Forex is the largest financial market in the world. Trading volume has now reached $6.6 trillion a day, 250 times larger than stock markets around the world.
Forex trading can be done online since it opened to the public in 1996. Easy because it’s all at your fingertips.
What is Forex trading?
The basics of Forex trading are the same as any other business: to buy a currency at a low price and resell it after a price increase to make a profit.
In other words, it is a process of speculation about the price of a currency that has the potential to generate profits.
Forex vs. Stocks
- 24 hours a day, while stocks are only traded during office hours.
- Minimal transaction fees.
- Huge liquidity ($6.6 trillion per day).
- Hard to manipulate because of the decentralized factor.
Who can trade Forex?
Individuals 18 years of age and older.
What are the things needed for trading?
- PC, laptop, or mobile phone
- Trading account
- Trading platform (software/app)
Forex trading time
The currency market will never stop as long as money is still in use. Although Forex runs 24/7, you can only trade from Monday to Friday (5 days). This is due to brokers closing on weekends, including public holidays. So only 20 days you can trade in each month.
During the day, the market is not active all the time. There are busy times, and there are slow times.
The picture below shows the 4 major sessions of the world economy (Sydney, Tokyo, London, and New York).
The best times to trade the Forex markets
The London & New York sessions were the most active. In the two sessions, there is also the most active hour, the overlap time (collision), meaning that both London & New York sessions are active. Market sessions can be used as a guide to finding out which currencies are traded the most.
Different day and night times affect the economic peak times of these countries.
The most active day is the middle of the week (Tuesday, Wednesday, and Thursday).
Usually, Monday is the slowest. The first day of work (maybe because the holiday mood is not over).
Friday is the hardest to anticipate as it is the last day of each week, and traders are more likely to close their respective positions on that day.
What is traded in Forex?
The simple answer is MONEY. Specifically, currencies.
There are 8 major currencies in Forex:
| ISO 4217 code (symbol) | Country | Currency | Nickname |
|---|---|---|---|
| USD (US$) | United States | Dollar | Buck |
| EUR (€) | Eurozone | Euro | Fiber |
| GBP (£) | Great Britain | Pound | Cable |
| CHF (CHF) | Switzerland | Franc | Swissy |
| JPY (¥) | Japan | Yen | Yen |
| CAD (C$) | Canada | Dollar | Loonie |
| AUD (A$) | Australia | Dollar | Aussie |
| NZD (NZ$) | New Zealand | Dollar | Kiwi |
The currency is traded in pairs:
Pair consists of Base currency and Quote currency.
The 3 most traded pair categories:
- Major Pair
- Minor Pair (Cross Pair)
- Exotic Pair
Major Pair
Currency paired with USD. The most liquid in the world.
- EUR/USD (euro dollar)
- USD/JPY (dollar yen)
- GBP/USD (pound dollar)
- USD/CHF (dollar swissy)
- USD/CAD (dollar loonie)
- AUD/USD (aussie dollar)
- NZD/USD (kiwi dollar)
Minor Pair (Cross Pair)
Major currencies paired with other than USD. Also known as Cross Pair.
- EUR/CHF, GBP/JPY, AUD/NZD, etc
Exotic Pair
The major currency is paired with another currency (other than the 8 major currencies).
- USD/SGD, USD/ZAR, USD/MXN, etc
Forex terminology:
Frequently used terminology:
Bullish vs. Bearish
- Bullish: The price of the pair is rising overall.
- Bearish: The price of the pair is declining overall.
Trading platform
The trading platform is software used to manage Forex trading, such as making analyses and opening/closing positions.
The most widely used software is MetaTrader 4.
But nowadays, users are no longer tied to computer applications; even trading can be done with mobile applications.
There are also web-based platforms without the need for any installation.
You can get all these trading platforms for free on the internet.
Leverage
With leverage, we can trade as if there is large capital. So don’t be surprised why we can open large trading lots with small capital.
In other words, leverage allows you to control large amounts of money using a small portion (or none) of your own money and borrow the rest.
The leverage ratio indicates the margin (or deposit) the broker needs as an advance, and the broker lends the rest.
Large or small leverage depends on what the broker is offering. Some offer a maximum of 1:50 and even some up to 1:2000.
For example, leverage 1:100
Let’s say you want to trade $100,000, so the broker will set aside $1,000 from your account to open the position.
You’re now controlling $100,000 with $1,000.
Leverage, if misused, can indeed bring consequences. High leverage means high risk (if used to the maximum).
Pips
Pips are the smallest price change that occurs. Pips are calculated starting from the last decimal in the price.
For example, the EUR/USD price rises from 1.3000 to 1.3100. So there is an increase of 100 pips.
Lot
Lot means the number of currency units you will buy or sell.
(Labeled as “Volume” in MT4)
A pip’s value depends on the lot volume value determined when you open trade.
| Lot Type | Minimum lot volume | Currency unit | 1 Pip value est. |
|---|---|---|---|
| Standard | 1.00 | 100,000 | $10.00 |
| Mini | 0.10 | 10,000 | $1.00 |
| Micro | 0.01 | 1,000 | $0.10 |
| Nano | 0.001 | 100 | $0.01 |
Long/Short (Buy/Sell)
In stock trading, we usually hear the terms Long & Short.
- Long means your trade is profitable when the price rises.
- Short means your trade is profitable when the price falls.
In Forex, you are always long one currency and short another when you open a trade.
But in Forex trading, the term Buy & Sell is often used.
Even so, it carries the same meaning.
Most trading platforms nowadays use Buy & Sell in their applications.
- Buy (Long): Buy (Long) base currency / Sell (Short) quote currency
- Sell (Short): Sell (Short) base currency / Buy (Long) quote currency
Bid/Ask
- Bid: The price you sell (short).
- Ask: The price you buy (long). The ask value must be higher than the bid.
Spread
Spread is the price difference between Ask and Bid.
In other words, the spread is what the broker charges you every time you open a trade.
Spreads vary between pairs and are determined by the broker.
Some brokers charge spreads in the form of fixed spreads (fixed) and floating spreads (variable).
Brokers that use 4-decimal pricing use fixed spreads. While the 5-decimal pricing broker has a variable spread.
Usually, brokers with variable spreads charge cheaper fees. But some brokers offer a choice of both types of spreads.
Rollover (Swap)
Rollover (Swap) is a charge imposed by the broker if a position has not been closed and carried over to the next day.
A positive or negative swap depends on the pair type, and the position opened (buy or sell).
Swap rates also change from time to time.
A positive swap means the broker pays you, while a negative one is an opposite.
The value of the swap depends on the number of lots opened.
To avoid rollover charges, you can open a free swap account.
Order type (Market Order vs. Pending Order)
- Market Order (Instant Execution): Buy or Sell at the current price. This order must be executed manually.
- Pending Order: This order will execute automatically on the server (no need to open the trading platform) when the price reaches the predetermined level.
Pending orders are divided into two groups:
- Limit orders: buy limit, sell limit
- Stop orders: buy stop, sell stop
