Forex Lesson 1: Understanding forex from Scratch.
In this article today I am going to teach you everything you need to know about trading forex fast.
Of course Forex affects every aspect of your daily life even if you may not know about.
You may be wondering, So what is FOREX exactly?
The word Forex is a match up of foreign exchange market, the largest financial market place in the world.
Picture a massive market place trading across all corners of the globe rather than having goods for sale in this market trade in foreign currencies.
FOREX OR FOREIGN EXCHANGE TRADING, is one of the most widely traded markets in the world with daily trading volume of over 6 trillion dollars. Unlike the stock market, the Forex market is opened 24hrs a day, from 5pm Sunday to 5pm Friday Eastern time.
So you might be wondering where exactly is this forex market based?
Well,it’s actually everywhere. Forex is a decentralized market with no single authority or exchange that governs it all. Instead it is made up of banks,brokers,dealers and even governments who trade currency with each other.
KEY CONCEPTS.
There are key concepts you must know and that includes currency abbreviations;
Each currency is represented by a three letter code called an ISO code. And some of the main currencies traded on Forex includes;
USD which is the US Dollars also known as simply “ the dollar”, AUD: which is the Australian dollar also known as the “Aussie”, NZD: is the New Zealand dollar also known as the “Kiwi”, EUR is the “Europe”, CAD is the Canadian dollar also known as the “CAD”, also GBP is the Great British Pound also known as simply the “Pound”, JPY is the Japanese Yen also known as simply the “Yen”, CHF is the Swiss Franc also known as the “Swiss”. These currencies are always traded against each other in pairs.
Now let’s talk about the CURRENCY PAIR!
What is a currency pair exactly?
In Forex, currencies are traded in pairs because when you trade Forex you are buying one currency while selling another at the same time.
Let’s take GBP/USD as an example. The currency in a pair (GBP) is the base currency and the second currency (USD) is the quote currency.
You get a quote of GBP/USD 1.2655, this means for every 1 GBP = 1.2655 USD. Of course there’s always an invisible 1 beside the base currency on the left (1GBP).
So here is what happens when you actually trade currency pairs, when you buy a currency pair like the GBP/USD you are expecting the Pound to appreciate while the Dollar depreciates. When you sell currency pair like the Pound/Dollar or when you go short on the GBP/USD you are expecting the Pound to depreciate while the Dollar appreciates. These pairs are also classified into majors and minors but now our concerns will be on the majors.
So let’s look into the MAJOR CURRENCY PAIRS in forex market;
Major currency pairs are the one which include the US dollars as the US is the world largest economy traded currency today.
These Major currency pairs includes:
EUR/USD
USD/JPY
GBP/USD
USD/CHF
USD/CAD
AUD/USD
NZD/USD.
All these include the US dollar as the US is the largest economy in the entire world.
Now as a beginner Starting out we recommend sticking to trading major currency pairs since they are the most liquid, meaning you can get in and out of the position faster. And with the tighter bid and ask spreads as well. Don’t worry we’ll come back to the concepts of ‘bid- ask- spread’ later as we read on.
Now let’s talk A PIP!
In the land of Forex, exchange rate changes are measured in pips. A pip stands for a “Percentage In Point” or a “Price Interest Point”, which is a standardized measurement for the smallest whole unit price move that an exchange rate can make.
I mean, If the AUD is sitting at 0.6751 and its value gained like 1 pip it will move to 0.6752, most currencies are written to the fourth decimal places, the fourth decimal place representing 1 pip.
However some exceptions bought this trend like the Yen cross pairs.
The JPY is often quoted to 2 decimal places so in USD/JPY 1 pip gain will be 146.22 moving to 146.23.
There’s also a pipette which is a fractional pip, that is One tenth of a pip and is represented by the fifth decimal place. You learn learn more about this as we’ll show you in video trading practical soon.
What are LOT SIZES then;
In Forex, positions are usually measured in lot sizes. A standard lot represents 100,000 units of the base currency, a mini lot is 10 the size of a standard lot and represents 10,000 units of the base currency, a micro lot is 1000 units of the base currency and a nano lot is 100 units of the base currency. You’ll soon understand it better as we proceed.
Now, the concept of BID ASK SPREAD:
Each transaction has a Bid and an Ask price. These two prices form the basis for trading on the forex market. When you are looking to sell an asset on the Forex market you will sell at the bid price, when you are looking to buy an asset on the Forex market you will buy at the ask price for the basis currency.
In essence the spread is the difference between the Bid and Ask price. The spread covers the dealers profit and the cost of the transaction, it is decentrally the cost you pay to enter the market. It is important to note that different brokers (ie. the trading platform you choose) can offer different spreads or may offer variable spreads that can change based on market conditions.
Now What are BROKERS AND Leverages?
Brokers provide leverage which is you using borrowed capital from the broker to trade in much larger positions than the actual amount of money you hold. You as a retail trader require a broker to access and trade the Forex market.
Now on the concept of leverage, you can imagine leverage, like using a lever with minimum strength. you can lift heavy loads with less effort like a lever that magnifies physical strength, financial leverage magnifies your trading power as borrowed capital in a nutshell.
Leverage turns up the volume on trades, however with the potential for more profits, also comes potential for more loss. It is important to keep in mind that leverage can act as a double edge sword to your overall deposited trading capital.
Leverage Offerings vary from brokers to brokers and are usually expressed in a Ratio like 1:50, 1:100 or 1:500.
A trader will be required to deposit a margin of the trade which will act as a collateral for the leverage position.
Now, LIQUIDITY:
A liquid market is a financial market where lots of trades occur. It’s easy for traders to buy and sell. For better understanding, you can even Visualize a vast global marketplace where many traders are trading, each transaction barely makes a ripple on the surface like dropping a tiny pebble in the ocean, because of the market’s vast size people can quickly enter in and out of the trades without causing much disruption to the exchange rate.
So what’s MARKET VOLATILITY?
High volatility prices are changing rapidly and by a significant amount. In terms of low volatility, the market is calm with smaller exchange rate fluctuations and price changes.
Later in our video you’ll notice the drastic and wide swings of price which signals high volatility. High volatility means there’s more risk for your trade but has more reward.
In terms of low volatility, the market is calm with a smaller exchange rate with fluctuation and price change.
In Low market volatility, you’ll notice the small swing of price which signals low volatility, low volatility means there is less risk for your trade but also less reward.
Factors that can cause Market Volatility to increase or decrease are:
Inflation,
Market demand,
Foreign policy announcement,
Political and economic conditions,
Economic data releases,
Central Bank decision,
Natural disasters or crises,
Change in interest rate.
HOW DO PEOPLE MAKE SENSE OF THE FOREX MARKET
Well, traders can employ a range of trading strategies and one of which is Technical Analysis.
Now let’s talk about TECHNICAL ANALYSIS…
With technical analysis traders study historical movement and data in order to help predict similar patterns that have the possibility of repeating themselves in the future. The idea here is that history loves to repeat itself.
For SIMPLE TECHNICAL ANALYSIS IN ACTION, when you look at historical price movement on your trading platform which I will be guiding you to get one soon, you’ll notice price making higher highs and higher lows signaling a moving up trend, so you believe in the future price will continue to make higher highs and higher lows, and then you want to look for long trades to trade with the moving up trend.
You look at the historical movement and notice that price was making lower highs and lower lows, signalling a moving down trend so you believe in the future, price will continue to make lower highs and lower lows, and you may want to look for short trends to trade with the moving down trend.
You look at the historical movement and notice every time price comes to this area it reverses drastically which means this area is of higher interest to buyers and sellers, so you believe in the future, if prices comes back to this area there’s a high percentage chance that will reverse often again which present trade opportunities.
You look at historical price movement and notice the time price touches the trend line it bounces off of it, so you believe in the future if prices comes to this trend line it will bounce off of it again which presents long trade opportunities.
Another method people use to trade the Forex market is fundamental analysis.
FUNDAMENTAL ANALYSIS
Fundamental analysis on the hand, examine the broader microeconomics and geopolitical factors that influence the exchange rate and currency value.
Factors that Forex trader look at are:
A country’s economic indicators such as GDP growth, inflation, interest rates and monetary value, political events and government policy change, central bank statement, any breaking news and or significant market events.
They use this information to try and predict the up coming market fluctuation in exchange rates and currency value and use them to their advantage.
Many traders use an economic calendar as a way to keep track of up coming economic event or announcement.
Of course you may really understand all of these things without watch in video how they look like and how they’re actually used, but you can watch it now from the video below 👇
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