What is Forex Trading?
The internet provides free information about forex trading. Here, we’ll share what you need to know when you’re starting out as a forex trader. This article will answer the following questions:
- What is forex trading?
- What are some forex basics?
- What is the forex market?
- How will you find out if what’s being offered to you is a forex scam?
Aside from answering these questions, we’ll also cover some basic but important forex tips.
What is forex trading?
Recall the time you travelled to another country and had to have your homecurrency exchanged to the currency of the country you were visiting. That exchange, in its very essence, is forex trading.
What is FX, and how does it work? The foreign exchange market is where different currencies from different countries are traded. Trading currencies is vital because it determines the flow of multinational businesses that affect economies.
Image source: Pexels
What is the forex market? To show you what the forex market is, let’s compare it to some parts of the stock market. Compared to the $22.4 billion traded by New York Stock Exchange (NYSE) per day, the foreign exchange market–known as “forex” or “FX”–plays with $5.3 trillion, making it the largest and most liquid financial market in the world.
Butwhat is forex trading, really? When you are trading currencies, you are buying one currency and selling another simultaneously. If, for example, you visit Japan, you have to exchange U.S. Dollars with Japanese Yen to purchase things locally. In this case, you need to sell your U.S. Dollars and buy Japanese Yen at the same time. Essentially, you traded your U.S. Dollars for the same value in the form of Japanese Yen.
People usually think of money changers when they think of FX. Aside from trading through money changers, though,forex trading can also be done electronically. In the same way, electronic trading is still an over-the-counter way to exchange currencies since you are making transactions with other traders around the world.
Many forex reviews compare forex with stocks because it’s the easiest way for people to see its benefits. Unlike stocks, forex trading does not need one centralized exchanging floor. Also, there are no schedules to be followed. Forex trading is open 24 hours a day, five days a week.
Its liquidity can also be attributed tothe fact that currencies are exchanged around the world and in the major financial centers: New York, Zurich, London, Tokyo, Hong Kong, Singapore, Frankfurt, Sydney, and Paris–which cover all time zones. These characteristics allow traders to continue trading when one market closes. These also provide extreme volatility across the charts, with prices changing every second.
Why should you trade forex?
The forex market presents many benefits. Let’s cover some forex basics. First, let’s find out why there are so many people who choose to trade currencies and why forex reviews highlight these benefits over stocks.
There are no middlemen
Spot trading currencies eliminates the need for middlemen. Knowing how the forex market works will show you how traders are able to deal directly with market players who are responsible for creating the price movements of a given pair. Having no middlemen in between trades also means there are no clearing fees, government fees, brokerage fees, or exchange fees.
Low transaction costs
The only transaction cost in forex trading is called the bid/ask spread, which is typically very low compared to your account balance.
In forex trading, you don’t have to wait for the bell to ring. Having a 24 hours a day, 5 days a week timeframe, you’ll be able to adjust your trades according to your lifestyle. You can choose to trade in the morning, noon, or night, while you work or while you sleep.
No one can control the market
The forex market is so huge and liquid that not even a central bank can control prices for an extended period of time.
People who give forex tips do not leave the benefits of leverage behind. Leverage allows you to start with a small deposit and still control a large total contract value. Basically, this offers you the opportunity to make large profits while keeping the risk low.
The forex market’s enormous size and time coverage makes it extremely liquid. This means that in one click, you’ll be able to buy or sell, and there will usually be someone in the market who is willing to complete the transaction. Unlike the stock market, you do not become stuck in a trade in the forex market. It’s so liquid that you can also set particular commands in your trading platform wherein it automatically closes or opens a position if it hits certain conditions.
Information is publicly available
Aside from getting access to free resources, like free demo accounts that don’t expire, you can also easily find information-only resources only. In stocks, information may be controlled by a select few. In forex trading deals tied tocentral bank policies, important information is publicand not easy to manipulate. This characteristic lessens the possibility of a forex trading scam.
Who trades forex?
Unlike the stock market, the forex market is decentralized. This means that there is no need for you to go through a centralized exchange with one particular price. Because of the fluctuations of currency prices, having a centralize system would be deemed useless.
Still, there is an arranged ladder in which the market players move by. On top of this ladder are the major banks, followed by large commercial companies, governments and central banks, and then speculators.
Image source: Pexels
The major banks
When people ask “What is the forex market?” they are actually looking for the players of the foreign exchange market. Who determines the exchange rates? The biggest players in the forex market: the major banks. They base price fluctuations on current supply and demand for particular currencies.
These banks are collectively called the interbank market. They take on an incredible numberof forex transactions daily for their customers and for their own institutions. Some of these banks are Barclays Capital, Citigroup, and Deutsche Bank.
Large commercial companies
Large companies join the forex market for the purpose of leveraging their businesses. For example, a company that purchases supplies from an overseas supplier needs to pay their supplier in their local currency. If a U.S. company buys parts from a Japanese company, they have to pay in Japanese Yen instead of U.S. Dollars.
Governments and Central Banks
The Federal Reserve, the Bank of England, the European Central Bank, and other central banks around the world are also involved in the forex market. Governments and central banks control the economy by intervening with inflation. They do this by adjusting interest rates. When interest rates are adjusted, big price fluctuations and massive volatility occurs in the forex market. Sometimes, a simple speech of a central bank authority can create large movements in forex exchange prices.
Nearly 90% of trading volume in the forex market is caused by speculators. These are individual retail traders who utilize fundamental and technical analysis to profit from the volatility of the forex market’s prices.
When can you trade forex?
Though the forex market is open 24 hours a day, it does not necessarily mean that the market is active the whole day. In the forex market, you can make money when the market goes up. You can even earn money when the market goes down, given that it goes your way. However, the market makes it very hard for you to earn anything if itdoesn’t move at all. There are many times when the market consolidates and doesn’t give anything in return.
What is the forex market’s schedule?
The forex market’s 24-hour day can be divided into four main trading sessions: the New York session, the Sydney session, the Tokyo session, and the London session.
This chart is for the summer session (approximately April to December)
|Sydney Open||6:00 PM||10:00 PM|
|Sydney Close||3:00 AM||7:00 AM|
|Tokyo Open||7:00 PM||11:00 PM|
|Tokyo Close||4:00 AM||8:00 AM|
|London Open||3:00 AM||7:00 AM|
|London Close||12:00 PM||4:00 PM|
|New York Open||8:00 AM||12:00 PM|
|New York Close||5:00 PM||9:00 PM|
This chart is for the winter session (approximately October to April)
|Sydney Open||4:00 PM||9:00 PM|
|Sydney Close||1:00 AM||6:00 AM|
|Tokyo Open||6:00 PM||11:00 PM|
|Tokyo Close||3:00 AM||8:00 AM|
|London Open||3:00 AM||8:00 AM|
|London Close||12:00 PM||5:00 PM|
|New York Open||8:00 AM||1:00 PM|
|New York Close||5:00 PM||10:00 PM|
The close times changes depending on the countries that shift to and from daylight savings time (DST).
When you look at this schedule, you will see that there are sessions that overlap. For example, the Tokyo session and the London sessions overlap at 3:00-4:00 am EDT. This is a busy trading time; there ismore movement due to the volume of traders who are in the market. Since there are more players, there are more transactions created, making prices more volatile, and thus giving the market players more opportunities to earn money.
How do you trade forex?
In the forex market, you earn money by buying or selling currencies. The mechanics of trading currencies is the same as the mechanics in trading stocks. In stocks, you earn when the shares you are holding go up in value. In forex, you earn when you exchange one currency for another currency with the expectation that the price will change so that the currency that you bought will rise in value compared to the currency that you sold.
Reading forex quotes
To trade properly, you have to know the forex basics first. Currencies are always traded in pairs. As mentioned, when you are trading currencies, you are buying one currency and selling another simultaneously. A quote looks like this: GBP/USD = 1.51258. In this example, the Great Britain Pound (GBP) is the base currency and the US Dollar (USD) is the quote currency. Basically, this reads “1 GBP is equal to 1.51258 USD”. To be able to get 1 GBP, you have to pay 1.51258 USD. At the same time, to get 1.51258 USD, you have to sell 1 GBP.
Long or short
To go long or to go short is one of the most important forex basics. To earn from the forex market, you will naturally have to buy well-performing currencies and sell poorly-performing currencies simultaneously. In its very essence, you buy currencies of good economies and sell currencies of bad economies.
When you take on a buy order, you are taking a long position. When take on a sell order, you are taking a short position.
If, for example, you long GBP/AUD, you are basically saying that you are buying GBP and selling AUD at the same time. This means that you believe that GBP is doing better than AUD.
If, for example, you short EUR/NZD, you are basically saying that you are selling EUR and buying NZD at the same time. This means that you believe that NZD is doing better than EUR.
There are many factors that can affect a trader’s decision. Some are fundamental traders who listen to news and look at the economics of the forex market. Some are technical traders who base their decisions on charted movements and indictors. It is best to have the skills and knowledge of both types to maximize your earning potential in the forex market.
Forex is not a get-rich-quick venture
The popularity of the forex market is largely attributed to its liquidity, huge size, and tendency to give large movements, thus providing big opportunities to earn. However, successful forex trading has only been attained by very few forex traders around the world.
The reality is that traders who lose a lot of money lack the proper discipline required to master the art of trading. Trading is not for the amateur and definitely not for the impatient. Remember: trading is not gambling. It takes proper strategy, skills, and discipline to build consistently profitable trades.
There is no shortcut to successful forex trading. It takes a lot of practice, hard work, and diligence to attain profitable levels. Remember this the next time someone offers you a get-rich-quick trading strategy. Most likely, this is just a forex scam trying to steal your hard-earned money.
Forex trading scams
Forex trading scams usually come in the form of trading systems which promise impossible returns. These systems generate automatic trades that run your account even while you sleep. Though some systems’ algorithmic capabilities do catch some profits, they don’t optimize a real trader’s trading judgment. Trading systems do not necessarily fit a particular trader’s needs and goals, which may be problematic to the trader’s account. Also, most of the time, the sellers of these systems earn their money from selling the system and not from trading currenciesitself.
One of the best forex tips that every trader should follow is the use of demo trading accounts. You can download a demo account that doesn’t have an expiration date. Even advanced traders use demo accounts to try out their strategies or to practice new methods.
Forex demo accounts act like real accounts and move in real markets. The only difference is you’re not using real money.
With forex demo accounts, you can learn the ins and outs of your chosen broker’s trading platform. You can master forex basics, and you will also get to learn how the market works, practice strategies, and test your skills with no risk at all. At the same time, practicing with demo accounts will help you spot forex trading scams.
It is best if you use a demo account until you develop a clear, profitable trading system. Do not put real money into an account unless you are sure that you will have a healthy win-lose ratio. Only open a live trading account when your profits on a demo account become consistent and you are confident in your forex trading skills.
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