In the coming weeks we will discuss the mechanics of Forex in greater detail but for now, let’s focus on the basic principles and concepts of Forex trading to give you a very brief idea! We’ve already touched on some of them in our previous lessons, make sure to go back and read through our blog if you’ve missed it!
The Foreign Exchange Market is also often referred to as Forex or FX Market that determines the exchange rates for every currency pair in the world. There are as many as 180 different kinds of currencies across the globe. It is the largest and most liquid financial market for currency trading.
Forex is the largest financial market with a volume of $6.6 trillion traded daily and the spot retail traders make up to 5% of it. The US Dollar ($, USD) is the most traded currency, followed by the Euro (€, EUR) and Yen (¥, JPY).
Forex market is open 24 hours a day, five days a week. There are dozens of global financial centres that are located across the making it possible!
There are 4 major trading sessions that every trader should be aware of:
New York Session
New Trading Week starts on Monday morning in New Zealand (it is still Sunday in the other trading centres) and ends on Friday, close of business hours in New York.
Best Trading Times
During any trading day, traders can experience increased trading volumes and new trading opportunities when the session overlaps! The session overlap occurs when 2 sessions are open at the same time! Naturally, the London & New York session overlap is usually the busiest time!
In Forex, your goal is to make money by trading currencies against each other. As such, each trade consists of simultaneously buying one currency and selling another. The relative price of these 2 currencies is called an exchange rate. The first currency in a pair is called a base currency. The second currency in a pair is called a quote currency.
To make it more consistent, a three-letter currency code has been established. The first two letters are the name of the country, while the last letter stands for the currency name, i.e.
- USD (United States Dollar)
- JPY (Japanese Yen)
- CAD (Canadian Dollar)
- EUR (can be considered as an exception as currency relates to the whole of Eurozone and not a single country)
What can you trade?
With our Partner Broker EagleFX you can trade a wide variety of instruments, including:
Pip is a standard unit of measurement used in Forex. Pip represents the smallest increment of price change between currency pairs. It is usually the fourth decimal place of a price quote (0.0001) or the second decimal place for JPY pairs (0.01).
A 1 PIP move for GBP/USD would mean that the price goes from 1.3791 to 1.3792 OR 1.3790
Some brokers will also quote with the last decimal place going up to 5 (or 3 for JPY pairs) These are called a pipette – a fractional pip.
You trade Forex with specific amounts of the base currency units called Lots. These are:
Standard Lot – 100,000 units of the base currency (1.0)
Mini Lot – 10,000 units of the base currency (0.1)
Micro Lot – 1,000 units of the base currency (0.01)
In Forex, you can see two different prices for a currency pair you want to trade:
the bid price – the price at which you sell the base currency
the ask price – the price at which you buy the base currency
In the example above you can sell the sell at 1.3788 (bid) or buy at 1.3793 (ask). If (based on your strategy and analysis) you believe that the value of GBP will go up, you can buy it at the ask price. Alternatively, if you believe the value of GBP will go down, you can sell it at the bid price. The bid price will always be lower than the ask price.
The difference between the bid and ask price is known as the spread. The spread is how the brokers make their money, especially if they do not charge you a separate commission or fees for using their platform to execute trades. The charge is built into the spread, to put it simply, they:
sell the currency to you for more than what they paid
buy the currency from you for less than what they will receive
Can you see what was the spread in the GBPUSD example we have used?
If you expect the price of a base currency to rise, you will go long (buy) and if you expect it to fall, you will go short (sell).
In a nutshell, going:
long means that you have bought the base currency
short means that you’ve sold the base currency and bought the quote currency.
By going long, you will profit if the price goes up. When you go short, you will profit if the price goes down.
Make sure to join us next week for the second part of our Trading Forex 101!