What Is the Forex Market?
Currency trading takes place in the foreign exchange market. Currency is significant because it enables us to buy goods and services both locally and across borders. To undertake international trade and business, international currencies must be
If you live in the United States and wish to purchase cheese from France, you or the firm from which you purchase the cheese must pay the French in euros (EUR). This means that the importer in the United States would have to convert the same amount of dollars (USD) into euros.
The same goes for traveling. A French tourist in Egypt can’t pay in euros to see the pyramids because it’s not the locally accepted currency. The tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate.
Forex trading in the spot market has always been the largest because it trades in the biggest “underlying” real asset for the forwards and futures markets. Previously, volumes in the forwards and futures markets surpassed those of the spot markets.
However, the trading volumes for forex spot markets received a boost with the advent of electronic trading and the proliferation of forex brokers.
Forwards and Futures Markets :-
A forward contract is a private agreement between two parties to buy a currency at a future date and at a predetermined price in the over-the-counter (OTC) markets. A futures contract is a standardized agreement between two parties to take delivery of a currency at a future date and at a predetermined price. Futures trade on exchanges and not OTC.
Both types of contracts are binding and are typically settled for cash at the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The currency forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.
Forex Terminology :-
The best way to get started on the forex journey is to learn its language. Here are a few
terms to get you started:
● Forex account: A forex account is used to make currency trades. Depending on the lot size, there can be three types of forex accounts:
● Micro forex accounts: Accounts that allow you to trade up to $1,000 worth of currencies in one lot.
● Mini forex accounts: Accounts that allow you to trade up to $10,000 worth of currencies in one lot.
● Standard forex accounts: Accounts that allow you to trade up to $100,000 worth of currencies in one lot.
● Ask: An ask (or offer) is the lowest price at which you are willing to buy a currency. For example, if you place an ask price of $1.3891 for GBP, then the figure mentioned is the lowest that you are willing to pay for a pound in USD. The
ask price is generally greater than the bid price.
● Bid: A bid is the price at which you are willing to sell a currency. A market maker in a given currency is responsible for continuously putting out bids in response to buyer queries. While they are generally lower than ask prices, in instances when
demand is great, bid prices can be higher than ask prices.
● Bear market: A bear market is one in which prices decline among currencies. Bear markets signify a market downtrend and are the result of depressing economic fundamentals or catastrophic events, such as a financial crisis or a natural disaster.
● Bull market: A bull market is one in which prices increase for all currencies. Bull markets signify a market uptrend and are the result of optimistic news about the global economy.
● Contract for difference: A contract for difference (CFD) is a derivative that enables traders to speculate on price movements for currencies without actually owning the underlying asset. A trader betting that the price of a currency pair will
increase will buy CFDs for that pair, while those who believe its price will decline will sell CFDs relating to that currency pair. The use of leverage in forex trading means that a CFD trade gone awry can lead to heavy losses.
● Leverage: Leverage is the use of borrowed capital to multiply returns. The forex market is characterized by high leverages, and traders often use these leverages to boost their positions.
● For example: a trader might put up just $1,000 of their own capital and borrow $9,000 from their broker to bet against the euro (EUR) in a trade against the Japanese yen (JPY). Since they have used very little of their own capital, the trader stands to make significant profits if the trade goes in the correct direction. The flipside to a high-leverage environment is that downside risks are enhanced and can result in significant losses. In the example above, the trader’s losses will
multiply if the trade goes in the opposite direction.
● Lot size: Currencies are traded in standard sizes known as lots. There are four common lot sizes: standard, mini, micro, and nano. Standard lot sizes consist of 100,000 units of the currency. Mini lot sizes consist of 10,000 units, and micro lot
sizes consist of 1,000 units of the currency. Some brokers also offer nano lot sizes of currencies, worth 100 units of the currency, to traders. The choice of a lot size has a significant effect on the overall trade’s profits or losses. The bigger the
lot size, the higher the profits (or losses), and vice versa.
● Margin: Margin is the money set aside in an account for a currency trade. Margin money helps assure the broker that the trader will remain solvent and be able to meet monetary obligations, even if the trade does not go their way. The amount
of margin depends on the trader and customer balance over a period of time.
Margin is used in tandem with leverage (defined above) for trades in forex
● Pip: A pip is a “percentage in point” or “price interest in point.” It is the minimum price move, equal to four decimal points, made in currency markets. One pip is equal to 0.0001. One hundred pips are equal to 1 cent, and 10,000 pips are
equal to $1. The pip value can change depending on the standard lot size offered by a broker. In a standard lot of $100,000, each pip will have a value of $10.
Because currency markets use significant leverage for trades, small price moves, defined in pips, can have an outsized effect on the trade.
● Spread: A spread is the difference between the bid (sell) price and ask (buy) price for a currency. Forex traders do not charge commissions; they make money through spreads. The size of the spread is influenced by many factors. Some of
them are the size of your trade, demand for the currency, and its volatility.
● Sniping and hunting: Sniping and hunting is purchase and sale of currencies near predetermined points to maximize profits. Brokers indulge in this practice, and the only way to catch them is to network with fellow traders and observe for
patterns of such activity.
Charts Used in Forex Trading :
Line charts are used to identify big-picture trends for a currency. They are the most basic and common type of chart used by forex traders. They display the closing trading price for the currency for the time periods specified by the user. The trend lines identified in a line chart can be used to devise trading strategies. For example, you can use the information contained in a trend line to identify breakouts or a change in trend for rising or declining prices.
While it can be useful, a line chart is generally used as a starting point for further trading analysis.
Much like other instances in which they are used, bar charts are used to represent specific time periods for trading. They provide more price information than line charts. Each bar chart represents one day of trading and contains the opening price, highest price, lowest price, and closing price (OHLC) for a trade. A dash on the left is the day’s opening price, and a similar dash on the right represents the closing price. Colors are sometimes used to indicate price movement, with green or white used for periods of rising prices and red or black for a period during which prices declined.
Bar charts for currency trading help traders identify whether it is a buyer’s market or a seller’s market.
Candlestick charts were first used by Japanese rice traders in the 18th century. They are visually more appealing and easier to read than the chart types described above. The upper portion of a candle is used for the opening price and highest price point used by a currency, and the lower portion of a candle is used to indicate the closing price and lowest price point. A down candle represents a period of declining prices and is shaded red or black, while an up candle is a period of increasing prices and is shaded green or white.
The formations and shapes in candlestick charts are used to identify market direction and movement. Some of the more common formations for candlestick charts are hanging man and shooting star.
Want to know more about how to trade forex?
Our free Let’s Get to Know Forex tutorial will walk you through getting started, making your first trades, and laying out how to construct a long-term trading strategy for long-term success.
Reach us via mail firstname.lastname@example.org or email@example.com