Forex market is one of the largest financial markets in the world. According to the statistics, its daily trading volume in 2019 has reached $6.6 trillion. Therefore, it’s not surprising that it continues to attract a growing number of traders worldwide.
Forex is suitable for both newbies and professionals, yet, as any other type of trading, it implies some risks. In this guide, we will look into key features of forex trading, its types, main definitions, benefits and challenges, everything you need to know to minimize trading mistakes and become potentially profitable.
Forex trading, also known as FX trading, is a way to exchange various currencies. Due to this particular function, it plays a key role in foreign trade and international business. FX trading always implies a currency pair, meaning that a trader buys one currency while selling another one at the same time. When an investor is going to buy a specific currency, expecting that its price will increase in the future, he is going long. Consequently, if he wants to sell the currency, predicting that its value will drop, he is going short.
When it comes to the forex or foreign exchange market, it stands out with the following features:
The key players in the forex market can be divided into five main groups:
Although currency exchange and trading date back to ancient times, the modern forex market is not here for long.
Currencies in the forex market are always traded in pairs. Each pair consists of two national currencies whose value is quoted against each other. All of them are represented by three letters: the first two stand for the name of the country while the third one indicates the name of the currency of that region. For example, USD consists of US and Dollar, GBP stands for Great Britain and pound sterling. USD is the most widespread currency in the forex market involved in the majority of fx trading. It is followed by EUR (European Union Euro), JPY (Japanese Yen), GBP, etc.
All currency pairs traded in forex can be divided into three main groups:
Forex trading is conducted on the decentralized base 24 hours 5 days per week. The main feature that makes it different from investing in other types of securities is currency pairs. So, investors have to sell and buy currencies simultaneously. When it comes to forex quotes like EUR/USD=1.1400, it’s necessary to understand that the base currency is on the left (in our case it’s EUR), the quote currency is on the right (USD). The equation means that 1 EUR is exchanged for 1.1400 US dollars. Let’s consider it in the example: if a trader wants to buy 1000 euros, with such an exchange rate he should pay 1140 US dollars. In case the exchange rate rises to 1.1500, he can gain a profit of $100 by selling the euros. Thus, when expecting the base currency price to grow you can buy the pair or go long and, conversely, when expecting the base currency to drop you can sell it or go short.
The majority of forex traders don’t want to take the delivery of the currency. They prefer to speculate and take advantage of market fluctuations. The forex market has three key types. Each of them has its defining characteristics and serves particular trading purposes.
Leverage in forex is a mechanism that allows speculators to enter the trade without paying the total amount of the underlying asset. They can invest just a part of it called margin. Leverage provides traders with great opportunities. It can significantly increase the profits, however, it can result in magnified losses as well, since all the calculations are based on the full size of the trade. Thus, when dealing with this instrument it’s crucial to have robust risk management and trading strategy.
Margin is an initial investment that is necessary to open the trading position. It is usually a percentage of the total amount of the asset which can differ, depending on the broker and the trade size. For example, if the margin is 5% and the whole amount of the underlying asset is $20000, the trader has to pay only $20000*0.05=$1000 to enter the trade. However, it’s crucial to note that despite investing $1000, he still risks $20000.
The spread is a small difference between the buying and selling price for every forex pair. For example, taking the EUR/USD pair, if the buying price is 1.14179 and the selling price is 1.14163, the spread will be 1.6 pips.
A pip, also known as a percentage in point, is the smallest unit to measure the price movements in a forex pair. It usually refers to the fourth decimal place. Thus, if to compare the buying (1.14179) and selling price (1.14163) of the EUR/USD pair, the pip will be 1 (7-6=1). However, there is an exception for currency pairs that are priced out to the second decimal. For example, in the EUR/JPY pair, the fluctuations in the second decimal will correspond to the number of pips.
A lot is a unit helping to measure the amount of forex transactions. The standard size of the lot is 100 000 units of currency. However, there are smaller lots:
Mini - 10 000 units; Micro - 1000 units; Nano - 100 units.
When it comes to standard lot size, forex traders may not have $100 000 or 100 000 euros to speculate. This is when the use of leverage becomes particularly helpful.
Like any other market, forex is moved by demand and supply. There is a great variety of factors, influencing these forces. Here are the key ones.
Forex trading is not much different from trading other assets. To start your fx experience you need to follow these steps.
1 ) Open the account. The first thing you need to do is to find a suitable platform to open a brokerage account. Naga is one of the leading fintech solutions, offering its traders a feature-rich and efficient ecosystem to manage their financial activities. It’s simple to get started with.
2 ) Broaden your knowledge. Forex is similar to other types of trading, yet it has its distinguishing features to pay attention to. Make sure you are aware of the forex key definitions, factors, influencing the currency price movements, news from the countries whose currency you are going to trade, etc. Not only will it give you more confidence but also it could protect you from some risks.
3 ) Choose your trading strategy. Once you understand forex basics, you can opt for a suitable trading strategy that will help you understand whether to sell or buy the currency pair at a specific time. Trading strategies can be developed manually or with the help of automation. In the first case, a trader himself conducts market analysis and tries to predict the price fluctuations. The automated method implies the algorithm that looks for and interprets the trading signs.
4 ) Get started. Don’t be in a rush and don’t succumb to your emotions. Gain some experience while trading small amounts and increase your investments when starting to feel more confident.
Before getting started with trading on the foreign exchange market, it’s reasonable to consider some of its merits and drawbacks.
Forex trading is gaining growing popularity worldwide. It’s not complicated to get started with, however, it requires some time, knowledge, and experience to become successful. If you decided to try it out, make sure you have chosen a trustworthy platform with a great package of trading tools. Opting for Naga will allow you to easily dive into forex trading details while taking advantage of its customizable tools, high level of transparency, and seamless security.
The amount of the initial investment depends on the currency pair you would like to trade. However, the leverage gives you more flexibility in choosing one. When starting a trade, you only need to pay the margin which is defined by your broker. It’s possible to get started even with $100.
Due to the need to operate in different time zones, the forex market is open 24 hours 5 days per week. It starts working every Sunday at 5 p.m EST and closes every Friday at 4 p.m. EST.
It depends on the level of risk you are ready to accept. Forex offers the highest liquidity and volatility when the London session opens (at 3 a.m EST). And it is gradually decreasing after a few hours. Higher liquidity means higher profits, but also higher risks and losses.
Foreign exchange is one of the biggest financial markets worldwide. Its daily trading volume accounts for $6.6 trillion. The most significant player in forex are central, commercial, investment banks, international corporations, and speculators.
The forex market is decentralized, thus not regulated by one supervising body. It is controlled by international organizations which have introduced a set of rules that all market participants must comply with. Some of them include the UK Financial Conduct Authority (FCA), The Monetary Authority of Singapore (MAS), etc.
A broker is a financial company or individual that sells and buys currency pairs on your behalf, working as an intermediary. Brokers are usually compensated through the spread or/and by charging extra fees. It can be a fee for every transaction or a monthly fee to use their trading product.
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