Forex Trading
Access the world’s largest market and trade more than 60 currency pairs
What is Forex?
Forex, short for foreign exchange, refers to the global marketplace where currencies are traded. It is the largest and most liquid financial market in the world, with a daily trading volume exceeding $6 trillion. Forex trading involves the simultaneous buying of one currency and selling of another, with the aim of making a profit from fluctuations in exchange rates
Traders participate in the forex market for various reasons, including speculation on currency price movements, hedging against currency risk, and facilitating international trade and investment. The forex market operates 24 hours a day, five days a week, allowing for continuous trading opportunities across different time zones.
What Forex Trading is and How it Works
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At Finspirefx, we understand that the foreign exchange market, or Forex, is where currencies are traded on a global scale. With a staggering daily trading volume of $6.6 trillion, the Forex market outshines even the New York Stock Exchange (NYSE), which sees only $22.4 billion in daily trades.
Given its immense size, the Forex market attracts a wide range of participants, including central banks, investment managers, hedge funds, corporations, brokers, and retail traders. Remarkably, 90% of these participants are currency speculators!
What makes the Forex market so compelling to investors worldwide? It’s the process of trading one currency for another—selling one while buying the other. The crucial factor here is the exchange rate between the two currencies, which constantly fluctuates. These fluctuations, driven by supply and demand, provide opportunities for traders to profit or potentially incur losses.
While you trade, millions of other traders are also active in the Forex market. When you sell a currency, there is a buyer on the other side. The high number of participants creates what is known as 'liquidity.' Due to the vastness of the Forex market and its global presence, liquidity remains exceptionally high.
What is Forex?
At Finspirefx, we recognize the dynamic nature of the Forex market, where approximately 13.9 million traders worldwide are constantly buying and selling currencies. This massive activity contributes to the high liquidity in the Forex market.
High liquidity benefits traders by making it easier to enter and exit trades since there’s typically a buyer for the currency you’re selling or a seller for the currency you’re buying. Additionally, the abundance of market participants helps keep trading costs, like spreads, relatively low and reduces the likelihood of market manipulation. Unlike markets with low liquidity, where a large trade can significantly impact prices, the vast volume of trades in Forex makes it less susceptible to such disruptions.
Given that the Forex market involves all global currencies, it operates 24 hours a day from Monday to Friday. Trading in this market is done over the counter (OTC), meaning there isn’t a centralized exchange like the New York Stock Exchange. Instead, it’s a global network of financial institutions and banks that oversee the market.
While you might be categorized as a 'retail trader,' it’s important to note that most Forex trades are executed by ‘institutional traders’—banks, funds, and large corporations. These institutions often speculate on price movements or hedge against future changes in exchange rates rather than engaging in actual currency purchases or sales.
Let’s look at an example
Currency Markets and Currency Pairs
At Finspirefx, it’s important to understand that currencies in the Forex market are traded in pairs. Let's consider the EUR/USD pair to explain what a currency pair entails.
A currency pair is made up of two components: the 'Base Currency' and the 'Counter Currency.' The base currency is always listed first, followed by the counter currency. In the EUR/USD example, the Euro (EUR) is the base currency, while the US Dollar (USD) is the counter currency.
When you’re ready to start trading and have familiarized yourself with the platform, you’ll notice that two prices are quoted for the EUR/USD pair: the Sell or 'Bid' price and the Buy or 'Ask' price. It’s crucial to remember that when you choose to buy or sell, you are dealing with the first currency in the pair.
Question
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Didn’t get it right? Don’t worry! Check out our Spreads and Margin page to learn more.
Now that we’ve given you a brief explanation of what Forex Trading and Currency Pairs are, let’s examine some common terms that you’ll experience as you learn to trade forex
- Pips & Pipettes
- Bid and Ask
- Spread
- Leverage
- Margin
What is a Pip?
To engage in online forex trading effectively, it's crucial to understand the term 'Pip.' Short for 'price in point' or 'percentage in point,' a pip is the fourth decimal place in pricing, equivalent to 1% of a basis point. Since most currency pairs are quoted to four decimal places, a pip represents the smallest possible price movement in an exchange rate (0.0001).
Knowing this term is essential for trading with platforms like Finspirefx, as the spread—something we'll discuss shortly—is quoted in pips. We'll cover more about spreads later!
Let’s look at an example to make it a bit clearer:
You want to trade the EURUSD, which is currently priced at 1.1060. If the price changes to 1.1059 before you enter the trade, it means there has been a one-pip decrease, or 0.0001.
Keep in mind that while most currency pairs are quoted to four decimal places, some, like the Japanese Yen, are quoted to only two decimal places.
What is the Bid and Ask price?
As we discussed before, when you’re going to be trading forex you’ll need to understand how currencies are actually priced. We know that currencies are actually traded in pairs; with the value of one currency appreciating or depreciating in value against the other.
Now, when we buy and sell a currency pair, you’re actually simultaneously buying one currency while selling the other. So, the ‘Bid’ price is actually the price where you sell a currency pair. So, it’s the price of buying the base currency against the counter currency!
What is the Spread?
Another key term in forex trading is the spread. Understanding this concept is essential for calculating the costs associated with online forex trading.
The spread represents the difference between two prices: specifically, the gap between the bid and ask price of a currency pair.
- The instrument you're trading.
- Market volatility.
- The broker you're using
A reputable broker will offer a lower spread to avoid pricing you out of trading. While spreads may widen during periods of high market volatility, Finspirefx ensures you benefit from the lowest available spreads, facilitating effective trading.
When the spread widens, it indicates a larger difference between the bid and ask prices, often reflecting increased market volatility. Conversely, a narrower spread usually signifies a more liquid market.
What is Leverage and Margin?
As you get more acquainted with terms like pips and spreads, you'll also come across 'leverage' and 'margin,' which are closely related concepts.
Leverage involves borrowing funds from your broker to control a larger position in the market than your initial investment would allow. This is done through a margin account and is a key factor in the popularity of forex trading. Essentially, leverage enables retail traders to manage significantly larger amounts of money than their actual investment.
Lets’ look at an example in more detail
You’ve decided to trade with a leverage of 1:100.
You’ve deposited $1,000 with your broker.
However, you’re actually able to control $100,000 for trading!
This means that when you trade with leverage, your profits are amplified because you're using more money than you actually invested, which you’ve effectively borrowed from your broker. However, it’s crucial to understand that trading with leverage is a double-edged sword. While it can increase your potential profits, it can also magnify your losses.
To access leverage, your broker requires some form of insurance, which is where margin comes into play. Think of your margin as a deposit you provide to your broker to open and maintain a trade. The broker holds a portion of your balance to cover potential losses.
The 'margin requirement' is usually expressed as a percentage of your overall trade. Each trade you open will have its own margin requirement, which can vary based on the asset you’re trading and the broker you’re using.
Trade Currencies:
Is Currency Trading the Same as Forex Trading?
As you learn about forex trading, you might encounter the term 'currency trading.' In essence, currency trading is the same as forex trading.
The term 'currency trading' simply avoids the abbreviation 'Forex' and focuses directly on the act of trading currencies. Essentially, forex trading involves trading currencies in pairs, which means you're speculating on the value of one currency relative to another. For example, when trading EURUSD, you are predicting changes in the value of the Euro compared to the US Dollar.
How to Trade Currencies in Forex
It’s all about working out the value.
The value of each currency is influenced by supply and demand, which determines the 'exchange rate' between two currencies. The exchange rate represents how much of one currency you receive in exchange for another, such as how many Pounds you get for your Euros. It's important to note that exchange rates are constantly fluctuating.
Investors in currency trading analyze various factors that could affect a currency's value and speculate on how these factors will impact it. If a trader expects a currency’s value to rise, they will buy it; if they expect it to fall, they will sell it.
In forex trading, you'll deal with currency pairs, meaning you'll be speculating on the value of one currency relative to another. For example, if an investor believes the Euro will weaken against the British Pound due to an upcoming data release, they might sell the Euro and buy the British Pound. If their prediction is correct, they will profit.
While the concept seems straightforward, effective speculation requires a solid understanding of the market and skill in analyzing market movements.
Forex Brokers:
What They Are and How They Work
Every day, trillions of dollars are traded in the Forex market, making it the largest financial market by volume. Historically, this market was only accessible to large banks, financial institutions, major corporations, and hedge funds. However, advancements in technology have now enabled smaller investors, such as individual traders, to participate as retail traders, thanks to forex broker
As discussed, a forex trade involves selling one currency while simultaneously buying another. Forex brokers facilitate this process by connecting traders with buyers for the currencies they wish to sell, or vice-versa. Essentially, brokers match your trade with other traders or route it to the interbank market to find a suitable counterpart.
Without a forex broker, accessing the interbank market would be nearly impossible due to its high capital requirements. Brokers, such as those provided by Finspirefx, meet these capital requirements and execute trades on your behalf.
Leverage allows you to trade larger positions than your actual investment by using borrowed funds provided by the broker. Finspirefx offers this leverage, utilizing their own capital to enable you to participate in the forex market.
Forex as a form of investment
As you become familiar with terms like pips and spreads, you'll also come across 'leverage' and 'margin,' which are interrelated concepts.
Leverage enables you to borrow funds from your broker to control a larger position in the market than what your initial investment would allow. This is done through a margin account and is a key factor in the popularity of forex trading. Essentially, leverage allows retail traders to manage significantly larger sums of money compared to their actual investment.
Examples of Forex Strategies
When you’re getting down to the nitty gritty of choosing a Forex trading strategy, its crucial to understand the best ways to choose one. There’s three main parts you should consider:
Time Frame
Trading Opportunity Frequency
Consider how frequently you want to open and close trades. If you prefer a higher number of trades, scalping might be suitable, involving frequent small trades. Conversely, if you focus on economic data and macroeconomic reports, you may favor a strategy with longer time frames and larger positions.
Position Size
Determine the size of your trades based on your risk tolerance. Larger trades can lead to higher risks and potential losses. To manage risk effectively, decide on the percentage of your account you're willing to risk per trade. For example, with a $10,000 account and a 1% risk limit, you would risk $100 per trade. Typically, fewer trades mean larger position sizes, and more trades imply smaller sizes.
Day Trading
Day trading involves opening and closing all positions within the same trading day. Traders use time frames ranging from minutes to a few hours. Day traders often focus on news events, such as interest rate changes, GDP releases, and elections. They typically open positions when the price breaks through the 8-period EMA in the direction of the trend and use a 1:1 risk/reward ratio for exits.
- You’ll find a significant number of opportunities available.
- Median risk to reward ratio.
- You’ll need to invest more time into this strategy.
- You’ll need to hone your technical analysis skills.
Hedging Forex Strategy
Hedging in forex trading is used to protect other positions in different asset classes or other forex positions. There are two main methods:
1. A trader creates a hedge by holding both a 'long' and 'short' position simultaneously on the same currency pair. This approach eliminates all risk while the hedge is active. When the market moves in one direction, and the trader expects the trend to continue, they close the opposite position.
2. This method partially protects against market movements. A trader who is 'long' on a currency pair can buy put option contracts on the same instrument. This reduces some of the risk associated with the position.
Scalping
Scalping involves making small profits from a high frequency of trades over very short time frames, typically between 1 and 3 minutes. This strategy can be executed manually or with an algorithmic program like an expert advisor.
Scalpers first identify the market trend using a longer time frame and indicators such as moving averages. They then create support and resistance bands and trade within these bands. Stops are placed just a few pips away to protect against significant market movements. The strategy involves accumulating small profits from numerous trades throughout the day.
Automating this process with an expert advisor can enhance speed and efficiency, remove emotional trading elements, and potentially increase profits over short periods.
- You’ll have a huge number of trading opportunities available.
- You’ll need to work a lot with technical analysis and hone those skills.
- You’ll need to invest a lot of time into this strategy if you do it manually.
- You’ll have a much lower risk:reward ratio.
- A lot of the process can be automated which means you’ll have more time for your analysis.
