The article is about Introduction to Forex Trading. Let’s learn about forex trading, how to trade, market hours, etc.
What is Forex Trading?
Forex trading simply means trading in the forex market. Forex is the abbreviated form of foreign exchange and foreign exchange refers to currencies. You trade vegetables in a vegetable market, stocks in a stock market and currencies in a currency market; it is as simple as that. You can trade currencies from your mobile devices, computers, and web-based trading platforms.
Although you will be trading currencies you will not see any physical cash, everything happens online. If you want to buy a certain currency at a certain price you will place an order through your trading platforms and the broker’s system will find someone to sell to you at your price, and the transaction is settled.
Why do people love to trade forex?
There are several reasons why people love to trade in the forex market. One of the most important reasons is due to leverage this market provides. Even if you have $1000 in your trading account you can buy currencies worth $100,000 and even more.
Leverage is a double-edged sword because when you place a highly leveraged trade your wins are bigger so are the losses. And another reason is that it opens 24 hours a day. You can trade from any corner of the world all you need is a mobile or a laptop.
Unlike in the stock market and other businesses, you don’t need thousands of dollars to start investing in the forex market. You can start with as low as $10 but it is not recommended to trade with that amount.
There is always an opportunity to make money in the forex market because whether the market is going up or down it doesn’t matter at all.
You should be buying if you think the market is likely to go up and you can sell short if you think the market has a higher chance of falling. You can make money in both directions.
The fx market is very volatile which creates many opportunities to the short term traders. In the forex market, there is never a problem of liquidity. In another word, if you want to buy there’s always a seller on the other side and vice versa.
Related Article: Introduction to Technical Analysis
Understanding Currency Pairs
Currencies are always traded in pairs. The value of a currency is determined by the value of another currency with which it is tied up. For example, if a US dollar is worth 120 Japanese Yen, the exchange rate can be written as USD/JPY= 120.
Here, the value of USD is determined on the basis of Yen. The value of USD against Great Britain Pound will be different than the rate of USDJPY.
The currency on the left side is called a Base Currency whereas the currency on the right side is the quote currency. In a USD/JPY pair, USD is a base currency and JPY is the quote currency. If USDJPY=120, it means that you need 120 units of Japanese Yen to buy 1 unit of USD or you will get 120 units of Yen if you sell 1 unit of USD.
The forex pairs that have US dollar in it are Majors and the currency pairs without USD are Crosses. Examples of Majors are – USDJPY, USDCAD, AUDUSD, etc. Examples of crosses are – EURJPY, EURGBP, NZDUSD, etc.
What is Pip?
Pip is the smallest move in an exchange rate, the term points can be interchangeably used for pips. For the currencies like USD, Euro, British Pound, or Swiss franc, 1 pip would be equal to 0.0001. If EURUSD rises from 0.1234 to 0.1235, it’s a pip rise. In the case of JPY, one pip= 0.01 because it is quoted to two decimal places.
Forex Market Hours
Forex market opens 24 hours a day from Monday to Friday. The forex market remains closed on public holidays. Although the market opens for 24 hours there are different sessions in which particular currencies are heavily traded.
In an Asian market session, JPY and AUD are traded in larger volume whereas in a New York market session USD is traded thickly. The best time to trade forex is when the market session of the two major economies of the world i.e. US and Europe overlap.
As one major forex market shuts down, another one opens. According to GMT, for example, forex trading hours functions like this: New York session is available from 01:00 pm – 10:00 pm GMT; at 10:00 pm GMT Sydney starts; Tokyo begins at 00:00 am and closes at 9:00 am GMT; and to complete the cycle, London opens at 8:00 am and closes at 05:00 pm GMT.
This allows traders and brokers around the world, together with the participation of the central banks from all continents, to trade forex 24 hours a day.
Factors Affecting Exchange Rate
Most of the time it is the economic events and economic performance that drives the market. Geopolitical factors influence the forex market largely. Some of the major factors that affect the forex market are as follows:
- Inflation Rates
- Interest Rates
- Country’s Current Account / Balance of Payments
- Government Debt
- Terms of Trade
- Political Stability & Performance
Related Article: Support and Resistance
Fundamental or Technical?
There are two popular ways to analyze the forex market; Fundamental and Technical. Among the forex traders, technical analysis is more popular than fundamental analysis.
Due to high leverage, many traders are unable to hold their losing positions for a long time so they prefer to trade on a short term basis. Generally, retail forex traders are short term speculators (scalpers, swing traders, and few position traders).
As per my experience, in the forex market, it is quite difficult to make money by using fundamental analysis. To validate this statement, for instance, you know that the Fed is in the mood to hike interest rate in the coming months making USD look bullish.
You buy USD hoping that greenback will be stronger but there are still enough chances that you lose that long trade.
If you ever analyzed the market trends of the currency pairs you will find out that even if a particular pair is very bullish, it does not simply go up continuously, it dives into deep correction too. Deep enough to blow your stops. Forex market is a perfect market to trade for the long term if one does not use leverage.
But for a retail trader, to trade without leverage, one will need a lot of trading capital. So, to trade on a short term basis with limited capital, technical analysis is preferred over fundamental analysis.
Start with A Trend Following System (Strategy)
It is a good idea to start trading with a trend following system rather than looking for Holy Grail systems and indicators. Trendfollowingsystem.com has hundreds of trend following systems and indicators that are well tested and optimized to trade in a real market environment.
You can also get the premium versions which I actually use myself to make money in the market. If you are a new trader, you are advised to trade on a demo account at least for three months.