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 Zeeland Dollar.

Forex currencies can be traded using a wide number of different financial instruments:

  1. Spot transactions
  2. CFDs (Contract for Difference)
  3. Futures Contracts
  4. Currency Forwards
  5. Currency Swaps
  6. 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 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 maintained 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 80% of the annual profits are generated by 20% of all trades. In order 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.

 

The Basics of Forex Trading

G.P. for Forex-Investors.com (c)