar | JOD | n/a |
Kenyan Shilling | KES | n/a |
Latvian Lats | LVL | Ls |
Lebanese Pound | LBP | £ |
Lithuanian Litas | LTL | Lt |
Malaysian Ringgit | MYR | RM |
Mexican Peso | MXN | $ |
Moroccan Dirham | MAD | n/a |
Namibian Dollar | NAD | $ |
Nepalese Rupee | NPR | ₨ |
New Zealand Dollar | NZD | $ |
Norwegian Krone | NOK | kr |
Omani Rial | OMR | ﷼ |
Pakistani Rupee | PKR | ₨ |
Panamanian Balboa | PAB | B/. |
Philippine Peso | PHP | Ph |
Polish Zloty | PLN | zł |
Qatari Riyal | QAR | ﷼ |
Romanian Leu | RON | le |
Russian Rouble | RUB | ру,; |
Saudi Riyal | SAR | ﷼ |
Singapore Dollar | SGD | $ |
South African Rand | ZAR | R |
South Korean Won | KRW | ₩ |
Sri Lankan Rupee | LKR | ₨ |
Swedish Krona | SEK | kr |
Swiss Franc | CHF | CHF |
Thai Baht | THB | ฿ |
Turkish Lira | TRY | YTL |
United Arab Emirates Dirham | AED | n/a |
US Dollar | USD | $ |
Venezuelan bolivar | VEF | Bs |
West African Franc | XOF | n/a |
» Compare Forex Brokers and their Trading Terms for Investors
■ The Basics of Forex Trading
G.P. for Forex-Investors.com (c)
□ Find More: » Automated Trading Systems | » Basics of Forex Trading | » Forex Market Cyclicity & Central Banks □ Trading Tips: » Think like a Whale eBook | » Forex Fundamentals | » Famous Investors & Tips