What is forex trading?
Forex is short for foreign exchange – the transaction of changing one currency into another currency. This process can be performed for a variety of reasons including commercial, tourism and to enable international trade.
Forex is traded on the forex market, which is open to buy and sell currencies 24 hours a day, five days a week and is used by banks, businesses, investment firms, hedge funds and retail traders.
Forex trading, or foreign exchange trading, is the process of buying and selling currencies. It is the largest and most liquid financial market in the world, with a daily trading volume of over $5 trillion.
Forex trading is done in pairs, so you are always buying one currency and selling another. For example, if you think that the euro is going to appreciate against the US dollar, you would buy EUR/USD. This means that you are buying euros and selling dollars.
The price of a currency pair is determined by supply and demand. If more people are buying euros than selling them, the price of EUR/USD will go up. If more people are selling euros than buying them, the price of EUR/USD will go down.
There are a number of factors that can affect the supply and demand for a currency, including economic data, political events, and central bank policy.
Forex trading can be a profitable way to invest, but it is also a risky activity. You should only trade forex if you understand the risks involved and have a sound trading strategy.
Here are some of the benefits of forex trading:
- High liquidity: The forex market is the most liquid financial market in the world, which means that you can buy and sell currencies quickly and easily.
- Global reach: The forex market is open 24 hours a day, 5 days a week, which means that you can trade whenever you want.
- Potential for high returns: There is the potential to make high profits from forex trading, but there is also the potential to lose money.
Here are some of the risks of forex trading:
- High volatility: The forex market is very volatile, which means that the prices of currencies can fluctuate wildly.
- Leverage: Forex traders can use leverage, which means that they can control a large position with a small amount of capital. This can magnify profits, but it can also magnify losses.
- Fraud: There are a number of forex scams out there, so it is important to do your research before you start trading.
If you are considering forex trading, it is important to do your research and understand the risks involved. You should also start with a small amount of money and gradually increase your investment as you gain experience.
What is the forex market?
The forex market is by far the largest and most liquid financial market in the world, with an estimated average global daily turnover of more than US$6.5 trillion — which has risen from $5 trillion just a few years ago.
One critical feature of the forex market is that there is no central marketplace or exchange in a central location, as all trading is done electronically via computer networks. This is known as an over the counter (OTC) market.
Difference between long and short positions
A long position means a trader has bought a currency expecting its value to rise. Once the trader sells that currency back to the market (ideally for a higher price than he or she paid for it), their long position is said to be ‘closed’ and the trade is complete.
If you wanted to open a long position on the Euro, you would purchase 1 Euro for USD 1.1918. You will then hold your position in the hope that it will appreciate, selling it back to the market at a profit once the price has increased.
A short position refers to a trader who sells a currency expecting its value to fall and plans to buy it back at a lower price. A short position is ‘closed’ once the trader buys back the asset (ideally for less than he or she sold it for).
In this case, if you think the Euro will weaken against the Dollar, you will sell 1 Euro for USD 1.1916 and hold a short position. You expect the Euro to depreciate and plan to buy it back at a lower rate.
What are the most traded currency pairs on the forex market?
There are seven major currency pairs traded in the forex market, all of which include the US Dollar in the pair.
You can also trade crosses, which do not involve the USD, and exotic currency pairs which are historically less commonly traded (and relatively illiquid).
This means they often come with wider spreads, meaning they’re more expensive than crosses or majors.
Different groups of currency pairs
Major currency pairs
Major currency pairs are generally thought to drive the forex market. They are the most commonly traded and account for over 80% of daily forex trade volume.
There are four traditional majors – EURUSD, GBPUSD, USDJPY and USDCHF – and three known as the commodity pairs – AUDUSD, USDCAD and NZDUSD.
These currency pairs typically have high liquidity, which means they tend to have lower spreads. They are associated with stable, well managed economies and are less prone to slippage, where the expected price of a trade differs from the price the trade was executed at.
Cross currency pairs
Cross currency pairs, known as crosses, do not include the US Dollar. Historically, these pairs were converted first into USD and then into the desired currency – but are now offered for direct exchange.
The most commonly traded are derived from minor currency pairs and can be less liquid than major currency pairs. Examples of the most commonly traded crosses include EURGBP, EURCHF, and EURJPY.
Exotics are currencies from emerging or developing economies, paired with one major currency.
Compared to crosses and majors, exotics are traditionally riskier to trade because they are more volatile and less liquid. This is because these countries’ economies can be more susceptible to intervention and sudden shifts in political and financial developments.
This analysis is interested in the ‘why’ – why is a forex market reacting the way it does? Forex and currencies are affected by many reasons, including a country’s economic strength, political and social factors, and market sentiment.
The biggest fundamental analysis indicators
News and Economic Data
Investors and banks look for strong economies to place their funds, in the expectation that their capital will appreciate.This is because the currency of that country will be in demand as the outlook for the economy encourages more investment. Any news and economic reports which back this up will in turn see traders want to buy that country’s currency.
Central Bank and Government Policy
Central banks determine monetary policy, which means they control things like money supply and interest rates. The tools and policy types used will ultimately affect the supply and demand of their currencies. A government’s use of fiscal policy through spending or taxes to grow or slow the economy may also affect exchange rates.
The three most popular charts in trading
The chart displays the high-to-low range with a vertical line and opening and closing prices. The difference to the bar charts is in the ‘body’ which covers the opening and closing prices, while the candle ‘wicks’ show the high and low.
If the candlestick is filled, then the currency pair closed lower than it opened. If the candlestick is hollow, then the closing price is higher than the opening price.g
The whole bar represents the currency pair’s whole trading range and the horizontal marks on the sides indicate the opening (left) and the closing prices (right).
While a bar chart is commonly used to identify the contraction and expansion of price ranges, a line chart is the simplest of all charts and mostly used by beginners. It simply shows a line drawn from one closing price to the next.
When connected, it is simple to identify a price movement of a currency pair through a specific time period and determine currency patterns.
How to start trading with a forex broker
FXTM gives you access to trading forex as you can execute your buy and sell orders on their trading platforms.
You should always choose a licensed, regulated broker that has at least five years of proven experience. These brokers will offer you peace of mind as they will always prioritise the protection of your funds. Once you open an active account, you can start trading forex — and you will be required to make a deposit to cover the costs of your trades. This is called a margin account which uses financial derivatives like CFDs to buy and sell currencies.
It is important to remember that trading for beginners isn’t an overnight process. It takes time to become familiar with the markets and there’s a whole new vocabulary to learn. For this reason, FXTM offer a wealth of resources to learn to trade forex. For example, our Demo account is a great way to experiment with different trading strategies – but with virtual money which means with no risk attached!
Once you’re ready to move on to live trading, we’ve also got a great range of trading accounts and online trading platforms to suit you.
Online trading platforms
MetaTrader and FXTM
As a leading global broker, we’re committed to providing flexible services tailored to the needs of our clients. As such, we are proud to offer the most popular trading platforms in the world – MetaTrader 4 (MT4) and MetaTrader 5 (MT5). They are both available on a PC, Mac, mobile or tablet. Our traders can also use the WebTrader version, which means no download is required, while the MT apps for iOS and Android allow you to trade the markets on the go, anytime and anywhere.
All these platforms can be used to open, close and manage trades from the device of your choice.
Combine tools with MetaTrader
The platforms contain a huge variety of tools, indicators and charts designed to allow you to monitor and analyse the markets in real-time. You can even build strategies to execute your trades using algorithms. Together with innovative services such as FXTM’s Pivot Point tool, Dow Jones insights, and our award-winning Customer Support team, our clients have the resources they need to trade with confidence on the platform of their choice. You can read more and download the trading platforms from our trading platforms page.
Learn forex trading
FXTM firmly believes that developing a sound understanding of the markets is your best chance at success as a forex trader. That’s why we offer a vast range of industry-leading educational resources in a variety of languages which are tailored to the needs of both new and more experienced traders.
These include Ebooks, daily market analysis, a variety of videos, and more long read guides just like this one!
There are also many forex tools available to traders such as margin calculators, pip calculators, profit calculators, foreign exchange currency converters, economic data calendars and trading signals.
Forex widgets can help to enhance your trading experience. Some of the most popular widgets include Live Rates Feed, Live Commodities Quotes, Live Indices Quotes, and Market Update widgets.