Maybe this is the first time you are visiting this site, while you are either a forex trader already, or you are interested to know what forex trading is and whether you can make money with it or not. Therefore, you’d better to start from the forex trading basics. Unfortunately, there are too many forex traders who are not familiar with basics of forex market and forex trading. It is never too late to learn more about the basics of something you have been doing for a long time. You can start from here today.
Before I explain about the basics of forex market and forex trading, I invite you to bookmark the below articles and refer to them later when you are done reading this post:
This is an article that you must read at least once, no matter if you are a novice trader, or you have been trading for a long time and you know a lot about forex trading: Become A Profitable Forex Trader In 5 Easy Steps
The reason is that this article helps a novice trader find the right track and become a profitable trader as soon as possible. It also helps those who have been trading for a long time without success, to have a new start, recover from the previous mistakes and losses and find the right way of become a profitable trader.
And, here is some articles and videos you must read and watch:
- Forex Trading Explained in Simple Words
- What Is Forex and How to Make Money with It?
- Understanding the Currency Pairs
- Candlestick Signals and Patterns
- Chart Analysis
What Is The Currency Market?
Whether you’re a new investor who lacks large amounts of funds or a professional with lots of money, you will definitely want to consider investing in the foreign exchange market. Never before has this market been so user-friendly to beginner and conveniently accessible to traders who prefer to conduct transactions after hours. Plus, if you need to experiment with trades before putting your money on the line, the forex market is a great place to start. You can trade with the demo money to see how forex trading is, and how your trading system or investment plan works: The Importance of Demo Trading and Your Demo Account
The main use of the foreign exchange market (also called the currency market, FX, or Forex) is to provide tools for international trade and investment by permitting companies to convert any type of currency into another. Hence, an entity in the US can import merchandise from Japan and pay for it with Japanese Yens, despite the fact that the business receives its revenue in US currency. This market also assists traders who aim to profit by converting the values of one currency into another.
How do we figure out how much our currency is truly worth? This is done by measuring its purchasing power. For example, if we were to spend $30 on a sack of grocery items, we can then judge the value of the US dollar according to how much it will buy. Let’s say we shop again at the same retailer a month later to buy those exact same items and the cost is $33, we can say the USD dollar’s value has decreased. That’s because we can no longer buy them for $30.
Comparing Currency Values
When it comes to foreign exchange, consumers think of one currency’s value in relation to another’s. For this reason, you will see one currency is quoted with second. So for example the line: USD/JPY, this signifies what a US dollar is worth in Japanese Yens. Hence, in a quote, the base currency is the first and the counter currency is the second type, both listed in a currency pair meaning this is how much of the second currency we can buy with the first.
Commonly traded currencies are symbolized as follows:
- USD: US Dollar
- CHF: Swiss Franc
- EUR: European Euro
- CAD: Canadian Dollar
- JPY: Japanese Yen
These are not any different than a symbol that represents a stock. For example, the abbreviation AAPL means Apple Inc, and thus the line AAPL/USD signifies that the quote resembles the monetary value of Apple stock in US dollars. So an Apple quote of 275 means that one share of Apple is worth $275 US dollars. As for the quote EUR/USD quote of 1.2500 would signify that one Euro is worth $1.25 USD, and EUR/USD quote of 1.2514 means that the Euro is worth $1.25 and 14/100th of a penny. However, in the forex market, rather than 1/100th of a penny, the last digit represents a pip meaning percentage in point. Some firms even measure to 1/1000th of a pip and so for this example the quote may be: EUR/USD quote of 1.25141.
This is an image of a quote window found in a Forex trading platform (below image). It represents an EUR/USD currency pair quote. In the illustration you see two prices in the quote window. The first is the sell price (on the left). It means that a euro could be sold for $1.40 and 360/1000ths of a penny or 36 pips. The price on the right is the buy price which means the euro can be bought for $1.40 and 381/1000ths of a penny or 38 1/10th pips. When you subtract the buy price from the sell price, you come up with the spread. The spread is the amount the banks and the brokerage firms profit from.
Currency Trading For New Traders
Trading on the forex market is much the same as trading on another market. Forex trading basics is almost the same with the basics of any kind of trading. Hence, it is best to purchase currency at a lower price and resell it once it goes up in order to earn a profit. Then you can sell it after the price rises and repurchase it at a lower price to make a gain. With such flexibility, the investor is enabled to profit whenever a strong move occurs.
The forex market is an over-the-counter type of market, but has no geographic location as the stock market and the futures markets do. Thus, trading is conducted amongst the world’s largest banks, so termed as the interbank market. It used to be that only prominent traders were able to tap into this market. Recently, advances in technology enabled individual traders to gain access to it through forex companies, also known as brokerage companies. With the newly enabled access, the costs of trading for the consumer have gone down. For this reason, forex has boomed in growth and popularity.
Now we can plainly see why thousands of traders would rather trade forex instead of options, futures, and stocks. First, Forex is accessible 24 hours a day enabling traders unlimited trading times. Second, they have a free demo account allowing traders to become familiar with the market before using real funds. Third, free access to live quotes and free live charts means more money that an investor has to trade with. Fourth, because small trade sizes are available, investors are able to make use of commonly accepted money management methods. Finally, traders can engage in day trading regardless of how little money is in their account. Hence, there are no day trading restrictions whatsoever.
The Foreign Exchange Major Trading Markets
Again, the forex market is accessible to trade on any time of the day or night. Sunday afternoon starts the trading week and Friday afternoon ends it. The FX market is comprised of three heavy trading periods including Tokyo, London, and the New York Trading Sessions. Most of the action in the forex market occurs when these sessions overlap. There is a US/Europe overlap between 8:00 am and 12:00 pm and a Europe/Asia overlap between 2:00 am and 5:00 am. Tokyo (7:00 pm to 4:00 am) starts trading for the week and numerous well-established investors take advantage of trading momentum as a means of creating tactics and as a measurement for dynamics in the future market. All times are define in the eastern time zone (EDT).
Approximately 6% of all of the worlds forex trading events can be done during Tokyo Trading Session hours. The largest and most prominent trading center globally is London, possessing a market of about 34% amount of the daytime foreign exchange volume. The majority of the world’s biggest banks locate their offices in London, since it has a significant market share. The majority of the investors in the London’s market and the large value of transactions enables the London session to be even more active than the Tokyo and New York sessions.
Following is the New York session as it conducts about 16% of all foreign trade. Most of its transactions happen in the US/Europe overlap time frame, but decrease as liquidity becomes dry and European investors leave the market. Because California never acted as a link between US and Asia trade, this causes a 50% decrease in activity by the midday period. Thus, market developers in the New York session’s afternoon hours don’t generate as much patronage. Activity in the New York session is highly affected by the US bond and equity markets. Also, pairs will often change in accordance to such capital markets.
Now that you are familiar with the forex trading basics, you may want to start trying it. With the assistance of foreign exchange brokers, you can set up an account and begin trading right away.
Just remember the basic advantage of investing the forex market rather than on the stocks or future markets:
- This market is open 24 hours from Sunday afternoon to Friday afternoon EDT.
- You can learn to trade through a free demo account.
- You have free access to charts and quotes.
- You are able to work in small account sizes.
- There are no limits to day trading transactions.
Because there are no fees for accessing the market, that means more money in your pocket to trade with.