Forex Trading explained for the basic level traders. FOREX Trading for beginners, The term FOREX is the shortened form of Foreign Exchange.
What is the FOREX Market?
The FOREX Market is a network of both buyers and sellers operating without any centralized exchange where one currency is transferred for any other currency between the participants or traders at an agreed upon prices.
In simple words, Forex trading is where people buy or sell currencies with the ambition to make profits on the difference between the two different currencies.
- Traders include Central banks, banks, currency speculators, institutional investors, governments, corporations, retail investors etc.
- Forex market is the largest and most liquid financial market in the whole world. Forex or FX market trades in just one day, what Wall street trades in a whole month.
- FX Markets available 24×5.5, Week starting from Sunday at 5 pm EST with the opening of the markets in Singapore and Sydney continuing whole week straight through to the New York markets closing on Friday at 5 pm EST.
- As of April 2019, an average daily turnover in the global foreign exchange markets(FX) is estimated at $6.6 Trillion.
- There are 7 major currency pairs to pick and choose from, and many other second tier and exotic currency pairs from all over the world.
The most traded Currencies in Forex markets are US Dollar, EURO, Japanese YEN, British Pound.
Major Forex trading centers are located in London, New York, Hong Kong, Tokyo and Singapore.
Stock Market Vs FOREX Market
- In Stock market there are more than 8000 publicly traded companies, which are more than enough to overwhelm any trading expert, Where as in Forex market there are 7 major Currency pairs to master the art of trading.
- In Stock market maximum leverage could be around 2:1, whereas in Forex market a trader can use up to 200:1 leverage. (Residents of the US and Japan may not use more than 50:1 leverage only)
- In Stock markets there will be brokerage fee, commissions, clearing fee etc. where in Forex markets there will not be any commission, brokers will be compensated from the spread.
- In stock market most brokers will be open only during the normal business hours, where as the Forex markets are open whole week round the clock, except weekends.
FOREX Standard symbols for the most commonly traded currencies:
- USD – United States Dollar
- EUR – Euro
- CAD – Canadian Dollar
- GBP – British Pound
- HKD – Hong Kong Dollar
- JPY – Japanese YEN
- AUD – Australian Dollar
- CHF – Swiss Franc
- NZD – New Zealand Dollar
- SEK – Swedish Krona
Currencies are generally traded in pairs, like EUR/USD. (EUR is a Base currency, USD is a Quote currency) Currency pairs are usually quoted as bid-ask spreads.
Currencies are bought and sold in the units called as Lots.
1 Lot = 100,000 units of the base currency
1 Lot of EUR/USD = 1 EURO X 100,000
Just like in Stock market, with Forex also, to make profits one needs to buy low and sell high, or sell high and buy low. For Example, if you buy EUR/USD at 1.3172 and then sell it when the price goes up to 1.4172, you will make a profit, if you do it the other way around, you will make a loss.
So what makes the price of any currency pair to go up or down? Supply and Demand.
What makes demand for any currency to increase?
- Higher Interest rates – gives better return on savings
- More National stability – Better, safer and more attractive banking environment
- Tourism – People need the local currency when travelling
Price where you sell the currency – Price where you buy the currency X Transaction size = Profit/ Loss
How to Start trading Forex?
Open a Demo or Practice account.
Many brokers offer demo accounts, where one can start trading using virtual money to react and interpret the real time prices in the Forex market while you learn to trade.