What is Forex?
As a forex trading guide for beginners, we must first define what the forex market is.
The forex market is a global marketplace where currencies are traded and where exchange rates for every currency are defined. It stands for “foreign exchange”. But its also known as “FX.”
Currencies are essential because they enable the purchase of goods and services locally and abroad. International currencies need to be exchanged to conduct foreign trade and business.
In a nutshell, the foreign exchange market works like most other markets in that it is subject to supply and demand. Forex is a decentralized market or over-the-counter (OTC) involving buying, selling, and exchanging currencies.
With an averaging trading volume of around $6 trillion per day, it is the largest market in the world. And it works round-the-clock 24 hours during five days a week (only closed during weekends).
The market opens with Asia (New Zealand, Australia, Japan), then it passes the baton to London and finally hand-over to New York, to repeat the whole cycle again and again until Friday. Unlike other markets, currencies are traded at all times during weekdays.
How to trade Forex
The market is set in currency pairs. For example, Euro vs. Us Dollar (known as EUR.USD) and traders make predictions trying to take advantage of the price movement while trading derivatives, such as rolling spot forex contracts.
In other words, when trading, you don’t actually own a truckload of Euros or Dollars and get delivered to your front door. Instead, using derivatives allows you to speculate on the pair’s price movement without owning the asset; brilliant, right?
Using a simple example, if there is a strong demand for the US Dollar from Europeans holding Euros, they will exchange their Euros into Dollars. In simple words, they are selling Euros to buy Dollars.
How to read a Forex pair?
Each currency in the pair is listed as a three-letter code. Where the first two letters stand for the country (or region), and the third letter stands for the currency itself.
If EUR.USD is trading at 1.21645, the one Euro is worth 1.21645 US Dollars
Selling (Short) – Bearish
Following the previous example, the sell-off of one currency brings its price lower, and traders take advantage of that downward movement to enter the market with short (sell) orders.
Buying (Long) – Bullish
On the contrary, when a strong buy of a currency, it brings its price high, and traders take advantage of the uptrend movement to enter the market with long (buy) orders.
When a person trades in the Forex market it basically means is trading on the country’s economical shape and its currency strength. A country with good economic indicators such as high employment rate, low unemployment rate, high consumer price index (CPI) etc, has a strong currency.
While when traders are in the stock market, they usually follow the KPI of a company, such as cash flow, present value, intrinsic value, sells, operational cost and countless other factors that a trader should consider for the fundamental analysis.
Related: Common Mistakes Made Trading Forex
Why trade forex?
The forex market is unparalleled due to its
- Huge trading volume, representing the largest asset class in the world, leading to high liquidity.
- Continuous operation: 24 hours a day except for weekends.
- Easy to grasp the diversity of factors that affect currency exchange rates.
- Use of high leverage to enhance profit and losses relative to account size.
- No need for large capital to start trading.
How to start trading Forex
For us, retail traders, we need a broker, but not just any broker.
A broker is nothing else but the bridge that allows us to connect to the market and major banks. They take our trades and send them into the market through the liquidity providers (LP). Now, would you cross a bridge that looks unsafe? I am sure you wouldn’t. That is why we need to be sure that we are choosing a good broker.
Nowadays, the options are limitless, and I know it is hard when we are starting to get the correct information in such a critical mission; how to choose a broker?
Knowing how to select your broker is a super important task in your venture in the financial field. Being very clear about the factors to consider will help you operate safely, reliably, and with a low operating costs environment. Above all, this is what we need.
For many who are starting in this world, the broker is nothing more than a bridge that allows you to access the financial markets. It connects your operations to liquidity providers, therefore your positions or market entries are guaranteed in price and execution time. Allowing you to get the best out of all your entries.
These are the four key points that you should know; let’s start:
- Get a full-regulated broker.
- Know your broker commission fees.
- Check the payment channel options.
- Please get to know their platform (trading software) and products (standard and/or ECN accounts)
And last but not least, a simple search on the internet can give you information about their services support, deposit/withdrawals process and so on. A good webpage for this purpose is Forex Peace Army.
This is it for today’s article, and I hope the information delivered helps you clarify some concepts and gives you more confidence about this beautiful market.
In the coming articles, I will write about the difference between fundamental and technical analysis, how to make your analysis. This will give you the needed edge to start making your decisions. Remember that the risk when investing comes from not knowing what you are doing. Please check our educational session in Surf-Up; a prime source of free information that will help you overcome the learning curve; check it out.
Quote of the day
“A trader’s job is to solve the market puzzle.”