FxBrokerReviews.org – The forex market with its rising popularity has become quite enticing for all those who want to start trading. Trading forex comes across as an easy way to earn some extra income and learn about the global market as well. It is also the most technologically advanced market as it is open 24 hours a day and provides various trading strategies and styles.
While online forex trading is easy, there are some basic terms and methods that might seem a little confusing for beginners. The market is ever-changing and famous for its volatility therefore it is very important to be prepared before you start investing money.
Many online forex brokers help traders with educational resources and materials required to learn about the market. Also, there are several sites and online content that you can go through before you start trading.
Our complete forex trader’s guide will help you dive into everything you could know about Forex. We’ll discuss the risks involved, typical fees, trading strategies, and more.
What trading forex means?
Forex refers to foreign exchange. Therefore, the exchange of foreign currencies all around the world is foreign exchange. The Currencies are traded against each other as exchange rate pairs. let us take an example to get a better understanding
Assume that you are an American traveling to any foreign country. You have $10,000 and you want to exchange your currency with a foreign currency. So, you exchange the dollar at an exchange rate of say 100. Therefore, in this case, you will get 1,000,000 of foreign currency.
Now, as you go back to the US, you find that the exchange rate has fallen to $90. In this case, your original $10,000 will now be $11,100. Here you have done a forex trade and made a profit of $1,100.
How does the forex market work?
Firstly, let us understand the forex market. The forex market is a global market that does not have a physical base. All the networking and trading is done through a system of networks and computers. Some bodies regulate the market but all the trading happens via the networks.
To get into the market you need to register yourself with an online forex broker or platform, through which you can start trading. These brokers help you set positions, speculate prices, and provide knowledge about the market.
The forex market is the largest financial market in the world and you can trade anytime and anywhere as it never sleeps. Due to being global, the market is always open according to the various time zones in the world. The New York and London markets are the busiest in the world.
What is the exchange rate and how does it work?
An exchange rate is a rate at which one currency will be exchanged for another currency. It is responsible for affecting trade and the movement of money between countries. The exchange rates are impacted by both the domestic currency value and the foreign currency value.
The rates increase or decrease in the market due to various factors in the economy of a country like interest rates, political situations, employment, inflation, and more. Let us take each factor and get a better understanding of the same:
- Interest rates: the interest rate paid by a country’s central banks affect the exchange rate. Higher interest rates increase the value of a currency because more investors exchange currency for the better-paying one and then invest it in that country to yield a higher interest rate and vice versa.
- Import-export: higher exports are a sign of increasing demand for the country’s currency. And when the currency of a currency rises the exchange rate also rises. Therefore, high exports see a rise in the exchange rate, and high imports lead to a fall in the rate.
- Inflation: low inflation, increases the value of the currency as the purchasing power of a country increases thus seeing a rise in the exchange rate, similarly, high inflation reduces the purchasing power seeing a fall in the rate of exchange.
- Political conditions of a country: a country undergoing political conflicts is likely to receive less attention from foreign investors due to several underlying risks and uncertainties, therefore any country that has severe political turmoil is likely to have a low exchange rate.
- Terms of trade: a trade deficit can also lead to a fall in the exchange rate. A country’s terms of trade improve if its export prices rise at a greater rate than its import prices. This results in higher revenue, which causes a higher demand for the country’s currency and an increase in its currency’s value. This results in an appreciation of the exchange rate.
How forex pairs are quoted in the forex market?
In the forex market, currencies are always traded in pairs which is known as a currency exchange. The currency pair consists of two parts: the base currency and the quote currency.
- base currency: It is the first currency listed in the currency pair.
- quote currency. : the currency listed later in the pair is the quoted currency.
In the currency mentioned above, AUD will be the base currency and USD is the quoted currency.
The price of each pair is determined based on how much of the quoted currency it costs to buy one unit of the base currency.
To start trading, a trader places an order of currency pairs or different pairs of currency that they want to swap. Each currency pair has exchange rates associated with them that help to determine the trade value. An exchange rate is the value of one country’s currency against another country’s currency and is quoted using an acronym that represents the currency.
What are the different types of forex currency pairs?
As mentioned above forex currencies are always traded in pairs. There are three most common types of pairs in which all currencies are traded in the market.
The pairs are as follows :
- Majors – These currency pairs belong to the developed countries that have US dollars. Example: EUR/USD, GBP/USD, and USD/JPY.
- Minors – Currency pairs of developed countries that don’t use the US dollar. Example: EUR/GBP, EUR/JPY, and AUD/NZD.
- Exotics – these are a combination of the developed world and emerging market currencies. Example: USD/ZAR and USD/TRY.
What are the different markets for trading forex?
A trader through forex trading brokers can buy and sell currencies in three different types of forex markets. Below is a detailed understanding of the types of forex market one can invest in :
- Spot market – spot market is where traders buy and sell currency pairs in real time i.e. at the present price. It may take time for the transaction to complete but in spot markets, the trade closes in the present.
- Forward market – The forward market is an over-the-counter market that facilitates the exchange of forward contracts that fix the price of an asset or financial instrument. The pricing of the contracts is based on the difference in interest rates between the two currencies that are being traded. The trade takes place on a future date mentioned in the contract.
- Futures Market: A futures market is a place of exchange where buyers and sellers trade in commodities and assets that they will receive on a future date, decided mutually by both parties.
A major difference between forward and futures markets is that while the former can be customized the latter has a rigid contract.
Start trading in the forex market today
Before you start investing money with any forex trading broker, it is important to go through some terms and the exact procedure of how one can trade forex. Below is a step-by-step guide on all that you need to know about trading in the forex market.
- Get information about the currency pairs
Before you open any trade you should be aware of the prices of the currency pairs as well as the exchange rate. You also have to build an understanding of what moves the currency pairs. If you are a beginner, then you can take the help of the educational resources your CFD forex broker has in store for you.
- Asking and biding
Ask and bid are two very important terms in the world of trading. The bid price is the price at which you would like to buy the currency and the ask price is the one at which you are willing to sell it. Once you have decided on your currency pair you have to place a bid or ask price to open a trade.
- Going long or short
Going long or making a long trade means buying the first currency and selling the second at the same time. It means that traders buy a currency in the hope that the currency pair increases, so they can sell it and make a profit. In simple words going long in the forex market means buying low and selling high.
Similarly, going short or making a short trade means selling low and buying high with the hope that the currency pair decreases in value, so they can re-buy it at a cheaper rate. If you are wondering for how long or short you can hold a position in the forex market it depends on the trading style, your willingness to take risks, and the nature of the market.
- Place your order
After getting enough market research and analysis it is time to start your first online forex trading. There are two basic types of trades that you could place;
- Market order – These are trades that are executed instantly. Meaning the trading happens in real-time. For example: if you place a buy trade on the currency pair EUR/USD, the trade will take place right away.
- Pending order – as the name hints these trades are executed at a later time when conditions are preferable and according to the terms of the trade. They include buy and sell-stop and buy and sell-limit. A buy-stop means buying at a higher price while a sell-stop means selling at a lower price.
- Exit your trade
Once you have opened a position and placed an order in the market the final step is to close the trade. you can either manually stop your trade or use stop-loss and take-profit to exit the trade.
Understanding online forex trading
For a better understanding of the market, there are several charts and indicators for beginners. A chart or price analysis is an important tool in online forex trading. There are several charts that you will come across while trading forex let us have a look :
- Line chart: the line chart is the most uncommon in the trading process. It simply connects the closing or opening prices of a currency pair. the line chart is mostly used by beginners to show a line drawn from one closing price to the next. When connected, it is simple to identify a price movement of a currency pair through a specific period and determine currency patterns.
- Candlestick chart: it is the most popular chart used by the best forex brokers in the market. It displays a high-to-low range and the opening and closing prices. If the candlestick is filled, then the opening price is higher than it closed. If the candlestick is empty, then the closing price is higher than the opening price.
- Bar Chart: a bar chart can be said as a blend of the candlestick chart as well as the line chart. It shows both the highs and lows and the opening and closing prices.
What are some of the best forex brokers in the market?
Now, that you have got an understanding of how the market works, all you need to do is find an online forex broker to help to get started with trading forex. We have compiled a list of the best CFD forex broker and forex platforms for you!
- IG – best online forex trading platform for beginners.
- E-toro – a free platform with an excellent reputation.
- Pepperstone – good for spread betting.
- NAGA – best in the market for copy trading.
Once you have understood the key concepts and strategies to trade, trading forex would not be a complicated process for you. Get to know your currency pairs, read charts understand the trade positions and you are up for returns in the market.
Before you start trading always remember that the market is ever-changing and always has some underlying risks and cautions.
For those who have read this far, happy trading!