The foreign exchange market – also known as forex or the FX market – is the world’s most traded market, with turnover of $5.1 trillion per day.* To put this into perspective, the U.S. stock market trades around $257 billion a day; quite a large sum, but only a fraction of what forex trades.
Forex is traded 24 hours a day, 5 days a week across by banks, institutions and individual traders worldwide. Unlike other financial markets, there is no centralized marketplace for forex, currencies trade over the counter in whatever market is open at that time.
Trading forex involves the buying of one currency and simultaneous selling of another. In forex, traders attempt to profit by buying and selling currencies by actively speculating on the direction currencies are likely to take in the future.
EUR = The first currency in the pair is known as the Base Currency
USD = The second currency in the pair is known as the Counter Currency or the Quote Currency
EUR/USD Euro/US Dollar
USD/JPY US Dollar/Japanese yen
GBP/USD British pound/US Dollar
USD/CHF US Dollar/Swiss franc
USD/CAD US Dollar/Canadian Dollar
AUD/USD Australian Dollar/US Dollar
NZD/USD New Zealand Dollar/US Dollar
AUD/CHF Australian Dollar/Swiss Franc
AUD/JPY Australian Dollar/Japanese Yen
CAD/CHF Canadian Dollar/Swiss Franc
CAD/JPY Canadian Dollar/Swiss Franc
CHF/JPY Swiss Franc/Japanese Yen
EUR/AUD Euro/Australian Dollar
EUR/CAD Euro/Canadian Dollar
EUR/NZD Euro/New Zealand Dollar
GBP/AUD Pound sterling/Australian Dollar
GBP/CAD Pound sterling/Canadian Dollar
GBP/CHF Pound sterling/Swiss Franc
GBP/NZD Pound sterling/New Zealand Dollar
NZD/CHF New Zealand Dollar/Swiss Franc
NZD/JPY New Zealand Dollar/Japanese Yen
EUR/TRY Euro/Turkish Lira
USD/TRY US Dollar/Turkish Lira
USD/SEK US Dollar/Swedish Krona
USD/NOK US Dollar/Norwegian Krone
USD/DKK US Dollar/Danish Krone
USD/ZAR US Dollar/South African Rand
USD/HKD US Dollar/Hong Kong Dollar
USD/SGD US Dollar/Singapore Dollar
USD/THB US Dollar/Thailand Baht
USD/MXN US Dollar/Mexican Peso
An FX trader is any individual who exchanges one currency for another. Individual traders commonly use different platforms to exchange foreign currency. These include banks, financial institutions, money changers, or FX brokers. Most trades are completed over-the-counter, which means that the trade is facilitated via a bank rather than a centralised entity.
PIP is the abbreviation of “point in price” or percentage in point” and it is the smallest unit of price movement in the foreign exchange market. For example, when the exchange rate of EUR/USD moves to 1.1552 from 1.1550, the currency pair has risen by 2 pips (or 0.0002).
Forex scalping is a trading strategy which aims to benefit from small price movements in the market. Scalp traders will target intraday price movements and only hold positions for a small amount of time to take advantage of small market opportunities. Forex scalpers must be prepared to monitor the markets all day long.
Forex leverage is offered by brokers to enable traders to maximize their trading potential. The forex market offers higher leverage than other markets, and this attracts potential traders. Leverage allows traders to deposit small amounts and trade with high volumes. The term ultimately means borrowing money in order to increase the potential returns on a trade, but this means losses get increased too.
The difference between the ask price and bid price is known as the spread. The spread represents the cost of a transaction; the lower the spread, the lower the cost. A spread is influenced by a number of factors: the supply of the asset, the stock’s trading activity, and the total demand or interest in a particular asset.
Hedging is a technique designed to reduce the risk caused by adverse price fluctuations. Investors and traders might implement a forex hedge in order to protect their position from risk as exchange rates change. Foreign currency options are a common hedging method, and grant the trader the possibility to buy or sell at a future exchange rate.
A swap is simply an exchange of one currency for another. At a later date, the two parties who made the swap will receive their original currency back with a forward rate. The forward rate locks in a specific exchange rate and therefore acts as a kind of hedge. The swap varies significantly among different financial instruments.
A drawdown is the difference between a relative peak and a relative trough in the value of an investment. After a new high is reached, drawdowns track the percentage change between the previous high and the smallest trough. In this way, drawdowns are useful for determining the financial risk of a certain asset.
Slippage refers to the difference between the requested price of a trade and the price at which it is eventually executed. Slippage is usually found when the markets are particularly volatile, and prices have moved quickly during the time it takes for the trade to be ordered and completed. Slippage can have positive and negative consequences.
Demo trading accounts are perfect for traders looking to establish the fundamentals and work on their technique. Beginning on a live account means that there’s the possibility of losing real money as you work out which technique works best for you.
Before moving on to a live trading account, it is a good idea to try out a few different approaches, and practice with a demo account. Demo accounts grant traders the opportunity to develop and test their trading skills, without facing the kind of risks you do on a live account.
Traders who want to iron out the creases in their trade before they hit the live markets have a range of demo accounts to choose from.
After you’ve refined your skills and experimented with different types of analysis and indicators on a demo account, it is time to switch to a Live Account and start trading with real money! Demo Accounts are great for practice, but Live Accounts offer all the real advantages of the FX markets.
Once traders are ready to move on to the live markets, having established a trading strategy which works for them, they can set up their first Live Account. Like Demo Accounts, there’s a huge range of options available for a trader looking to upgrade their trading from Demo to Live.
Different types of trading tools for technical analysis:
When it comes to finding the right tool for daily analysis, a trader has a wide range of technical analysis tools to choose from.
Popular indicators include: the moving average indicator, which filters out price fluctuations to help traders identify trend directions, and Bollinger Bands, which plot two lines, two standard deviations away from the moving average.
Oscillators based on statistical concepts are another common addition to the trader’s toolkit. Oscillators are used to estimate whether an asset is overbought or oversold. Popular oscillators include the RSI (Relative Strength Index), MACD (Moving Average Convergence/Divergence), Momentum, Stochastic and ADX (Average Directional Movement Index).
To identify turning points in the markets, and analyse chart patterns, FX traders commonly use support and resistance, along with Fibonacci retracement tools and Japanese Candlestick patterns.
Aside from these, other FX traders prefer to use chart patterns including head-and-shoulder, double top/double bottoms, and draw trend lines to identify trend patterns.
A forex signal is a suggested entry or exit point for a forex trade, usually with a specific price and time indicated. Forex signals can be obtained from either specialist companies or a number of knowledgeable and experienced traders. The services may be free or come with a charge – most brokers offer their own forex signals either for free or for a low price.
Traders can view the performance results for any signal provider on a platform, and decide to accept or reject future trade recommendations into their trading accounts. Due to providers protecting their strategies, traders may have to blindly follow a signal provider.
Some brokers offer their own unique twists on forex signals, by merging the concept of forex signals with a number of technical tools into one grand forex trading system.