Forex Trading Explained

Basic concept

Forex Trading is a foreign exchange/currency market. The word forex itself is a coin of two English words: foreign and exchange, and denotes the buying and selling of currencies of different countries.

Unlike other stock exchanges, Forex does not have its physical headquarters in a city. It exists in an electronic network made up of large financial institutions.

Today, forex is the largest financial market, with a daily turnover of about $ 5.5 trillion a day.

You can do this whole process online.

The term currency market means the sale of one currency while buying another. Since currency pairs are traded, in order to profit from the exchange rate shift, you need to buy a currency that you think will strengthen and sell another.

For example, if you believe that the euro (EUR) will strengthen against the dollar (USD), you will buy EUR / USD; or in other words you buy EUR and sell USD. If you believe that the EUR will depreciate against the USD, then you will sell EUR / USD; or you will sell EUR and buy USD.

There is no need to wait for a growing market to profit. At any given moment, one currency will strengthen against another. The FX market is constantly creating investment opportunities.

Since nothing concrete and tangible is bought and sold, this type of trade can be a little confusing. You should think about buying a part of the value of one country. If, for example, you buy a Japanese yen, you are buying a part of the Japanese economy that is in direct correlation with what the market thinks about the current and future health of the Japanese economy. In general, the established exchange rate of two currencies is a relationship that reflects the state of one economy in relation to the state of another economy (countries, currencies).

It is possible to trade forex 24 hours a day, except on weekends, so the trading week starts on Sunday at 21:15 CET and lasts until Friday at 23:00 CET. During the day, there are several time intervals that coincide with the working hours of the world’s largest stock exchanges. For example, the London Stock Exchange starts at 9:00 am, New York at 2:00 pm, Sydney at 11:00 pm, while Tokyo opens at 1:00 am local time. Forex trading is most active during the work of London and New York, and it is then that the most important changes in the value of currencies take place.

Who trades in the FX market?
Forex traders can be divided into two groups, hedgers and speculators.

Hedges: governments, companies (importers and exporters) and some investors exposed to exchange rate changes. Shifts in the domestic currency in relation to the foreign currency of the company with which they do business (for the exchange of goods and services) or in which they invest, will affect their profitability. This is the core of all foreign exchange trading; however this accounts for about 5% of the actual market.

Speculators: this group, which includes banks, funds, corporations and individuals, creates artificial pressure on the exchange rate in order to profit from variations or price shifts.

Currency pairs

Currencies are traded in pairs and are shown that way. A three-letter currency code, a slash, and then another three-letter currency code are always displayed. The first currency, which is shown, refers to the “base”, “leading” or “primary currency” (base currency), the second currency refers to the “secondary currency” (quote currency).

The most famous pair is certainly EUR / USD (Euro – US Dollar).

Each currency is recognizable by a three-letter code. For example, the EUR is the euro and refers to the European currency, the USD is the US dollar. The world’s leading currencies (often referred to as majors) are the USD, JPY (Japanese Yen), GBP (British Pound or Sterling), CHF (Swiss Franc), AUD (Australian Dollar) and CAD (Canadian Dollar).

For example, when you look at EUR / USD, then EUR is the leading currency and USD is the secondary currency. The “currency pair” is then followed by a five-digit number with a decimal point after the first digit, for example 1.2660. The number represents the ratio of one currency to another, and can be read as “the amount of secondary currency required for a unit of the main currency”. In the example we gave, EUR / USD 1.2660, 1 Euro will require 1 dollar and 26.6 cents.

Although there are a very large number of currencies that can be traded, the most common trades are 8 US dollars (USD), European euro (EUR), Japanese yen (JPY), British pound (GBP), Swiss franc (CHF), Australian dollar (AUD), Canadian Dollar (CAD) and Hong Kong Dollar (HKD). These currencies are called major currencies.

Calculating Your Profit / Loss – P / L

As already explained, the exchange rate represents the value of a major currency unit relative to a secondary currency. Since you trade a certain amount in the main currency by opening trades, and you do it in the same amount when closing the trade, the profit or loss generated by this circulation (opening and closing) will be in the secondary currency.

For example, if a trader sells 100,000 EUR / USD at 1.2820 and then buys 100,000 EUR / USD at 1.2760, his net position in EUR is zero (100,000-100,000), however his USD position is not. USD position is calculated as follows: 100,000 x 1.2820 = 128.200 USD long and -100.000 x 1.2760 = – 127.600 short. Profit or loss is always in another currency. For simplicity, P&G reports are typically displayed in USD. In this case, the profit in the trade is 600 USD.

Basic concepts

Pip
Pip – represents the change in the currency ratio by one decimal place. It is the smallest unit of exchange rate change. Pip is the last decimal in the currency ratio. It is usually the fourth decimal, so the pip represents 1/100 of one percent, or 0.0001. There is an exception to this, and these are currency pairs that include the Japanese yen. These pairs are expressed with only two decimal places, so in these cases the pip refers to the second, last decimal.

Stop and Limit – Orders

Often the trader wants to limit the loss on the position he has opened (in which case he sets a “stop” order) or wants to take a profit at a certain level, which is acceptable to him (in which case he sets a “limit” account).

Long – Tremin used for purchase order,
Short – tremin used for sales order,
Bid – offered price,
Ask – requested price,
Buy – purchase,
Sell – sale,
Spread – difference between sale and purchase price,
Chart – chart,
Time frame,
Candlestick – spark plug,
G5 – US, Germany, France, UK, Japan,
G7 – US, Germany, France, UK, Japan, Italy, Canada,
G10 – G7 + Belgium, Netherlands, Sweden.

What are the advantages of the Forex market compared to other investment markets?

  • It is possible to perform large transactions with a small stake. You can invest in several markets at the same time.
  • You can limit loss and profit by setting the Stop Loss and Limit Profit functions on your accounts.
  • Other markets are limited by working hours while the Forex market is not. You can trade 24 hours, 5 days a week.
  • In other markets, it is mostly earned when the price rises. You can also make money in the Forex market when exchange rates and prices fall.
  • Markets with a small number of participants and a small trading volume are easily manipulated. The Forex market cannot be manipulated due to the large number of investors around the world, the unlimited geographic space from Japan and Asia through Europe to America, and the large volume of trading.
  • The Forex market is the most liquid market in the world.

What does it take to trade Forex?

Before you start trading currency, you need to open an account with a Forex broker.

By the way, what exactly is a broker?
Simply put, a broker is a person or company that buys or sells orders in accordance with the trader’s decision. Brokers make money by charging a commission or fee for their services.

You may feel overwhelmed by the number of brokers offering their services online. To decide on a particular broker, you need to inquire and do a little research, but the time spent will give you an insight into the services available to you as well as an insight into the fees that brokers charge.

Our recommendation is that before deciding to trade Forex, open a demo account with one of the brokers, in order to monitor the activities of the market and learn as long as possible through the use of the platform.

Conditions for success

There are basic components needed for success and almost all experts agree on this: You must have a good knowledge of technical and fundamental analysis, as well as the management of your account. You should also know the psychological aspect of trade and be disciplined.

In order to successfully trade Forex, there is a whole world of education, really extensive analysis and countless hours of monitoring a very large amount of relevant and potentially relevant information, all without any guarantee that the right decision will be made. So, once again, the investment rule has been confirmed: in order to achieve a high return, it is necessary to accept a high risk.

Before you make a decision to trade on Forex, you should know that of all the traders, participants in forex, only 10% are those who really make money in this market, and the other 90% are losers!

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