Forex Basics

What is Forex?

Forex, or foreign exchange is the market that deals with currencies of the world. The forex market is largely concentrated within the banking sector also known as the interbank markets. Trillions of dollars or transactions are conducted every day, involving multiple currencies.

When you trade forex, you are essentially buying one currency for another. This is one of the many things that makes forex trading so different from trading stocks or bonds. Unlike most of these securities that are traded individually, with Forex you trade the currency pairs. For example, when you trade EURUSD, you are either buying EUR and selling USD or selling EUR and buying USD simultaneously.When the exchange rate fluctuates against the other currency, you can make profits (and even losses).

Retirement & College Savings

You’re cruising along at 35,000 feet when the cabin suddenly loses pressure. Yellow oxygen masks deploy from the ceiling, begging to be used. You start reaching for the lifeline but your child sitting next to you screams for help. What’s your next move?

If you follow the preflight safety instructions, you put on your own mask before assisting others, no questions asked. After all, it’s difficult to help others if you don’t help yourself first. This seems straightforward when we’re flying through the sky, but a recent report from T. Rowe Price reveals that it becomes cloudy when we’re on the ground, handling money, as an alarming number of parents are putting their own retirements at risk in order to fund their children’s college expenses.

Nine out of 10 parents believe their children will attend college, and since college typically arrives before retirement, the majority of parents feel like they should put money toward that first and save for retirement after. In fact, 49% of parents are willing to delay their own retirements to pay for their children’s education, while 74% feel guilty they won’t be able to provide more financial assistance. Overall, 63% are concerned about their children having enough financial resources to attend college, the most commonly cited concern besides health care costs.

Naturally, parents want to take care of their children first, but past experiences may be hindering the financial decision-making process. The report finds that 63% of parents believe they took on too much student debt themselves, and 79% want their children to worry less about money while in college than they did. Just over half of the 2,000 American parents in the study say they would take on at least $25,000 in debt to fund their children’s education, with 9% saying “whatever it takes.” Yet 66% of parents are still paying down their own student loans. Finding a balance with your money is a crucial part of personal finance. Saving for retirement does not have to be mutually exclusive from saving for college.

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Everything you need to know about the Forex Markets

This guide is designed to help you get started with trading forex. It contains some of the most important information you need in order to trade forex. Although this guide is not exhaustive, the information provided will give you a very good idea of what to expected when trading the forex markets.

Forex trading Hours and Sessions

The forex markets operate 24 hours a day and are closed only on weekends and on major public holidays.

There are three major forex trading sessions.

  • The Asian trading session: This covers Australia, New Zealand and Tokyo
  • The European trading session: This covers the London and Frankfurt markets
  • The U.S. trading session: This covers the New York markets

Liquidity is high during the overlap of the Asian and European trading session for an hour each day in the morning at 8AM CET. Following this, you will gain see an overlap of 3 hours with the U.S. trading session, starting from 3PM CET.

Trading during these hours is the most ideal as there is a lot of news releases coming out and also liquidity is high, making it easy to buy and sell.

Forex Currencies

The forex currencies are traded as currency pairs. Therefore, you will always see two currencies. For example, EUR/USD. The first currency is known as the base currency. This is the currency in which the prices are displayed. The second currency is known as the quote currency.

An exchange rate of EUR/USD = 1.1200 means that 1 euro is equal to $1.1200.

For currency pairs that have the JPY involved, prices are quoted in only three decimals. Example, USD/JPY = 110.25 means that 1 USD = 110.25 yen.

Forex currency pairs are categorized into the following three types:

  • Forex majors: These are the mostly actively traded currency pairs globally. Therefore, they are always very liquid. Examples include EURUSD, USDJPY, GBPUSD, USDCHF and USDCAD.
  • Forex minors: Forex minors are mostly currency pairs where there is no USD. For example, EURGBP is a forex minor or EURJPY. Forex minors are also known as cross currency rates.
  • Forex exotics: The exotic currency pairs are those that involve the USD and an exotic currency such as the ZAR, TRY, BRL and so on. These currencies are mostly from the emerging markets. Examples of a forex exotic currency pair is USDZAR, USDBRL, USDTRY and so on.

Types of Orders

In the forex markets there are two ways to trade. You can either buy and sell at the market price or you can place a pending order. Within the pending orders, there are different types of orders as listed below.

  • Limit orders: When you place a limit order, you are telling your broker to execute your order when price is trading below (for a buy order) or above (for a sell order). Usually you will see that a limit order is used when you are setting your take profit levels.
  • Stop orders: Stop orders are placed by telling your broker to execute the order when price is trading above (for a buy order) or below (for a sell order). Stops are commonly used as a stop loss order.

Spreads

Spread is the difference between the bid and the ask price. You will always notice that the bid and ask prices are different. The price difference between the bid and the ask price is known as the spread and this is how the dealers make money.

Sometimes, the spreads can be very narrow or very wide. This basically depends on the market liquidity. During off market hours, such as the early Asian trading session, you can see that the spreads widen a lot due to lack of liquidity.

You will also find that the spreads for forex exotics are much higher compared to forex majors.

Leverage

Leverage is a way of borrowing money from your forex broker to maximize your positions. Leverage is represented as a ratio such as 1:100. What this means is that you can trade up to 100 dollars for every dollar you put up.

Leverage is important in forex because the pip, which is the fourth decimal is the smallest unit of change. Without leverage, you will need to have a capital of at least $100,000 in order to see any decent profits.

When you trade with a capital of $500 for example, using a 1:100 leverage, your account is now expanded to $500,000 allowing you to take bigger contract sizes.

Lots

When you trade forex, you will trade lots. A lot is the unit or a contract that you can trade with.

The below table gives a quick summary of the trading lots.

Lot Units Dollar Value
Micro Lot 0.01 or 1000 units $0.10
Mini Lot 0.10 or 10,000 units $1.00
Standard lot 1.0 or 100,000 units $10.00

How to analyze the Forex Markets?

Before you begin to trade forex, there are some key things that you should know. After all, without knowing how to approach something chances are that you will end up losing even before you started.

One of things about the forex markets is that while it gives you an opportunity to trade the markets and make money from it, you can also easily lose money. In this article, we take a look at the different ways you can analyze the forex markets and also address the issue of why it is important.

Why is it important to analyze the forex markets?

Analyzing the markets is one of the main things that traders and investors do before they start trading. If you simply buy and sell the securities based on the direction that they are moving in, it can lead to losses at some point sooner than later.

Analyzing the markets is important because it gives you context about what to do about the markets and how to go about it. This lays

the foundation for a trading plan which comes at the next stage.

A forex trading plan essentially allows you to execute a trade and tells you where to book your profits and exit the market or where you should accept the losses if your analysis was wrong.

One thing worth mentioning about analyzing the forex markets is that the markets are right all the time. Sometimes you may be right, which is when the markets reward you and at times the markets can prove you wrong, which is when the markets take money from you.

Profits and losses are a common aspects of trading and this is something that you should know before hand.

Different ways to analyze the Forex Markets

There are two main ways that you will analyze the forex markets.

Technical analysis, is the most common. In this approach, you will basically look at the price chart and use the past price history to understand and possibly predict what price will do in the short term.

Within technical analysis, there are many different ways that you can analyze the markets. The most common sub types of analyzing the forex markets using technical analysis include:

  • Technical indicators
  • Chart patterns
  • Wave counts

Using technical indicators is of course the easiest of all. In this approach, you would use technical indicators such as moving averages or Bollinger bands or oscillators to understand where to buy or sell.

Using a combination of two or more technical indicators, you can build your own trading system. Some traders take this a step further and build automated trading strategies that trade based on a set of rules.

Trading with chart patterns, also known as price action trading, is a bit more advanced. In this type of analysis, you will make use of certain known repetitive patterns that occur in the markets.

Based on the past price history, you will then identify these patterns and take speculative positions in the markets. Trading with chart patterns also includes understanding how market sentiment works and reading an individual candlestick or the price chart.

Finally, the wave count method of analysis is the most advanced. It is also highly subjective. In this approach, you will count the different waves in the markets to predict future price flows. There are many different ways to use the wave count method.

The most famous of all is the Elliott wave and Harmonic patterns.

Besides technical analysis, there is another form of analysis known as fundamental analysis.

With fundamental analysis, you basically try to understand what is the reason behind the market’s reaction and thus the price movements. Fundamental analysis is different from technical analysis.

Fundamental analysis tells you the reason why price is moving in a certain way. Technical analysis tells you what price can do in the future based on how it behaved in the past.

Fundamental analysis requires you to keep track of the market developments. This includes understanding how to read fundamental reports such as the GDP, unemployment and inflation and most importantly central bank interest rate decisions.

Analyzing the forex markets– Conclusion

In conclusion analyzing the forex markets requires a lot of practice. You will need to spend a lot of time to understand how they work. Both technical analysis and fundamental analysis are important to the success of your trading.

Therefore, the sooner you are educated about these types of analysis, the better your chances are about successding with forex trading.

Who are the major participants in the Forex Markets?

The foreign exchange market or the forex markets for short is a dynamic market where currencies are transacted. The daily turnover in the forex markets are said to exceed all the other financial markets that are available.

Boasting of being the only market with a daily turnover of over $4 trillion, you might be wondering what causes this much of turnover.

Well, that is because the forex markets are comprised of the following group of participants:

  • Central banks
  • Financial Institutions
  • Hedge funds
  • Dealers
  • Banks
  • Individuals

Different categories of market participants in Forex

Among the following groups, they can be categorized into the following types:

  • Speculators
  • Hedgers
  • Commercials

The speculators, which is what you as a forex trader fall into this category do not deal with the actual delivery of the currencies. On the contrary, as a speculative trader, your goal is to take advantage of the volatility in the

forex markets.

This means that regardless of which way the forex markets are moving, you are there to make money from the volatility without having to own or take delivery of the underlying security, which is the currency in question.

The hedgers are those who actually have exposure to the underlying currency. Thus, they make use of the FX markets and other derivatives in order to hedge their exposure. For example, if a hedger can be an export company that is expecting payment for their services in three months time.

Because the exchange rate can fluctuate, the export company can engage in an FX transaction in order to lock in a price. This is beneficial to them because they can then forecast a steady cash flow from their clients abroad.

The commercial group are the ones who are like the dealers. They enable buying and selling of the currencies in the markets. The commercials main aim is not to profit from the volatility but to make money by buying low and selling high to their customers.

An example of a commercial group is a bank. The bank offers you one price to buy a currency and another price to sell the same currency. The difference they make is the profit they get to keep.

In the forex markets, the retail trader such as yourself are actually a minority. Most the transactions are done from central banks and large financial institutions and big export companies that transact globally.

About the Forex Markets?

The forex markets operate 24 hours a day five days a week. This allows traders across the globe to engage in the forex markets. This gives them a major advantage compared to the rest.

For example, a trader in Australia who wants to trade the U.S. markets will have to stay awake late at night or early in the morning. This is because the stock markets operate for only eight hours a day during the U.S. business hours.

This is not the case with the forex markets however and this is where traders can take advantage. Because the forex markets never sleeps, there is always a trading opportunity that comes your way.

Another aspect about the forex markets that is unique is that it can be highly leveraged. Typically, leverage in the forex market starts at 1:100. This means that you trade hundred times for every dollar that you put up.

Leverage is risky as it can both increase your profit potential and also increase your losses. However, leverage is something that you need. This is because the forex exchange rate fluctuations are so minute (fourth decimal). This means that you need to be capitalized above $100,000.00 in order to see any meaningful profits coming into your account.

This is why leverage is used in forex so that traders even with a $1000.00 to start with can make money using leverage without having to put up too much capital.

Why should you Trade Forex?

There are many reasons for trading forex. For one, the use of leverage means that you do not need the same amount of capital required for trading stocks. Stock trading, as you might know requires a minimum investment of $10,000 or more and that is if you wish to trade on margin which is about 1:2.

There are also a lot of regulations and requirements and if you break one of the rules, you could end up getting banned for 90-days.

This is not the case with the forex markets. Besides being able to use leverage, you can easily transact in over 100+ currency pairs that are available, giving you a wide choice of markets to choose from and to make money with the volatility in the forex markets.

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Average daily turnover of $3 trillion (U.S. dollar)

'Largest financial market in the world with over $3 trillion in average daily turnover!'

Dear Trader, welcome to the dynamic world of forex, where the markets never sleep (except on the weekends of course). Boasting of an average daily turnover of $3 trillion (U.S. dollar) if not more, the world of currencies is one of the largest, even bigger than the equity markets.

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'Five things that make forex trading different to stocks'

Forex is traded over-the-counter, meaning that trades are not centralized.

Stocks on the other hand are traded at a regulated exchange where all trades are centralized

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The Forex markets operate 24 hours a day and are closed on the weekends. On the other

hand, stocks are traded during the U.S. or the respective country’s business hours. In most cases, stocks trade no more than eight hours a day

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You need to have a considerable capital if you want to trade stocks, which

puts off most from trading due to the big capital requirements. Forex on the other hand allows you to trade for as little as $100

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Using leverage in forex you can magnify your trading profits significantly.

Most often, you will find that the average leverage that is used in forex is about 1:100. This means that you can trade up to 100 times your capital in forex, which is not available with stocks

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You can buy or sell a currency pair with ease in forex trading. When it comes to stocks,

only long or buy positions on the equities are available and you can only sell the stocks that you own

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