What is Forex trading and how does it work? This is a common question we've always received from newbies who want to venture into the FX market. In this article, we'll provide satisfactory answers to these questions and more.
September 7, 2020 | LonghornFX – The Foreign Exchange market opens up a world of possibilities for traders. As the largest and most liquid market in the world, it’s no coincidence that some of the most legendary trading stories occurred on the Forex Market. Remember when George Soros “broke the Bank of England” by short-selling the pound and profiting $1 billion? Yes, that happened in the Forex Market!
Gone are the days when trading was reserved for seasoned professionals, however. The advent of the internet brought widespread accessibility to global markets and millions of individuals from all over the world profit from trading CFDs online every day. But what exactly is Forex trading, and how does it work?
This article will cover these Key Points:
- What is the Forex Market?
- What are Currency Pairs and how many types are there?
- What are the Key Trading Terms
- How do Forex Charts Work?
- How can I start trading Forex?
What is the Forex Market?
First of all, Forex is a portmanteau for ‘Foreign Currency’ and ‘Exchange’. The Forex market is a global marketplace where national currencies are bought and sold for a variety of reasons such as tourism, trading or commerce. In trading, currencies are always exchanged as currency pairs, so traders simultaneously buy one currency and sell another.
What are Currency Pairs and how many types are there?
All currencies are traded as exchange rate pairs. The first listed currency in a pair is called the base currency, while the second is called the quote currency. Since there are always two currencies involved in trading, the exchange shows the value of one currency in relation to the other currency in the pair.
For example, in the EUR/USD currency pair, the exchange rate indicates how many Dollars (USD) are needed to buy 1 Euro (EUR).
We can distinguish between three types of Currency Pairs: Majors, Minors, and Exotics.
Major Currency Pairs always include the US Dollar, which is the most frequently traded currency, paired with another major currency such as the Euro, Japanese Yen (JPY), Swiss Franc (CHF), British Pound (GBP), Canadian (CAD), Australian (AUD) or New Zealand Dollar (NZD).
Minor Currency Pairs are pairs that are not associated with the US Dollar. The most frequently traded Minor pairs do include the British Pound or the Euro, such as the GBP/JPY pair or the CAD/EUR. Exotic Currency Pairs include a currency belonging to an emerging economy, paired with an already well-established currency, such as the USD/THB (US Dollar/Thailand Baht).
What are the Key Trading Terms?
When trading in the Forex market, there are some terms you need to know before getting started.
First, what is a PIP in trading?
A PIP (short for Point in Percentage) is a number representing the fourth decimal point in a currency exchange rate. PIPs are used to accurately measure price movements and calculate your profits or losses based on the change in price value.
What does ‘Going Long’ or ‘Going Short’ mean?
When you ‘go long’, you are buying the base currency in a currency pair based on your belief that the value of that currency will increase. When you ‘go short’, you’re selling the base currency as you think that its value will decrease.
What is Trading with Leverage?
When trading Forex, you’ll definitely come across the word ‘leverage’. This is because brokers often offer the possibility to trade with leverage as a way of increasing your profits through very small price movements. Trading with 1:500 leverage means that you only need to input $10 for a position worth $5000, so you can open a much larger position than what your initial investment would normally allow.
How do Forex Charts Work?
With many Online Brokers, trading charts are customizable based on individual preferences. Prices of currency pairs are displayed with ‘candlesticks’ which indicate the opening, closing, high and low price for the time period they represent.
The height of the candlestick shows the price range for the chosen period, while the center of the candlestick indicated the difference between the open and closing price. Traders can choose to display their charts using different timeframes, be it 15-minute or weekly intervals.
How Can I Start Trading Forex?
Anybody can get started with trading Forex, no matter their education or professional background. There’s a wide variety of resources available online, and you can learn directly from traders by joining online communities and groups. Online Broker LonghornFX lets traders practice trading through a Demo Account, so you can learn the ropes before depositing real money. Get confident in your strategy, keep updated with current news and start trading!