Most sovereign nations in our world today have their own national currencies. This money is usually printed in form of paper and coins. It is normally issued and controlled by the nation’s central bank. Though primarily used as a medium of exchange within their boundaries, but for the purpose of tourism, international trade, business, etc; people change one currency into another. This forex trading for beginners’ course will focus on how foreign exchange is done in these modern times.
Foreign exchange or forex for short; is the conversion of one currency into another. Forex trading is the frequent exchanging of one currency into another especially because of financial gains. There are about 164 different national currencies in the world today. Some countries do not have their own currencies but use that of other countries. For example; the Euro (EUR) is used by 35 independent states while the US dollar (USD) is used in 10 countries.
The foreign exchange market or forex market is the decentralized marketplace in which the different national currencies are traded against each other. The trading is done electronically on a counter basis; that is, between market participants from all over the world. The market decides the exchange rates and all other trading modalities. It has no central location but the major trading centers are located in New York, Sydney, London, and Tokyo. Their time zones overlap making the forex market accessible on a 24/5 basis; except on weekends.
The major participants in the foreign exchange market are the big companies who trade large volumes; that is, the big multinational commercial banks, central banks, hedge funds, big investment firms, money managers, etc. At the lowest tier of the forex market is the individual forex traders who trade small volumes mainly for speculation or sometimes to profit from the interest rates. The forex market is the biggest financial market in the world today as it averages up to USD 5 trillion per day in sales volume.
Every forex trade comprises buying and selling at the same time. For example, if a trader has USD and wants GBP, he will sell his USD and buy GBP. Since the currencies traded against each other, pairing up the currencies makes it easier to write the exchange rate as a single quote. So, in the forex or fx market, the national currencies are grouped in pairs. As an example, consider the currency pair comprising of the USD and Japanese Yen; usually written as follows:
USDJPY or USD/JPY
In every currency pair, the first one (in this case the USD) is known as the base currency while the second currency (JPY) is called the quote or counter currency. The exchange rate is always written in terms of the quote currency that will exchange for a unit of the base currency.
USDJPY = 109.294
It means that 1 USD will exchange for 109.294 JPY. If the exchange rate goes up, it means that the USD has strengthened against the JPY or that the JPY is weakening. The market forces of demand and supply also determines the rates because once the forex market is in session, the exchange rates of the different currency pairs keep fluctuating in real time. Other factors that may affect the exchange rates include political news, government policies, inflation, etc. The ultimate aim of a retail forex trader is to capitalize on these changes and make potential profits but trading forex comes with a high risk of losing part or all your invested funds.
Major currency pairs
The most-traded currencies in the fx market are referred to as the major pairs. The four most actively traded pairs are: EURUSD, USDJPY, GBPUSD and USDCHF. The U.S dollar represents the world’s largest economy and it is the most traded currency in the fx market. In fact, about 88% of all forex trades involve the USD. So, all the major currencies are paired against the USD. The EURUSD is the most traded currency pair as it accounts for over 20% of all forex trades.
But, there are also commodity pairs which are also grouped as major pairs, they are USDCAD, AUDUSD and NZDUSD. They are called commodity pairs because the economies of the nations that own the currencies are significantly dependent on commodity exports. They are New Zealand, Canada and Australia.
Minor or cross currency pairs
These currency pairs do not include the USD. Some of the minor pairs are EURGBP, EURAUD, GBPJPY, NZDJPY, etc
Exotic currency pairs
These pairs comprise of one major currency and another from a developing economy. Examples are: EURTRY, JPYNOK, AUDMXN, etc. They are the least traded and often have high spreads.
Beginners forex trading concepts
Since this is a forex trading for beginners’ course, let us look at some basic terms associated with trading currencies.
Percentage in points (Pips)
Depending on the broker, most forex quotes are expressed to 4 or 5 decimal places while some are expressed in 2 or 3 decimal places. A pip is a standard unit used to measure the small changes in the values of a currency quote. For example; if the EURUSD changes from 1.20014 to 1.20039, then
Difference = 1.20039 – 1.20014 = 0.00025 = 2.5 pips or 25 pipettes.
So, we say that the EURUSD has gained 2.5 pips. A pip is given as the fourth decimal place while a pipette is a tenth of a pip or the fifth decimal place.
For currency pairs where JPY is the quote currency, the pip is expressed as the second decimal place. For example, if the USDJPY price drops from 109.258 to 109.214, then
Difference = 109.258 – 109.214 = 0.044 = 4.4 pips or 44 pipettes. Therefore, we say that the USDJPY has dropped by 4.4 pips.
The spread is very important to forex traders because it is used by most brokers to receive compensation for every forex trade. It is measured in pips as the difference between the bid and ask prices.
Spread = ask price – bid price
In the forex market, the quantity of currency units is standardized; meaning that you cannot just decide to buy any random amount of currency. Forex contract sizes are specified as follows:
One standard lot = 100,000 units of currency
One micro lot = 10,000 units of currency
One mini lot = 1,000 units of currency.
So, if a forex trader buys 1 lot of EURUSD at 1.20037, it means that he opened a position to buy: 100,000 EUR at the cost of 120,037 USD.
This is one of the most important features of fx trading that is appealing to all traders including beginners. Leverage is a tool that enables a trader to multiply his market exposure and his trading power using a small deposit called the margin. For example, on leverage of 1:500, and a deposit of €300, a professional forex trader can open trade positions worth €150,000. This multiplies his potential profits but also multiplies his potential losses.
How forex trading works
Forex can be traded in the spot or derivatives markets. Here are some popular ways of trading forex:
1. Forex futures
In this market, forex futures contracts are traded using standardized quantities and fixed settlement dates. It is traded on regulated exchanges such as the Chicago Mercantile Exchange (CME). Forex futures are mainly used for hedging purposes to limit risks arising because of fluctuations in exchange rates.
Currency forwards are contracts between two parties; they decide the agreement terms which are strictly between them. They decided the exchange rate, date of transaction, etc.
3. Spot market
This is the major way of trading forex through the fx market which is the largest financial market in the world. Exchange rates or prices are determined by demand and supply. It is the underlying market from which other forex trading methods mirror its prices. This forex trading for beginners’ course will focus on spot forex trading.
Individual or retail traders can gain access to trade forex through online forex brokers. These are online investment firms that specialize in providing forex trading access to individuals and institutions via software trading platforms. There are numerous forex brokers that offer their services through the internet. Generally, here are some factors to consider before choosing a forex broker:
- Security and Regulation: You need to make sure that the broker has provided modern security technologies to maintain a safe trading environment. It is always safer to trade with brokers who are authorized and regulated by the appropriate authorities in their country of operation. These brokers ensure better security and better trading conditions because they abide by strict rules stipulated by the regulatory authorities.
- Fees: Every forex broker charge for its services. Some charge fixed commissions but the majority of them charge through the spread; which is the difference between the buying and selling prices which they usually quote on their trading platforms. If you will trade frequently, then, you might consider a broker with lower spreads or affordable commissions. There are other fees like withdrawal fees, inactivity fees, swap fees, etc.
- Trading instruments: Some brokers have a large asset index while some have only a few trading instruments. If you wish to trade an exotic currency pair or less popular currencies, you need to check if it is available with the broker before you register a trading account with the broker.
- Payment options: In this modern age, there are a wide variety of payment methods which include credit cards, e-wallets, bank transfers, cryptocurrencies, etc. You need to consider a broker that suits your preferred funding option. For example; if you have your money in Skrill, you might want to consider a broker that can accept Skrill payments directly.
- Trading platforms: Most forex brokers offer at least one software trading platform where all client orders are placed. All platforms are not the same, some come with more sophisticated features and support mobile trading, forex charting, analysis, multiple order types, etc. Choose a broker that has offers platforms that suit your style, for example, if you plan to use forex robots, you need to choose a broker that offers a compatible platform for its installation and activation.
The forex broker is the service provider who provides all the technical infrastructures needed to execute forex trades placed by the trader. On its website, the broker presents its contract specifications and details of its trading services. A trader signs up by registering a live or demo account. A Live account is funded with real money; orders placed from a live account are executed by the broker or its partners. But demo accounts are practice accounts designed for trading practice, strategy testing, or platform training. Demo trading orders are instantly executed because it merely simulates the live trading environment and not executed in the forex markets.
On its trading platform, a broker presents the live ‘bid price’ and ‘ask price’ of all the available currency pairs as well as other financial trading instruments. Forex traders will buy at the ask price and sell at the bid price. Before opening a trade, traders first decide on the following:
- Currency pair to trade.
- Quantity to trade (lots).
- How to trade: Usually forex traders are informed whether to ‘buy’ or ‘sell’ from their forex trading strategies, signal generators, analysis, etc.
- Risk management: To curb risk, different order types are available. You may decide to set ‘stop loss’, take profits or trailing stop prices.
Generally, if you predict that the exchange rate of a currency pair will increase, then open a ‘buy’ position but if you forecast a decline, then, open a ‘sell’ position. Opening a buy position is also referred to as ‘going long’ while opening a sell position of referred to as ‘going short’. Depending on your strategy, you may maintain the trade position for a few minutes or months. But it is only when the position is closed that the trade is complete, then the profits or losses accrued from the trade will be calculated and it will reflect in the account balance.
Since the forex quotes are constantly fluctuating, it is often difficult to guess the price direction without a proven strategy or a trading plan. To this effect, traders have contrived forex trading strategies to help them determine how to approach the market and know exactly when to buy or sell defined trading instruments.
Most trading strategies are derived from technical or fundamental analysis. Technical analysis believes in historical analysis of trends and patterns on charts in order to determine entry points. Fundamental analysis studies the political, social, economic and other forces that affect the demand and supply of a currency. Below are some popular strategies:
This forex trading strategy aims to capitalize on the small market moves to make quick potential profits. Usually, scalpers open and exit trade positions in a matter of minutes or even seconds. It requires good knowledge of technical analysis and risk management but the trader must have clear exit strategies because scalping is fast-paced and a high-risk strategy.
2. Day trading
Day traders open and close all trade positions on the same day. They focus on the intraday market movements and do not pay overnight charges. Day trading needs an appreciable knowledge of technical analysis, risk management as well as trading discipline.
3. Swing trading
This trading style aims to benefit from the short-term market movements that happen within a few days. So, swing traders open trade positions, incur swap fees and close the position after a few days.
4. News trading
News traders watch out for political events, comments, central bank releases and economic data that usually move the markets. News traders look for the perfect time to place their trades ahead of an important release. Most brokers provide important tools needed for forex trading and this includes the ‘economic calendar’; which is an important tool that shows the times of important economic events and their forecasted impacts on selected currencies.
Why trade forex?
Here are some of the reasons why many people choose to trade forex:
Low initial capital
Trading tools and learning resources
With our current modern internet technology, there are several internet resources focusing on forex trading for beginners. A number of websites, mobile apps, subscription services, etc provide daily analysis, market news, trading signals as well as videos, articles and eBooks.
Leverage is notoriously referred to as ‘a double edged sword’. It is possible for a forex trader with a little sum of money to leverage his position and rake in huge profits. This is a major attraction to learn forex trading but it is also the bane of forex trading beginners because it has blown several accounts. This is because leverage can boost profits on a good trade and also boost losses on a bad trade.
Forex quotes are unstable and continue to fluctuate. Traders may take a position only for the market to reverse against their position. In times of volatility, prices rapidly move up or down; this may cause huge losses to traders. The forex market is inherently risky and a good number of retail investor accounts end up losing their trading capital.
A good number of forex brokers, especially the unregulated ones usually act as market makers. They directly execute client orders and trade against the currency trader. This means that the trader’s loss is the broker’s profit and vice versa. These brokers manipulate the spread to their own advantage often forcing traders to a loss.
Forex trading for beginners’ course introduces forex trading; which is the act or profession of exchanging currencies because in order to make profits from the exchange rate fluctuations or interest rates variations. In the forex market, currencies are grouped into major, minor and exotic pairs. Pips, leverage, lots and spread are some important fx trading foundational concepts.
To trade forex, you need to identify trading opportunities usually from your strategies, then open a position on your broker’s trading platform. Day trading, scalping, news trading and swing trading are some of the strategies used by traders to determine whether to buy or sell a currency pair at a given time. But trading forex CFDs are complex instruments and come with the high risk of losing money, so it is best to learn forex trading properly before attempting a live trade.
Why trade with PrimeFin?
PrimeFin is an online brokerage firm that offers forex and CFDs for trading over the internet. Through its advanced technologies, clients can trade over 350 forex and CFD instruments on its MT4 trading platform. The MT4 is powerful, rugged, loaded with complex tools for order management, charting, technical indicators and other tools used for risk management. It supports automated trading using trading robots and also supports mobile trading.
Orders placed by PrimeFin clients are executed swiftly. There are no hidden commissions rather tight spreads are offered on all trading instruments. Traders are provided with resources to learn forex trading for beginners and experienced traders as well. Fundamental analysis tools like daily news, economic calendar, etc are also available. Demo accounts preloaded with virtual funds are also available for practice purposes.