September 17, 2021, | AtoZ Markets–One of the largest markets in the trading industry is Forex. Over the last decade, the daily turnover of the Forex market has continued to grow, and just during the past year, it has increased by 40% and reached up to US$ 6.6 trillion.
Would you also like to participate? This article will guide new and aspiring Forex traders to understand what it is, how it works, and more.
The Basics of Forex
The Foreign Exchange market is a global market where traders can speculate and trade national currencies. It’s an over-the-counter or OTC market that’s open 24 hours per day during weekdays but is closed on weekends. Generally, you have two options: trading without a broker and with a broker. Both have advantages and disadvantages, so make sure to consider both individually.
But before you start trading, there are the basic terminologies you need to learn.
The traded pairs are composed of base and quote currencies. For a currency pair of EUR/USD, the base currency is the first currency, on the left, which is EUR. The quote currency is the last, on the right, USD. You’re always trading the first or the base currency against the quote currency in a currency pair.
For example, if EUR/USD is equal to 1.45, it means that you need 1.45 US$ for one Euro, or with one Euro, you can get 1.45 units of US$.
Bid and Ask Prices
These are the prices required to buy and sell currencies. The bid price is the price you’re willing to sell a specific currency for, while the asking price is how much you’re willing to buy. All bid and ask prices are set in real-time and are constantly changing.
These are the differences between the bid and ask prices. Since the bid price is always higher than the asking price, there’s always a spread and it’s the cost of the trade. If the spread is low or small, the trade is cheap, and vice versa.
A percentage in point or pip is a base unit of the currency pairs. It’s 1/100 of 1% of the pair. It represents the change or movement of a currency pair’s price in the market. It’s indicated in the fourth decimal place or 0.0001. For example, if the EUR/USD pair of 1.14456 increased to 1.14466, there’s a difference of 0.0001 or 1 pip.
When trading, you open and close positions. A position is trade-in progress and can either be long or short.
Opening a long position means a trader buys a currency with the expectation of its price increasing. The position is only closed when the trader sells the currency back to the market when the new market price is higher than their purchase price. After that, the trade is complete.
A short position is opened when a trader decides to sell a currency when they expect the price to drop and plans to repurchase it for a lower price. This position is closed, and the trade is complete when the trader successfully repurchases the currency at a lower price.
There are two significant ways traders analyze the market: through fundamental analysis and technical analysis. Fundamental analysis helps to predict the price direction of a currency based on economical and financial factors. Technical analysis uses price trends on the charts to predict future movements.
A Forex chart graphically shows the exchange rate between a currency pair and how it’s changing over time. The y-axis of the chart represents the rates or prices, while the x-axis shows the time. You can view Forex charts for every currency pair and set the time frame of the price movement you want to see in terms of seconds, minutes, etc.
There are three main types of charts in the market:
1. Line Chart
It’s the most straightforward chart and uses a line to represent the rise and fall of the prices in the market. The line is drawn from one closing price to the next one.
2. Bar Chart
It’s a more complicated chart since it involves bars and dashes. This chart shows both the opening and closing prices and their highs and lows. The vertical bar shows the trading range for a certain period. The bottom indicates the lowest traded price, while the top indicates the highest. The dash on the left side indicates the opening price, while the one on the right indicates the closing price.
3. Candlestick Chart
A candlestick is made up of a block and a stick that protrudes in the top and bottom parts. The top part represents the upper shadow, while the bottom is the lower shadow.
The block represents the range between the opening and closing prices. Moreover, this block can either be hollow or filled. If it’s filled or with a color, it means that the currency pair closed at a lower price than when it opened.
There are many things you need to learn and understand when it comes to Forex. It’s best that you fully grasp these functions and how to use them to your advantage. Once you’ve learned the fundamentals, you’ll be able to generate trading strategies fit for you.