What is Forex?
The forex market is the world’s largest financial market in the world, with about $5 trillion traded every day.
Forex (or FX) stands for ‘foreign exchange’, travellers will have heard of foreign exchange as it's the process to buy currency when visiting another country. For example, you may sell your South African rand and buy US dollars for your trip to the USA. The online forex market is, however, 90% speculative, which means that you don’t take possession of the actual, physical currency. Rather, you open and close deals and make either a profit or loss which gets reflected in your online account balance.
Because the forex market is an over-the-counter (or OTC) market this means trading takes place directly between two parties without dealing through an exchange. Allowing you to access the forex market online anywhere in the world.
Some of the features of the forex market
Liquidity
The high volumes traded in the Forex market lead to high liquidity allowing a currency pair to be bought and sold almost instantaneously.
Easy access
Some brokers let traders open an account with as little as 5 dollars. You can fund your account with a credit or debit card as well as other methods.
Open 24 hours
The Forex market is open 24 hours a day from Monday morning to Friday night, so you can trade any time of day, in any timezone.
Increased leverage
Leverage involves borrowing money so that you can use a small investment to get a greater return. However, your risk is also increased.
Controllable risk
Forex traders can set a stop-loss, which means you set the maximum amount you are prepared to risk on trading at any time.
Multi device trading
Most brokers allow trading on Mobile, Tablet, and Desktop. This allows traders to take advantage of the market whilst you are anywhere in the world.
Currency Pairs
Currencies are always traded in pairs, the first currency is called the base currency and the second is called the counter currency. When you buy a currency pair you are always buying the base currency and selling the counter currency. The reverse happens when you sell the pair.
There are four major currency pairs. They are the euro/US dollar (EUR/USD) – this pair makes up the majority of the market and is the most commonly traded currency pair, the British pound/US dollar (GBP/USD), the US dollar/Japanese yen (USD/JPY) and the US dollar/Swiss franc (USD/CHF).
Most brokers allow the trading of many different currency pair combinations, just remember that the major pairs are the most liquid.
Accessing the forex market
Open an account
Register with a broker and deposit the amount you wish to start trading.
Support
You will have access to a personal account manager who will provide you with support when you need.
Demo trading
If you never traded before or you are not in the position to start trading yet, you can open a demo account, this will allow you to trade without any risk.
Practise small
If you never traded before or you are not in the position to start trading yet, you can open a demo account, this will allow you to trade without any risk.
Some useful terms
What is a pip?
A pip, short for percentage in point, is the smallest unit of change in price. Most currency pairs are quoted with four decimal points, therefore, one pip usually equals 0.0001 but for some currency pairs 1 pip equals 0.01 such as the USD/JPY.
What does long mean?
Long means to buy a currency or asset. You would want to ‘go long’ when you are looking for prices to increase, or rise.
What does short mean?
Short means to sell a currency or asset. You would want to ‘go short’ when you are looking for prices to decrease, or fall.
What is the spread?
The spread is the difference between the bid price (the price that a buyer is willing to pay) and the ask price (the price that a seller is willing to receive) of a security or asset. The spread is essentially the cost of your trading.
Stop loss
A stop loss order is an order placed with a broker to automatically close a position at a loss if the market goes in the opposite direction of your open order. Using a stop loss is a way to limit your risk and because you set the stop loss, you have control over your risk. A stop loss can be used for both long and short trades.
Take profit
A take profit order is an order placed with a broker to automatically close a position in profit if the market reaches your desired profit level. Using a take profit rate helps you to control your trading as you don’t need to continuously observe your open position. A take profit can be used for both long and short trades.
Bullish
Believing a market will rise or increase in value.
Bearish
Believing a market will fall or decrease in value.
How to analyse currencies
Fundamental Analysis
This type of analysis involves studying economic, social, and political forces that could affect the value of a currency.
Some events that can influence a currency's value include Jobs reports and the effectiveness of the company's management.
To read more about Fundamental Analysis download a free ebook by clicking the button below.
Technical Analysis
This type of analysis involves using charts to identify trading opportunities in price trends and patterns.
Some technical indicators include Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), and Moving Averages.
To read more about Technical Analysis download a free ebook by clicking the button below.
There is a third type of Analysis – Sentiment Analysis. This type of analysis involves studying the ‘feeling’ of the market. When a currency is falling in value it is said to have bearish sentiment, and when a currency is rising in value it is said to have bullish sentiment.
Many traders have their preference for analysis, and some would even go as far as to completely dismiss the validity of the others. This is not helpful, new traders should try to understand all types of analysis, and then decide what to apply when trading. It’s even possible to use more than one type of analysis whilst trading the markets.
Are you read to open a demo account an practice what you have learnt? Then check out some of our recommended brokers, we only recommend regulated brokers so your money is in safe hands.
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