What is forex trading?
When talking about forex trading, you may hear a few terms thrown around, including FX, forex, foreign-exchange market and currency market. These terms are all used interchangeably and all refer to the forex market where forex trading happens.
So, what is forex? Put quite simply:
Forex is the marketplace in which currencies are exchanged.
In fact, you may have participated in forex without being entirely conscious of it. Have you ever transferred the currency from your country into a different country’s currency in preparation for an upcoming trip? That’s one of the simplest examples of forex trading.
And although currency exchange first began when people started exchanging gold and silver, forex trading as we know it began in 1944 with the Gold Standard agreement.
In the forex market, currencies are traded in pairs, and they are traded always by measuring the value of each currency in the pair against the other currency in the pair. Have a look at the following currencies. You may recognize some or most of these currencies, and there’s a reason for that which we’ll go over below:
- USD: US Dollar
- EUR: Euro
- GBP: British Pound
- CAD: Canadian Dollar
- AUD: Australian Dollar
- NZD: New Zealand Dollar
- JPY: Japanese Yen
- CHF: Swiss Franc
Obviously there are many more types of currency in the world, as there are many more countries in the world, but these are some of the most frequently traded currencies.
How does pairing currencies work?
As mentioned above, when you pair two currencies together, you are measuring the value of one of those currencies against the other. For example, take the pair “EURUSD”; that pair is the Euro and the US dollar, and when paired in this order, measures the value of the Euro against the dollar. If the value of the Euro increases, then the value of this currency pair increases as well. If the value of this pair decreases, then that means that the value of the US dollar has increased.
Alternatively, if you switch the pair around to be USDEUR it will work in the opposite way. If the value of the dollar increases, then the value of this currency pair increases. But if the value of the Euro increases, then the value of this pair decreases. Get it?
Major pairs, minor pairs, exotic pairs
When talking about currency pairs, there are three types of pairs: Major, minor and exotic. Major pairs are any of the currencies in the list above paired with the US dollar. Minor pairs are any of the currencies listed above that aren’t paired with the US dollar but still listed with other major currencies. Finally, exotic currencies are currencies that aren’t mentioned in the list above. And an exotic pair is an exotic currency paired with a major currency. Some examples of exotic currencies include:
HKD: Hong Kong Dollar
NOK: Norwegian Krone
THB: South African Rand
ZAR: Thai Baht THB
Helpful terms for forex traders
Forex spread: The spread in forex in the difference between the bid and the asking price of a currency pair. This difference tends to be lower when it comes to major currency pairs and higher when it comes to minor and exotic currency pairs.
Forex CFDs: Forex CFDs are one of the two ways to trade forex (we’ll go over the other way, spot forex, below). CFD means Contract For Difference, and is indeed a contract that is used to show the movement in financial instrument prices. This makes it so that with forex trading, you don’t have to own the asset to be able to profit on small price movements.
Spot forex: Spot forex, or margin, is when you buy and sell the actual currency. This means that as you purchase and exchange your different currency pairs, you will make or lose money as the values change.
Leverage: Your forex broker will provide you with capital so that you can increase your trading volume. This borrowed capital is called leverage. Take caution with leverage, as it can maximize your profits by a great amount, but it can also multiply your losses!
Pip: This is the base unit in currency pair prices (0.0001 of the quoted price). A single pip change is a change in the price of 0,0001.
Margin: The margin is the money that you have in your account. Your broker may offer you leverage to bolster your margin, and potentially increase your profits.
How to get started?
Now that you know a little bit about what forex trading is, you can take your first steps towards forex trading. Let’s go over some beginner tips!
Choose your forex broker
The first thing you need to do to be a forex trader is find the right broker. Choosing the right broker will help you become profitable, so you can keep investing in the future. Make sure you choose a brokerage firm that has a good reputation; that means some thorough research beforehand, and reading plenty of independent reviews.
Choose your currency pair
You have over 60 currency pairs to choose from so you certainly have plenty of options. When choosing your currency pair, there are three main things that you should consider:
- Trending or non-trending: To find out if the pair you are considering is trending or not, you can use trend lines or moving averages in your charts. Your broker should provide free resources to you so you can do this research.
- Trading strategy: What strategy to you plan to use? Make sure to research the different strategies available like trending strategies, range trading strategies or sideways market strategies and research how those strategies should be paired with trending, non-trending or sideways currencies.
- Average true range: The ATR is the average amount of movement of your currency pair each day.
Make your trade
After choosing a broker and deciding which currency pair you want, you will be ready to make your first trade. Your broker will most likely provide you with online trading software to facilitate your trade.