All You need to know about FOREX
What is forex
The foreign exchange market is one of the largest and most active financial markets in the world. The worldwide reach of forex allows it to have a turnover of $5.1 trillion daily and an unmatchable flow of money for individual traders. Forex is short for ‘foreign exchange’- a market that stays open 24 hours of the day, Mondays to Fridays.
Forex is a wide market that involves a lot of people; there is no single centralized exchange for transactions to take place. The exchanges occur through a global network of brokers, dealers, banks and you, the trader. There’s no particular time to trade because everyone operates in different time zones. The question ‘what is forex’ is a very broad one because it is a wide term that covers a lot but basically, all traders or aspiring traders have to understand that forex is an interbank market.
Being an interbank market means that it is decentralized and traded continually. Before forex became an open market for everyone, it used to be exclusive to only big corporations, banks and billionaires. Now everyone from small businesses to individual can dive in and trade to make extra earnings. Trading can be done anytime because the forex market is characterized by liquidity, but there are seasons when the volume is higher and seasons when the volume is lesser. We’ll shed light on that, in the next section.
In the forex market, currency pairs are traded from Sunday afternoons to Friday afternoons (Eastern Standard Time). So, regardless of where a trader is located in the world, they can trade and take advantage of the global trade opportunities available. In other financial market the freedom to trade at all times and have complete access to global opportunities at all times of the day is nonexistent.
Forex has three major trading sessions, and their start time varies by location. The three sessions are Asia, Europe and North America; these trading sessions influence the market’s movement. For example, when the London session overlaps with the New York session, liquidity becomes high, or the market movements become bigger during that time. Let’s talk about the individual sessions.
At the beginning of the Asian sessions, only Asian banks trade. Asian sessions account for 21% of forex transactions, and although the trading volume is usually thin, traders have a lot to gain from the session. The Asian trading sessions begin at 23:00 GMT and end at 8:00 GMT the next day. During summer, it begins at 19:00 EDT and ends at 4:00 EDT and during winter, it begins at 18:00 EST to 3:00 EST.
Price changes during Asian sessions are small compared to the ones you’ll observe during American and European sessions. Major financial centers like Singapore, Hong Kong, and Sydney play host to a lot of FX transactions.
The trading sessions in Europe begins to bubble just as the trading session in Asia starts to fade. London sessions start at 7:00 GMT and end by 16:00-17:00 GMT. In the trading world, the European session is a synonym for the London session, and it is one of the most important commercial centres in the world. The London session accounts for about 36.7% of the total trading volume and provides more trading volume individually than New York, and Tokyo combined. The liquidity in London is very high so major currency pairs like EURUSD are more likely to increase and move by the hour.
The spread during the London session is usually lower thanks to the overlapping of the London session with two others. Transaction costs become low and liquidity becomes high, this leads to an influx of transactions during this time.
The North American session is a synonym for the New York trading session, which starts at 12:00 pm GMT and ends around 9:00 pm to 10:00 pm GMT depending on the season. In US time, the session begins by 8:00 am and ends by 17:00 EDT/EST. During the American session- especially within the 4 hours when it collides with the European session, many currency pairs can be traded.
The New York trading session behaves similar to the Asian Session when it ends but it starts like the London session. In the mornings, the overlap with the London session causes high volatility and depending on the season the degree of overlapping could change.
What is Spread in Forex
Once you get into the Forex trading market, ‘spread’ is one of the terms you will hear a lot. Simply put, Spread is the difference between the bid price and the asking price. The Bid price is the price a forex trader is willing to buy a currency pair at, and the Ask price is the price traders will buy your currency pair at. Spreads differ from broker to broker; they do not have a fixed value. So, depending on the broker, don’t expect to get the same price all the time.
How do spreads work?
On the trading platform, currency pairs look like EUR/USD, the spread would look like this:
Ask price 1.0772 or bid price 1.0771; the spread would equal the bid price minus the sell price.
i.e Spread = Bid Price – Sell Price
Spread is one of the essential ways that online brokers make money. Many online brokers offer variable spreads, although spreads can be fixed. Volatility is one of the things that affect the range of a spread, and since EUR/USD are the most popular currency pairs, they often have the lowest spread. Depending on the market conditions, the Forex spread can vary. Higher spreads are possible during volatile periods and when there are macroeconomic revelations.
Pip in Forex
Currencies are valued in relation to other currencies, influencing what forex traders sell or buy. Pips are the change in price movements or the standard unit for measuring the difference in the value of a course. Many currency pairs in the forex market price out to four decimal places, if you’re looking for the single pip, it’s usually in the last decimal place.
Only the Japanese Yen doesn’t have the pip in the fourth decimal point, so for every currency pair with JPY, the pip is the 2nd number from the decimal point. In the meta trader, the price of currency pairs is displayed in the graph on the right side. So, if, for instance, you’re looking at a EURUSD pair chart, and the displayed price is 1.07748, the fourth number from the decimal point is ‘4’. If the price on display changes from 1.07748 to 1.07778, that means the price moved up three (3) pips.
Lot in Forex
Lot in forex trading is the capital you use in a specific trade and the number of units of an asset you intend to buy or sell. A good understanding of lot will prevent losses and help you with risk management as you trade. You’ll get more units to buy or sell with a more oversized lot. Still, confused about how Lots work? Let’s dive deeper:
In the forex trading market, you will always hear four lot names. These names are a representation of the amount of unit in an asset you buy. So, in essence:
1 standard lot = 100,000 units
2 mini lot = 10,000 units
3 micro lot = 1,000 units
4 nano lot = 100 units
How is lot calculated? There are many lot calculators on the internet that you can use to calculate your lot size. How does lot calculation work?
The first step would be to choose a currency pair, it can be EURUSD or EURJPY, then choose the currency you want and fill in your account balance. The next space to fill in would be the stop loss pips and risk amount, once that is done, you can calculate. The calculator should automatically calculate your lot size based on your risk %.
If you’ve been paying attention to the article, you may have seen the term currency pairs repeatedly. A currency pair is the pairing of two different currencies, whose values are relative to each other. Every currency pair has a base currency and a quote currency just like in mathematical division, the currency that comes first is the base currency and the one after is the quote currency. In EUR/USD for example, EUR is the base currency while the quote currency is USD.
In the trading world, these currencies are bought, sold and exchanged consistently, one is given to get the other and vice versa. Every currency has its own exchange rate and those rates change from time to time, depending on the market.
Major pairs are the currencies that are most traded in the forex market. The US dollar is considered one of the biggest markets in the world, so a major pair is any pair with the USD in it. There are seven major pairs in the world right now, and they include:
Euro and US Dollar- EUR/USD
US Dollar and Japanese Yen – USD/JPY
British pound sterling and Dollar – GBP/USD
US dollar and Swiss Franc- USD/CHF
New Zealand Dollar and US Dollar- NZD/USD
US dollar and Canadian Dollar- USD/CAD
Australian dollar and US Dollar- AUD/USD
These currencies are major pairs because they trade more volume against USD.
Minor pairs are all the other currencies that don’t associate with the USD. Minor pairs have a lower liquidity rate and higher speed, unlike major pairs.
Risk Management in Forex
If you’re new to forex, this is one of the most important things you must learn about. Risk management involves setting rules and taking individual actions that will allow you to manage adverse impacts during trading properly. Every forex trading strategy involves excellent risk management. The entire Forex market is built on probabilities, so it’s essential to enter a trade with good risk. Never risk what you cannot handle because it might lead to pure failure.
There’s also something pretty common in the forex market; risk to reward ratio. Simply put, the risk-to-reward ratio is how much you’re risking and how much you’re going to gain from a trade. The risk-to-reward ratio is always set to 1:2 or 1:3. For Example: you use 10 pounds as risk and your reward is 20 pounds, that means your RR would be 1:2.
Leverage in Forex
In the forex market, a lot of transactions take place and Leverage is one of it. We can say that leverage is a loan taken out by a forex trader to increase their trading capital. Leverages are given by brokers and it can be very risky to use. Only take leverages when you are super confident in your trading abilities and strategies.
Leverage can either bring you massive profits or massive loss, the latter should be avoided at all costs. Brokers are willing to borrow traders more that 50 times the amount of your planned investments as long as you pay an initial deposit. So simply put, we can say leverage is capital that you borrowed. The level of amount of leverage you take, will depend on how much you need and how confident you are in your strategy.
If you’re new to the forex market, all of these terms are the basic things that you’ll see, hear or find as you interact with the market. Finding a good community of traders and reliable mentors is a sure way to make progress in the forex space.
Brokers are an essential part of the foreign exchange community; they handle many of the buying and selling that go on in the forex market. Brokers can be independent individuals or companies that organize and finalize financial operations in someone else’s place. Brokers usually charge a commission for handling transactions and the like. Brokers do this across many classes of assets. These classes can include insurance, forex, and real estate.
Forex brokers are always on top of the game, trying to assess, buy and sell currencies on behalf of clients. They have 24 hours access to the foreign exchange market, so they are able to view currency pairs from all over the world at any time. The main benefits of having a forex broker are their constant market access, their currency speculating abilities and their efficiency.
Forex brokers always try to remain competitive and relevant in the foreign exchange market daily. To trade with them, you’ll have to pay a particular amount and add a spread. Since transactions carried out are done in pairs, traders would have to buy or sell pairs they’re willing to trade. The pair can be AUD/USD or USD/JPY.
This involves the examination and prediction of the market based on past occurrences. Basically, technical analysis uses the history of price moving to form predictions about what the market will hold. Technical analysis pushes the idea that traders should be able to identify particular patterns in the movement of the markets using history. It is explained that, if you understand this, you should be able to predict the correct price moving in the future.
Fundamental Analysis involves the thorough analysis of the foreign exchange market. This is done through a step-by-step analysis of the economic, political and social factors that may affect the market price of currencies. A country has to be in excellent economic health for investors to invest and for foreigners to build businesses. Investments mean foreigners would have to buy the currency of the country they want to invest in. All of these affect the foreign exchange market directly and indirectly.