What is Forex or Forex Trading? Possibly, this has to be one commonly asked questions of this century. On this page, I have dedicated my precious time to provide the right A-Z information for all you need to know about this subject.
Interested to learn more about FOREX?
Let’s get started!
Forex simply refers to a decentralised global market where investors, traders and institutions get to trade all the world’s currencies.
Forex can also be referred to as currency market or FX which is an abbreviation for Foreign exchange. It is a continuous process of exchanging or trading a particular currency in exchange for another.
The forex market is where all banks, financial institutions, brands and business organizations assemble to deal in currencies.
With a daily trading volume of more than $6.6 trillion; thereby making FX market the largest liquid market in the world.
Trading activities are done on the interbank market, which is open for 24 hours in 5 working days of the week.
Not even the stock market comes close to the forex market in terms of trading volume.
Believe it or not, you might have participated in the forex market without even knowing.
Hopefully the explanations above doesn’t look like something out of John Madden’s playbook. But in case it does, let me break it down.
Let’s say you are from Australia and you travelled to USA for the summer holidays, you’ll have to convert your local currency into American currency denomination, which is Pounds ($) USD.
When this transaction is completed, you have just participated in forex trading.
In the foreign exchange market, currencies are traded in pairs and they can be bought and sold through a dealer or a brokerage company.
Now that we understand the meaning of the forex market and how it’s been done, I have a test for you. What should be the definition of forex trading? I will give you some time to think about it…
Okay, I will give you a hint below😉…
Definition of Forex Trading
This refers to the process of buying and selling two currencies or more currencies with the sole objective of making a profit.
In the foreign exchange market, the price of a single currency is paired against the price of another currency.
As a trader, you have to trade one currency for another at a time (I mean you trade currency in pairs). A currency pair is a price quote of the exchange rate for two different currencies traded in FX markets and this is where your profit or loss lies.
Just like the stock market, your trade in the forex market should be based on the value of the currency (Exchange Rate).
Therefore, the Forex market allows you to trade through the rise and fall of currency value.
If you assume or think that a certain currency will increase in value, you purchase it. Similarly, if you assume or think that a certain currency will decrease in value, you sell it off. This is how the forex market works!😁
The foreign exchange market is very large, it is easier to find a seller or buyer faster compared to other financial markets.
For instance, if South African government devalues its national currency to woo foreign investors to stake in the country’s economy, then your obligation as a forex trader is to study the movement of the currency.
If you think the trend will continue downward, you can sell the South African Rands against another currency with higher value rate.
The more the South African Rands devalues against a currency with higher value rate, the higher your profits accumulate in the trade.
Still with me? OK, good!
Now that we have an understanding of what the Forex market and Forex trading is all about, let’s discuss on the currencies in the Forex market.
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Currency Pairs in Foreign Exchange
Every forex trading transaction involves the buying and selling of two currencies. This is known as Currency pairs, they include a quote currency and a base currency.
The movement of currency pairs tells how well one currency performs against the other.
There are 3 forex currency pairs known as minors, majors and exotics.
What Are Major Currency Pairs In Forex Trading?
The major currency pairs are the most liquid and frequently traded currency pairs in the forex market. They also feature the U.S Dollar (USD) on one side.
One of the commonest currency pairs on the foreign exchange market is the EUR/USD. Below is a list of the major currency pairs in the world.
- EUR/USD (Eurozone / United States).
- USD/JPY (United States / Japan).
- GBP/USD (United Kingdom / United States).
- USD/CHF (United States/ Switzerland).
- USD/CAD (United States / Canada).
- AUD/USD (Australia / United States).
- NZD/USD (New Zealand / United States).
The major currency pairs account for more than 85% of the trade volume of the foreign exchange market. Many forex traders opt for currency pairs with the U.S dollar over other currency pairs.
Why are these traders interested in currency paired against the American USD?
Typically, the major currency pairs have low volatility and high liquidity. They are related to stable, properly managed economies and this makes the US dollar as the world’s leading reserve currency.
What Are Minor Currency Pairs In Forex Trading?
Minor currency pairs are composed of major currencies which are not paired against the U.S Dollar. These currency pairs can also be called crosses or cross-currency pairs.
Typically, they are less liquid and can be more volatile than the Major currency pairs. Examples of minor currency pairs are;
- EUR/GBP (Eurozone / United Kingdom).
- EUR/CHF (Eurozone / Switzerland).
- AUD/NZD (Australia / New Zealand).
- EUR/SEK (Eurozone / Sweden).
- NZD/JPY (New Zealand / Japan).
- GBP/CHF (United Kingdom / Switzerland).
- GBP/CAD (United Kingdom / Canada).
- AUD/CHF (Australia / Switzerland).
- CAD/CHF (Canada / Switzerland).
- NZD/CAD (New Zealand / Canada).
What Are Exotic Currency Pairs In Forex Trading?
Exotic currency pairs are known as currencies from smaller economics paired up with a major currency.
Exotic currency pairs are the Hong Kong Dollar (HKD), Norwegian Krone (NOK), South African Rand (ZAR) and Thai Baht (THB).
Unlike the Majors and cross-currency pairs, exotics can be risky to trade as they are more volatile and liquid.
They contain wider spreads and are very sensitive to sudden political, geographical and financial developments.
Exotic currency pairs are not frequently or heavily traded as the Majors and cross-currency pairs, this is why they attract massive transaction costs.
Not all forex brokers offer the exotic pairs on their trading platforms. However, some still offer them for interested traders.
The Exotic currency pairs are made up of an exotic currency and a major currency. Examples are;
- USD/BRL (United States / Brazil).
- USD/HKD (United States / Hong Kong).
- USD/SAR (United States / Saudi Arabia).
- USD/SGD (United States / Singapore).
- USD/ZAR (United States / South Africa).
- USD/THB (United States / Thailand).
- USD/MXN (United States / Mexico).
- USD/DKK (United States / Denmark).
- USD/SEK (United States / Sweden).
- USD/NOK (United States / Norway).
- USD/RUB (United States / Russia).
- USD/PLN (United States / Poland).
The G10 currencies are made up of top ten of the world’s most heavily traded currencies. Furthermore, these are the world’s most liquid currencies.
Its is unclear how the G10 currencies originated. However, its history can be traced to the G-10 countries who agreed to be involved in the IMF’s General Arrangements to Borrow (GAB).
The General Arrangements to Borrow (GAB) was established in 1962 as an agreement made between countries to pool resources together.
This was done to provide the International Monetary Fund (IMF) with more funds to magnify its lending capacity.
From time to time, people trade them in an open market with little or no impact on their own global exchange rates.
The G10 currencies are listed as follows;
|COUNTRY||CURRENCY NAME||CURRENCY CODE|
|United States||American dollar||USD|
|New Zealand||New Zealander dollar||NZD|
The Danish krone makes it G11 in some banking circles.
What Is BRIICS?
BRIICS is an abbreviation made for the five major emerging national economies. These rising national economies include the following countries: Brazil, Russia, India, Indonesia, China and South Africa.
Initially, these countries were four in number and were known as BRIC. The acronym “BRIC” was coined by Goldman Sachs as a nomenclature for the modern rising economies.
|COUNTRY||CURRENCY NAME||CURRENCY CODE|
All the currencies discussed above might sound confusing for now, but it will soon make sense, I promise!😉
Now it’s time we discuss where the real action takes place and that’s our trading chart!
What Is Forex Chart In Forex Trading?
A Forex chart is a graphical interface that shows the historical records and the behavior of price movement between two currency pairs.
This help forex traders to make a technical analysis of the historical behaviour of two currency pairs.
And also, they can help the trader to make a forecast of the future price movement or trend.
There are 3 common types of Forex charts. They are;
- Line Chart.
- Bar Chart.
- Candlestick Chart.
What Is Line Chart In Forex Trading?
Under normal circumstances, the line chart is a comprehensive way of trading forex, especially for newbies, novices and beginners.
In a line chart, a line is drawn from a particular closing price to another.
It allows you to identify the general price movement of a currency pair within a given time frame and determine the currency patterns.
What Is Bar Chart In Forex Trading?
The bar chart is the commonest tool used to know the contraction and expansion of price ranges.
Typically, a bar chart displays the opening, closing, high and the low of the currency prices.
The top of the bar shows the highest paid price while the bottom of the bar indicates the lowest traded price within a period of time.
The actual bar showcases the currency pair’s overall trading range coupled with the horizontal lines on its sides which indicates the opening (left) and closing prices (right).
What Is Candlestick Chart In Forex Trading?
The candlestick chart is loved by many traders because of the wide range of information it exhibits. In the same vein, it can also be called the Japanese Candlestick Chart.
This chart shows the low, high, opening and closing currency prices. A candlestick has 3 points which are made up of the open, close and the wicks.
The wicks indicate the high to the low range while the ‘real body‘ (wide section) tells traders if the closing price of a currency pair was higher or lower than the opening price.
When a candlestick is filled, it means that the currency pair closed lower than it opened.
Similarly, when a candlestick is hollow, it portrays that the closing price is higher than its opening price.
I’m sure you are familiar with this kind of trading chart, aren’t you? Yes I definitely know you are!
How Does Forex Quotes Work?
In forex trading, you’re bound to come across terms like ‘Bid’ and ‘Ask’ prices. If you don’t know how these quotes work, you might end up being confused.
The ‘Bid’ price is the rate at which you purchase a currency while the ‘Ask’ price is the price you can sell the currency.
Again, when you purchase a currency, it is said to be a long trade. You’re buying this currency with the expectation that it will appreciate and increase in value. Consequently, you can sell it at a higher rate and make a huge profit on the difference.
In the same way, when you are selling a currency, your expectation is for the currency to fall in value.
When this happens, you can buy the same currency again for a low price and make a profit based on the difference.
However, the number quoted for the prices are listed based on the current exchange rate of the currencies in the pair.
What are Forex CFDs?
As an enthusiast in forex trading, you must have seen ‘Forex CFDs’ on some forex trading platforms and websites.
There are 2 major ways for people to trade Forex. You can trade Forex by either of the following;
- Using CFDs.
- Spot Forex.
Spot Forex is the process of buying and selling a particular currency. For instance, you could buy the United States Dollars for the Euros.
When the value of the United States Dollar (USD) increases, then you exchange your Euros for the USD again.
As a result, you get to receive more amount of money compared to the amount you originally spent on the purchase of the currency.
Forex CFDs are known as Contract For Difference; they are used to represent the movement in the prices of financial assets and instruments.
Rather than trading large amounts of currency, you can pocket a huge profit on the price movements even without owning the financial asset.
CFDs are available on a variety of financial instruments like bonds, indices, shares, commodities and cryptocurrencies.
Forex CFDs gives you the liberty to trade on the price movements of these financial instruments without owning the
In every case, they allow you to trade on the price movements of these assets without owning the asset itself.
What is Leverage and How Does It Work in Forex Trading?
Forex CFDs doesn’t just allow you to access a wide range of financial markets.
They also allow forex traders to gain entry to a larger portion of the financial markets for them to maximize their profits.
CFDs provide leveraged access to financial markets. This means that a forex trader can access a larger portion of the market than what he/she could have gotten outright.
For instance, a trader can be provided with a leverage of up to 1:100, which means if $1,000 is invested by the trader and the leverage made available by the brokerage firm is 1:100.
Therefore; the total amount available for trading is $100,000. 😱
The most exciting fact about forex leverage is that the potential profit you can generate is as though you invested the asset outright. 😃
However, the risk is that you can make losses and these losses are proportionally magnified to the same range as potential profits.
Before you get to know how to execute trade in the forex market, It is important for you to know some key concepts in the Forex dictionary.
- Spread: This is the difference between the ‘bid’ price and the ‘ask’ price of a currency pair. Normally, the spread of popular currency pairs are low ( Major currency pairs).
Those currency pairs that are not frequently traded tend to have higher spreads (Exotic currency pairs). Before you can make a successful and profitable trade from the forex market, the value of your currency pair must cross the spread.
- Pip: Pip in the forex glossary refers to the base unit in the cost or price of currency pairs.
For example, if the bid price for the EUR/USD currency pair moves from 1.1660 to 1.1670, this shows a pip change of ten.
- Margin: This is the total amount of funds in the forex trader’s account. Some traders who are insufficient of funds can open access to trade higher position size through the usage of leverage or traders with high risk tolerance spirit seeking higher return on their investment.
Due to this reason, many CFD and forex brokers allow their clients to use leverage.
- Leverage: Leverage is said to be the capital prepared by a Forex brokerage company to support and bolster the trading volume of their clients.
It is very common to see Forex brokers offering leverage to its Forex traders.
For instance, if a forex broker provides you with a leverage of up to 1:100, it simply means that for every $1 you have in your trading account, you can place a trade worth up to $100. This is a typical amount of leverage offered on a standard lot account.
Imagine you have a margin (Fund) of $1000 in your trading account and you have access to trade $100,000 worth of a currency pair. Cool isn’t it?😇
However, it isn’t as cool as it sounds. Although leverage allows you to increase your initial capital investment, it can increase your losses as well.
If you are new to forex, I recommend you to trade steadily and gradually.
In-fact, I advise inexperienced or beginners not to risk more than 2% to 5% of their equity in my trading courses.
Which means if you have $1000 funds in your trading account do not risk more than $20 to $50 summation on all your total active trades.
You can kick-start your trading career using lower position size (1%-5%) until you are fit to trade higher position size in the market.
How To Make A Forex Trade
Forex trade is based on the speculation of value of two currencies. The most traded currency pair in the foreign exchange market is the EUR/USD.
The EUR/USD currency pairing nickname is Fiber while GBP/USD currency pairing nickname is Cable.
On the other hand, the first currency by the left hand side is the counter currency (EUR, GBP) while the second currency at the right hand side is the base currency (USD).
When a price is quoted for this currency pair, it means how much a EURO or GBP is worth in the U.S Dollars.
Vividly, you can always see the two prices displayed as one is a buy price (bidding price) and the other is the sell price (Asking price).
If you should click on the buy or sell button, you are either buying or selling the initial currency in the pair.
For instance, you can trade the currency pair ‘EUR/USD’. If you think the Euro will increase in value and compete well against the U.S Dollar, you buy the EUR.
Since the Euro is the first currency in the pair and you are sure it will go up, then purchase EUR/USD.
If your thought is based on the fact that the Euro will drop in value against the United States Dollar, you sell EUR/USD.
If the ‘BUY’ price for the EUR/USD is 0.70643 and the ‘SELL’ price is 0.70640, then the spread is 0.3 pips.
The trade can either favour you or be against you. When you cover the spread, you’ll be able to make a loss or generate a profit on your trade.
Are There Risks In Forex Trading?
Honestly, every business carries its own risk; Therefore trading currencies in the forex market can be complicated, complex and risky.
In the interbank market, there are many financial institutions such as banks trading against each other globally.
This market has diverse degrees of regulation and many forex instruments are not designed in a standard manner.
In the interbank market, financial institutions are to set, receive credit risk and sovereign risk.
Also, they have designed internal procedures and mechanisms to ensure that they remain safe.
Typically, the interbank market is comprised of participating banks making offers and bids for each currency.
Under this trading condition, the pricing mechanism of the interbank market is strictly based on supply and demand.
Again, due to the large trade volume within this marketplace, some traders will find it challenging to control the price of a currency.
This has helped to increase the much-needed transparency for investors to deal in the interbank market.
Additionally, there are implications of financial risk when retail traders transact with forex brokers which are not fully regulated.
These semi-unregulated forex brokers can even trade against their own customers or even re-quote their prices and this move will backfire on their customers.
Conclusion On Forex Trading
Forex provides a wide variety of opportunities and benefits for people to grow their finances.
A lot of traders have received a significant return on investment by trading in the foreign exchange market.
Furthermore, the forex market is a branch of the financial markets that helps you achieve financial freedom.
If you are looking for the best channel to invest your resources, you should definitely try out the foreign exchange market.
I’ve covered the most important information about Forex Trading in this overview and I believe that you have been able to deduce the Forex market from this article.
As time goes on, I will provide more forex trading insights and tips for you.
Now it’s your turn🤗
what got you interested in Forex trading and are you willing to trade Forex for living or as an additional source of income?