Currency Trading For Beginners: Forex Explained
There’s currently a lot of interest in forex trading, but as with stock market trading, it’s not something you can quickly learn by watching a video demonstration or a few guide articles. Aspiring traders must first become familiar with the global financial landscape and understand both how currencies work and how they’re traded to benefit from forex.
As your forex broker, Fair Forex will help you navigate the complex world of foreign exchange markets. Below is a brief introduction.
What Is Forex?
Forex or foreign exchange is the global activity of buying and selling foreign currencies. The market is decentralised and takes place electronically over-the-counter (OTC).
Ordinary individual traders who trade currencies using personal accounts created via brokers like Fair Forex are called retail traders. Then there are the institutional traders: banks, hedge funds, pension funds, investment firms and huge commercial corporations with very large trading capital. They self-manage their funds or manage the funds of their clients. Institutional traders can influence the market because of how massive their funds are.
How Does Forex Work?
- The Market –The forex market is open 24 hours for five and a half days. In the U.K., it begins every 9PM/10PM GMT on Sunday and closes at 9PM/10PM on Friday. The market doesn’t stop on weekends, but only the institutional traders make behind-the-scenes moves during these days. This explains why there may be gaps between the currency rates between Friday and Sunday. Because of time zones, the biggest markets open in succession: Wellington, Sydney, Singapore, Hong Kong, Tokyo, Frankfurt, London then New York.
- The Currencies– There are 180 currencies in the world with eight Major Currencies. These are the Euro, GBP, US Dollar, Canadian Dollar, Australian Dollar, New Zealand Dollar, Japanese Yen and Swiss Franc.
- The Pairs – Currencies are traded in pairs, and almost all of them can be traded with another. However, you cannot just trade any two currencies as a pair. Brokers offer a limited number of pairs, often the most popular ones because it is the most efficient use of capital. There are eight major pairs: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD and GBP/JPY. All other pairs are either Minor or Exotic.
- Pair Components – Each pair consists of two currencies. The first is called the Base Currency and the second is the Counter or Quote Currency. So, if we take the biggest currency pair, EUR/USD, EUR is the Base and USD is the Counter/Quote.
- Bids, Asks, Spreads –When you trade a pair, you’ll be presented with two prices: the bid (buy price) and the ask (sell price). The difference between the two is the spread. The unit of measure used for the spread is pip or percentage in point.
Here are a few more terms you need to be familiar with and are excellent starting points for learning forex trading:
- Bull market – A market is bullish if the price of a currency pair is going up. Market investors buy while the prices are still rising so that they can sell when the prices have reached their peak.
- Bear market – A market is bearish if the price of a currency pair is going down. This means investors are buying high and, if they sell now, they will sell low which would mean a loss. If there is a strong belief, however, that the falling currency will strengthen again, investors will buy when the prices are falling and will sell once they’ve risen high again.
- Long position – This means you will buy the Base currency and sell the Counter currency. If a trader takes a long position, it means they expect the price of Base currency to increase.
- Short position – This means you will sell the Base currency and buy the Counter currency. If a trader takes a short position, it means they expect the price of the Base currency to decrease further and that they intend to buy it back at a much lower price.
How Do Forex Traders Earn Money?
Here’s the simplified version of how forex traders earn money: they buy a currency at a low price then sell it at a higher price.
There are so many factors that come into play, however, that can affect a trader’s profits or lack thereof. The historical performance of the currency pair and the individual currencies; any sudden economic or political turmoil in the countries of origin; the market being bullish or bearish, and your decision to take the long or short position can all affect your investment.
Ideally, a forex trader should take the time to study how the market works and learn the histories of the currencies they’re interested in. They should also be up to date on global financial news and current events. It’s only when traders have a clear grasp of currency behaviours and know which indicators to refer to that they can generate profits from their trading activities.
Start Trading at Fair Forex
If it is your first time trading foreign currencies, Fair Forex is an excellent place to start. We offer some of the industry’s lowest commissions and spreads. Clients can also open an account with a deposit for as low as $50.
We’d love to show you more about the types of accounts you can open and the trading tools we provide for free. Contact us today, and one of our team members will get back to you as quickly as possible.