This article is going to answer the question; ”what is forex trading?” amongst several other forex-related questions.
The word ‘’Forex’’ has been thrown around in different spheres lately.
It’s almost like any random discourse you find yourself; you could be sure someone is about to bring it up.
Forex this, Forex that it’s almost exhausting!
The best way to go around the awkwardness of not knowing about this is just to know what it is.
Forex simply is the buying and selling of different currencies for a profit.
That’s the long and short of it. Forex or the foreign exchange market is simply a place where the action of buying and selling of different currencies takes place.
The term ‘Forex’ is simply an abbreviation for Foreign Exchange.
So, rest assured whenever you see the term ‘Forex’ just know someone somewhere got tired of saying ‘Foreign Exchange’ and decided to make life easier for himself.
Forex, FX, and foreign exchange, all are one another meaning the same thing. So be not confused! Anyway, that’s that about the basics, let’s get into the nitty-gritty.
Foreign Exchange transactions take place every day and almost every time around the world.
99% of the time at some point in our lives we all have dabbled into Forex.
Yes, including you. It may not necessarily be with the use of a sophisticated trading system like we all know it to be.
It could be a physical exchange.
The year is 2012 and you’re travelling from Canada to Singapore.
Luckily for you, there isn’t a global pandemic so you travel without hassles ☺.
You’re travelling for a short vacation so you’re there to lavish.
Obviously, to make this possible, you would need to spend Singapore dollars, right?
Nobody is spending Canadian Dollars in Singapore so the smart thing to do would be to get your hands on some Singapore dollars.
To make this a reality, the only thing to do would be to walk into the Singapore exchange and sell your Canadian Dollar using the exchange rate.
This right here is Forex summed up. The buying and selling of currency.
Of course, this is not the entirety of it.
There are other people who make a living off trading currencies and if you ask me, that’s where the REAL Forex market is.
This market although seemingly complicated doesn’t completely differ from the idea of a physical market.
Only a small percentage of currency transactions happen in the ‘real world’ like the example above.
When it comes to where the majority of forex transactions take place, the Global Financial Market carries magnitude.
The Global Financial Market is a decentralized marketplace where huge volumes of currency transactions take place.
While each of these currencies is regulated by their Central Banks, the Global financial market, in general, is regulated by no one! Now you might be wondering,
‘’When did all this start?’’ who started all this’’, how long has this been going on; and all sorts of curiosities. I’d be answering all those in the next subheading.
History Of Forex Trading – A Walk Down Memory Lane
Since the beginning of time, systems were put in place as methods of Exchange.
Ranging back as early as 6000BC, there was a system called the barter system which was introduced by the Mesopotamian tribes.
Now, of course, it wasn’t as sophisticated and robust as it is now, but well, people got along just fine.
This particular system involved the exchange of commodity goods like salt and spices to facilitate transactions.
Keep in mind that these commodities were as valuable as valuable can be so it’s not exactly a far-fetched idea.
Huge ships would sail to other countries just to trade with their store of value being these spices.
This system went on for a while up until the 6th century when the first gold coin was minted.
The idea behind using gold as a medium of exchange (asides from the obvious reason) was that gold was limited in supply, durable, uniform, and most importantly generally accepted.
General acceptability is usually the characteristic of being a legal tender.
And Gold coins did just that.
Now, this went on for a while after that and even to relatively recent times.
Until, well, it wasn’t. People started complaining that gold was too heavy to carry around and that they needed an even more durable way of carrying around their money.
Lol imagine being asked for a financial favour and you claim not to have any money but people can literally hear your pockets jingle.
Yikes. Well, this possibly was the case for people, especially the rich.
So, in the 1800s countries had already adopted Gold as the standard.
This Gold guaranteed that the Government back then would be able to redeem any amount of money for its value of Gold.
This worked fine until World War1 where European countries had to suspend the gold standard to print more money to pay for War.
The foreign exchange market was entirely backed by Gold at this point and during the early 1900s.
Countries traded with each other because they could convert the currencies they received into gold.
The gold standard, however, could not hold up during the world wars.
When Can I Trade Forex?
Yes, another huge perk about the forex market.
The trading hours.
Forex markets work almost round the clock.
The market is rarely closed. Unlike other financial markets (NYSC, LSE, stock-bond, etc.)
The Forex market opens 24 hours a day 5 days a week.
Making it easily accessible whenever.
Although there are still times when the market may be ‘’better’’ to trade than other times.
When the market is active, with a significant number of forex traders starting and closing positions, the optimum time to trade is when there is a high volume of trades.
Simply put, trade when other traders are trading.
It helps create volume and those huge volumes can translate to profit…or loss, depending on if you’re a good trader.
You should strive to trade when at least more than one trading session is open.
But to be more specific, here are the trading sessions and when they trade:
- Sydney is open from 9:00 pm to 6:00 am UTC
- Tokyo is open from 12:00 am to 9:00 am UTC
- London is open from 7:00 am to 4:00 pm UTC
- New York is open from 1:00 pm to 10:00 pm UTC
What Are Currency Pairs?
Currency pairs on a forex platform depict the value of a unit of a currency compared to a unit of another currency pair.
How it works is if you take a foreign currency pair like EUR/USD, the base currency, in this case, is EUR.
You are buying or selling EUR.
That’s the base.
The quote currency is USD.
You are quoting EUR in terms of USD.
That is, one EUR costs 1.15 USD or whatever.
What Moves the Forex Market
Forex is a real global marketplace, with buyers and sellers from all corners of the globe participating in trillions of dollars of trades each day.
The fact that foreign exchange trading has become such a global activity means that macroeconomic events everywhere play a greater role in forex than ever before.
Traders don’t have to stick to popular currencies anymore, but they are a good place to start.
Can I Make A Living Off Forex Trading?
If you’re new to trading, you might well wonder if it’s really possible to make a living from currency trading, given that the majority of small traders do not.
The short answer? YES! It’s definitely possible to make a consistent income from Forex trading.
What Do You Need To Trade Forex
Forex traders really do not need to have a lot of capital to trade due to being able to trade only a percentage of their capital.
The average Forex broker requires at least $100 to open an account and start trading.
With a good core i5, core i3 laptop, or even a smartphone, coupled with stable internet you’re good to go.
As long as you’ve gathered knowledge on how to open and close orders, how to read the market, an understanding of the platform you want to trade with.
How To Start Trading Forex?
5 Easy Steps to Trade Forex
You can take the following steps to prepare yourself to start trading forex:
- Connect a device to the internet.
To trade forex, you’ll need access to a reliable Internet connection with minimal service interruptions to trade through an online broker.
You’ll also need to obtain a smartphone, tablet, or computer to run a trading platform.
If your internet drops while you’re trading, that can result in undesirable losses if the market moves against you.
2 . Open and fund a trading account.
After you’ve decided on a broker, you can deposit funds into a trading account.
Most online forex brokers accept a number of ways to fund an account, including bank wire transfers, debit card payments, or transfers from electronic payment providers like Skrill or PayPal.
3. Obtain a forex trading platform.
You will need to download or get access to an online forex trading platform supported by your broker.
Most forex brokers either offer a proprietary trading platform or support a popular 3rd-party platform like MetaTrader4 and 5 (MT4/5) from MetaQuotes.com or NinjaTrader.
4. Start trading.
After completing all of the previous steps, you now have a funded Forex account and are ready to trade.
You can also usually open a demo account funded with virtual money to test out the broker’s forex platforms and services before going live.
Demo accounts are also beneficial for testing trading strategies and practising trading without risking any funds.
These trading platforms are brought to you by brokers.
They are basically middlemen who make their money by earning money from transactions carried out by you and me on the forex market.
Forex Brokers And Why You Need Them
Forex Brokers like many other middlemen in business are important solely because of their ability to bring buyers and sellers together through a platform.
Many individuals cannot possibly possess the license to be a broker or have the ability to jump through all the many regulatory requirements a broker would have to go through to provide brokerage services.
We need them because they have access to these currencies and that’s just something many people are privileged to.
Forex Trading Platform Explained
Back in the day, as far back as 1973.
(Post unpegging of USD to the Gold standard) the International Monetary Fund created a system that allowed Central Banks to exchange currency with themselves.
But this was a bit flawed because of the rigours it took for smaller institutions to get their hands on this currency.
The 1990s then brought about the advent of recent day technology and that of course…meant technology for every other thing.
Around 1998 a currency trading system introduced in the United States allowed individuals and not just institutions to trade currencies at the spot market in foreign currencies.
With more Technological advancements, these trading systems/ platforms were optimized to meet up with new tech.
Subsequently, it evolved into what we have today.
What Is Buying And Selling In Forex?
Buying and selling in forex is speculating on the upward and downward price movements of a currency pair, with the hopes of making a profit.
All forex trading involves buying one currency and selling another.
which is why it is quoted in pairs.
You would buy the pair if you expected the base currency to strengthen against the quote currency, and you would sell if you expected it to do the opposite.
The price of a forex pair is how much one unit of the base currency is worth in the quote currency.
For example, if the price of GBP/USD is 1.32000, it means that £1 costs $1.32.
Long/Short: Long or Short simply put is your trade direction.
It means that the trader is currently buying or bullish.
So, imagine a trader says ‘’Hey Donald, I’m long EURO/DOLLAR’’ it simply means that the trader is predicting the market to go up so that he can make a profit.
The direct opposite is the same for ‘’short’’.
If a trader says he’s short ‘’EURODOLLAR’’ it simply means he’s predicting the market to go down.
He’s selling EUR/ USD
Bullish: The term is similar to the term ‘’long’’.
A Currency Pair is bullish when the price is continually shooting up or increasing.
A trader also says he’s bullish when predicting the market to increase or move to a higher price.
Bearish: This is directly akin to the term ‘’short’’
Leverage: Leverage simply means how much larger you can trade relative to your account size.
here’s an example:
Ok imagine you fund a trading account with $10,000 and the broker (i.e., the middleman providing you with the service of trading on their platform) allows you a margin of 1:50, it simply means that the broker is allowing you to trade $500,000 worth of currency.
Leverage is calculated by multiplying your capital by the second digit on the right side of the ratio.
In this situation $10,000 x 50.
Pip (Point-in-percentage): A pip is the smallest price in the forex market.
Also better explained with an example.
Imagine a pair like EUR/USD is trading at 1.0012 and then increasing to 1.0015 in the course of the day, the market is said to have moved up 3 pips.
To calculate pips, find the difference between the old and new prices.
Bid: This is the price that you can sell at.
Ask: The asking price is the price you can buy at.
Imagine you buy EUR/USD at 1.0015 and you immediately want to sell, you typically would a price lower than that.
That is because of the broker.
The buying price or ask price is usually the price the broker is willing to sell you his currency and the bid price is usually the price the broker is willing to buy the currency back from you.
The difference is the spread.
Spread: Spread is the difference between the ask and the bid price and is how the broker makes his money.
They are “Grid trading, Arbitrage trading, Trend trading, Martingale, scalping and hedging.
Grid trading is a trading strategy that places above and below a set price, creating a grid of orders at incrementally increasing and decreasing prices
Arbitrage Trading: Arbitrage is trading that exploits the tiny differences in price between identical assets in two or more markets.
Trend Trading: Trend trading is a trading style that attempts to capture gains through the analysis of an asset’s momentum in a particular direction.
Martingale: The Martingale system is a system of investing in which the dollar value of investments continually increases after losses or the position size increases with the lowering portfolio size
Scalping: Scalping is a trading style that specializes in profiting off of small price changes and making a fast profit off reselling.
Hedging: Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset
These differences are created to provide solutions to different market situations. They have different approaches and require different levels of expertise.
Because of how vast these strategies can be, they are difficult to delve into.
Although I’ll be creating a separate article on how to trade forex using different approaches and strategies.
FAQS – What is Forex Trading?
The Forex Market is a decentralized marketplace that includes a spectrum of currencies and assets globally. Because of this decentralization, there is no one location.
Well, it depends on how good a trader you are. No doubt you might lose some money along the way, but it all depends on you.
A Long position occurs when you buy an asset or currency pair with the expectation of it increasing in value. A short position on the other hand is the reverse of a long position in the sense that you sell with the expectation of the Value of the currency pair reducing in Value.
Launch your MT4 platform. Look for the Expert Advisors section under the Navigator panel on the left side of the platform. Click on the Plus sign and the available EAs should be listed there. Click on the EA you want to install and drag it onto one of the charts on your platform.
It is because of something called the spread. Once you enter a buy trade, the broker puts you into the market at the bid price but doesn’t execute until the market reaches the asking price. The opposite is the same for a sell trade.
Well, there are several experts who will carry out this function. But I personally recommend Forex Dominant.
Fundamental Analysis or Economic News almost always affects price movement or market data. it might not be immediate or drastic but there is usually always an impact.
The best Forex strategy would be a strategy centred on risk mitigation and profit maximization. This way you reduce your risks but seek to maximize profits.
Is Forex Illegal?
Short Answer? No.
The foreign exchange market is not illegal.
Backed by numerous regulatory bodies of several countries, Central Banks, and other institutions including the securities and exchange commission of different countries.
it is Legal and also encouraged.
Is Forex Just Gambling?
Trading Forex isn’t gambling – Here’s why
By using various strategies and tools, a trader has the ability to dial the odds to their advantage and be ahead of the market, as well as other traders.
Unlike gambling, there is no “house” in Forex trading.
Your competitor on the market is another trader who has his/her own interests.
In short, trading Forex is more like a zero-sum game where some people win and some people lose.
But more importantly, the real adversary in this sense is yourself: you have to think before you make a decision and don’t let greed get the better of you.
Can Forex Make Someone Rich?
Forex Trading is NOT a Get-Rich-Quick Scheme. Forex trading is a SKILL that takes TIME to learn. Skilled traders can and do make money in this field. … The truth is that even expert traders with years of experience still encounter periodic losses.
How Long Does It Take To Learn Forex?
It will typically take on average around 1 year for someone to learn to trade forex. The technical side would be learned within a few weeks, but the risk management and psychology will take around a year to come to grasp.
The majority of traders give up before ever learning to consistently trade the markets.
What Currency Pairs Can I Trade In?
When trading in the forex market, traders have a wide range of currency pairs to pick from.
Currency combinations that include the US dollar (USD), are major currency pairs.
The most widely traded currencies in the foreign exchange market are called major pairs.
The following are the seven most popular forex pairings in the world, all of which may be traded using spread bets and CFDs:
- The euro and US dollar: EUR/USD
- The US dollar and Japanese yen: USD/JPY
- The British pound sterling and US dollar: GBP/USD
- The US dollar and Swiss franc: USD/CHF
- The Australian dollar and US dollar: AUD/USD
- The US dollar and Canadian dollar: USD/CAD
- The New Zealand dollar and US dollar: NZD/USD
In the forex market, the majors are the most liquid and widely traded. They account for the vast bulk of all FX transactions.
Because these pairs have the most buyers and sellers, their bid (buy) and ask (sell) spreads are often the smallest.
Most traders would agree that the top seven major forex pairs are the most profitable to trade.
Conclusion – What is Forex trading?
Forex trading is a highly profitable investment that can provide you with high returns on your investments. It involves the buying and selling of currencies in order to make a profit.
Anyone can invest in forex trading, whether you’re a beginner or an experienced trader. Before you start investing, it’s important to have a clear understanding of forex terminology and principles so that you can make informed decisions about your trades.