What Is Forex

What is Forex Trading?

Foreign exchange, commonly known as ‘Forex’ or ‘FX’, is the exchange of one currency for another at an agreed exchange price on the over-the-counter (OTC) market. Forex is the world’s most traded market, with an average turnover in excess of US$5.3 trillion per day.

  • 24-Hour Forex Trading
  • Leverage
  • Pricing
  • Pips (Percentage in Points)
  • Spread
  • What affects forex prices?
  • What does it mean have a long or short position?
  • Commonly traded currencies in the FX market
  • Candlesticks and Candlestick Chart
  • Bearish and Bullish Market Trends

24-Hour Forex Trading

One of the key elements behind forex’s popularity is the fact that forex markets are open 24-hours a day from Sunday evening through to Friday night. Trading follows the clock, opening on Monday morning in Wellington, New Zealand, progressing to Asian trade spearheaded out of Tokyo and Singapore, before moving to London and closing on Friday evening in New York.

The fact that prices are available to trade 24 hours a day helps to ensure that price gapping (when a price jumps from one level to the next without trading in between) is less and ensures that traders can take a position whenever they want, regardless of time, though in truth there are certain ‘lull’ times when volumes are below their daily average which can widen market spreads.

Leverage

Foreign exchange is a leveraged (or margined) product, which means that you are only required to deposit a small percentage of the full value of your position to place a forex trade. This means that the potential for profit, or loss, from an initial capital outlay is significantly higher than in traditional trading.

We strongly recommend a leverage of 1:20 or less to protect your account from possible over trading and over leveraged scenario. For account size above USD 10,000 it is most highly recommended to follow the above configuration.

According to most experts agrees that a leverage of 1:10 is the best for protecting one capital from sudden shock in the market as witness from several black swan events.

Pricing

All forex is quoted in terms of one currency versus another. Each currency pair has a ‘base’ currency and a ‘counter’ currency. The base currency is the currency on the left of the currency pair and the counter currency is on the right.

For example, in EUR/USD, EUR is the ‘base’ currency and USD the ‘counter’ currency. Forex price movements are triggered by currencies either appreciating in value (strengthening) or depreciating in value (weakening). If the price of EUR/USD for example was to fall, this would indicate that the counter currency (US dollars) was appreciating, whilst the base currency (Euros) was depreciating.

When trading forex prices, you would buy a currency pair if you believed that the base currency will strengthen against the counter currency. Alternatively, you would sell a currency pair if you believed that the base currency will weaken in value against the counter currency.

Some examples of major currency pairs are:

  • EUR/USD (The value of 1 EUR expressed in US dollars)
  • USD/CHF (The value of 1 USD expressed in Swiss francs)

Pips (Percentage in Points)

Pip stands for Percentage in Points. Most of our currency pairs are quoted to 5 decimal places with the change from the 4th decimal place (0.0001) in price commonly referred to as a ‘pip’. For example, if the price of the EUR/USD forex pair moved from 1.33800 to 1.33920, it is said to have climbed by 12 ‘pips’ (92-80=12).

Spread

The difference in the BID/ASK of the currency pairs is referred to as the ‘spread’. An example would be EUR/USD dealing at 1.33800/1.33808 (in this case the spread is 0.8 pips or 0.00008). The exceptions to this are the JPY pairs which are quoted to just 2 decimal places. A USD/JPY price of 97.41/97.44 displays a 3 pip ‘spread’.

What affects Forex prices?

Forex prices are influenced by a multitude of different factors, from international trade or investment flows to economic or political conditions. This is what makes trading forex so interesting and exciting. High market liquidity means that prices can change rapidly in response to news and short-term events, creating multiple trading opportunities for retail forex traders.

Some of the key factors that influence forex prices are:

  • Political and economic stability
  • Monetary Policy
  • Currency intervention
  • Natural disasters (earthquakes, tsunami etc)

What does it mean have a long or short position?

  • A long position is one in which a Forex trader buys a currency at one price and aims to sell it later at a higher price, when he closes a position. The trader is benefiting from a rising market.
  • A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this case the trader is benefiting from a declining market.
  • It’s important to realize that the trader opens a long position for one currency and the short position for another.

Commonly traded currencies in the FX market

The most popular currencies and their symbols are shown below:

SYMBOLCURRENCY
USDUnited States Dollar
EUREuro (EUR/USD)
JPYJapanese Yen (USD/JPY)
GBPBritish Pound or Sterling
(GBP/USD, or STG/USD)
CHFSwiss Franc (USD/CHF)
CADCanadian Dollar (USD/CAD)
AUDAustralian Dollar (AUD/USD)
NZDNew Zealand Dollar (NZD/USD)

Candlesticks and Candlestick Chart

A price chart that uses candlesticks is called a Candlestick Chart

Candlestick Components

Basic Candlestick Patterns:

Bearish and Bullish Market Trends

What Does this Mean?
Bearish and Bullish are simply terms used to characterize trends in the currency, commodity or stock markets. If prices tend to be moving upward, it is a bull market. If prices are moving downward, it is a bear market. Of course, this doesn’t have to refer to the market overall. A single sector, or even a specific asset, can be called bullish or bearish and the words are often used to refer to sentiment among traders, which can make the market go bearish or bullish even if the trend hasn’t started yet

Why Bears and Bulls?
Actually, the origins of the terms are not completely clear. There are a number of different theories but none are agreed on. The most popular idea is that the line on a graph that shows each trend corresponds to the movement that each animal uses when it fights. Bulls ram their horns forward and upward, whereas bears swipe downward with their claws.

Another theory points to English merchants who would speculate on the sale of bearskins, selling the skins before the bears had been killed. They hoped that the market price would fall by the time the skins were delivered, making their transactions even more profitable.

What Makes a Bull Market?
Bull markets usually happen when economic indicators show that things are looking up. Consumer confidence is high, usually thanks to high employment and this causes consumers to spend more and invest more. Not only does that make prices go up, it also contributes to high levels of confidence in the business sector, which helps the market rise even more.

What Makes a Bear Market?
Bear markets tend to happen when market sentiment is very low, often driven by low employment rates and negative economic data. Of course, the most famous bear market is the Great Depression of the 1930’s which was triggered by the Wall Street crash in 1929. Like in a bull market, the sentiment in the market snowballs, so that negative feelings triggered by one event can lead to a long term downward trend.

Only when the trend is longstanding is it considered a bear market. Up and down movements in the market are normal and are what make it possible for traditional traders to make money trading. However, only Forex Traders who can short sell on Forex Trading Platforms can keep making money in a serious bear market.