If you take on the Forex market without proper education, you would fail and lose out on money-making opportunities because you ran ahead of the starting gunshot.
So follow thoroughly and be smarter than the average half baked trader.
The lesson starts now.
If you've ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet.
Assuming you traveled from Nigeria to US and you saw a pizza at the airport with a $1 price tag, you bring out your Naira currency and exchange N400 to get $1 in order to pay for the pizza,
When you do this, you've essentially participated in the forex market! You've exchanged one currency for another. Or in forex trading terms, you've sold Naira to buy Dollar.
On your way out of the States back to Nigeria, you stop by the currency exchange booth to exchange the Dollar that you still had on you for Naira and notice the exchange rates have changed. $1 is now going for N500. These changes in the exchanges rates are what will allow you to make money in the foreign exchange market.
The foreign exchange market, which is usually known as "Forex" or "FX," is the largest financial market in the world. The foreign exchange market looks absolutely enormous with it’s over $7 TRILLION a day trade volume.
Since you won’t be doing a physical transaction of exchanging one currency pair for another like the scenario explained above when it comes to online forex trading, then you are left with the question:
What is Traded?
The answer is right below under the next topic.
So what is traded online - The simple answer is MONEY .
Because you're not buying anything physical, this kind of trading can be confusing.
Think of buying a currency as buying a share in a particular country, it’s like buying stocks of a company. The price of a currency in Online Forex Trading is a direct reflection of what the market thinks about the current and future health of such currency.
When you buy, say, the US dollar, you are basically buying a "share" in the US economy. You are betting that the US economy is doing well, and will even get better as time goes. Once you sell those "shares" back to the market, hopefully, you will end up with a profit.
On the Online Forex
Market, Currencies Are Traded in Pairs
Forex trading is the simultaneous buying of one currency and selling another. Currencies are traded through a broker or dealer (click here to open a forex account), and are traded in pairs; for example, the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY).
When you trade in the forex market, you buy or sell in currency pairs.
Imagine each pair constantly in a "tug of war" with each currency on its own side of the rope. Exchange rates fluctuate based on which currency is stronger at the moment.
Major Currency Pairs
The currency pairs listed below are considered the "majors". These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded. The majors are the most liquid and widely traded currency pairs in the world.
Pair Countries - Euro zone / United States
EUR/USD
Pair Countries - United States / Japan
USD/JPY
Pair Countries - United Kingdom / United States
GBP/USD
Pair Countries - United States/ Switzerland
USD/CHF
Pair Countries - United States / Canada
USD/CAD
Pair Countries - Australia / United States
AUD/USD
Pair Countries - New Zealand / United States
NZD/USD
The Forex market is the largest financial market so different players come in to trade with a number of different ways to invest or speculate in the market. Below are the four major ways it can be traded.
Spot Market
This is the place most retail traders participate in. Most likely, you might be participating in the place also.
In the spot market, currencies are traded immediately or "on the spot," using the current market price. What's awesome about this market is its simplicity, liquidity, tight spreads, and round-the-clock operations.
It's very easy to participate in this market since accounts can be opened with as little as a $5! Aside from that, most brokers usually provide charts, news, and research for free.
Futures
Futures are contracts to buy or sell a certain asset at a specified price on a future date (That's why they're called futures!). Forex futures were created by the Chicago Mercantile Exchange (CME) way back in 1972, when bell-bottoms and platform boots were still in style.
Since futures contracts are standardized and traded through a centralized exchange, the market is very transparent and well-regulated. This means that price and transaction information are readily available.
Exchange-traded Funds
Exchange-traded funds or ETFs are the youngest members of the forex world.
An ETF could contain a set of stocks combined with some currencies, allowing the trader to diversify with different assets. These are created by financial institutions and can be traded like stocks through an exchange.
Like forex options, the limitation in trading ETFs is that the market isn't open 24 hours. Also, since ETFs contain stocks, these are subject to trading commissions and other transaction costs.
Options
An "option" is a financial instrument that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the option's expiration date. If a trader "sold" an option, then he or she would be obliged to buy or sell an asset at a specific price at the expiration date.
Just like futures, options are also traded on an exchange, such as the Chicago Board Options Exchange, the International Securities Exchange, or the Philadelphia Stock Exchange.
However, the disadvantage in trading forex options is that market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.
There are many benefits and advantages of trading forex. Here are just a few reasons why so many people are choosing this market. This could also excite you to choose the option of trading the forex market.
A 24-hour market
There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.
No middlemen
Spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
No commissions
No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail brokers are compensated for their services through something called the "bid-ask spread".
Leverage
In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.
For example, a forex broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on.
While this is all gravy, let's remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
No fixed lot size
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5,000 ounces. In spot forex, you determine your own lot or position size. This allows traders to participate with accounts as small as $5
Low transaction costs
The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. At larger dealers, the spread could be as low as 0.07%. Of course, this depends on your leverage and all will be explained later.
High Liquidity.
Because the Forex market is so enormous, it is also extremely liquid. This means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will as there will usually be someone in the market willing to take the other side of your trade.
You are never "stuck" in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop-loss order).
No one can corner the
market
The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.
Now that you know the overall structure of the forex market, let's delve in a little deeper to find out who exactly these people on the ladder are. It is essential for you that you understand the nature of the spot forex market and who the main players are.
Besides, you would be contending with them in the market for profit.
Until the late 1990s, only the "big guys" could trade this market. The initial requirement was that you could trade only if you have the starting balance of $10,000. Forex was originally intended to be used by bankers and large institutions, and not by us "retail traders."
However, because of the rise of the internet, online forex trading firms are now able to offer trading accounts to "retail" traders like us.
Now let’s take a look at the major players:
Banks
Since the Forex spot market is decentralized, it is the largest banks in the world that determine the exchange rates. Based on the supply and demand for currencies, they are generally the ones that make the bid/ask spread that we trade.
These large banks, collectively known as the interbank market, take on a tremendous amount of Forex transactions each day for both their customers and themselves.
A couple of these super banks include UBS, Barclays Capital, Deutsche Bank, and Citigroup. You could say that the interbank market is THE foreign exchange market.
Governments and
Central Banks
Governments and central banks, such as the European Central Bank, the Bank of England, and the Federal Reserve are regularly involved in the forex market too. Just like companies, national governments participate in the forex market for their operations, international trade payments, and handling their foreign exchange reserves.
Meanwhile, central banks affect the Forex market when they adjust interest rates to control inflation. By doing this, they can affect currency valuation.
There are also instances when central banks intervene, either directly or verbally, in the Forex market when they want to realign exchange rates. Sometimes, central banks think that their currency is priced too high or too low, so they start massive sell/buy operations to alter exchange rates.
Companies take part in the foreign exchange market for the purpose of doing business. For instance, Mercedes Benz must first exchange its U.S. dollars for the Japanese yen when purchasing its mechanical parts from Japan for its products.
Since the volume, they trade is much smaller than those in the interbank market, this type of market player typically deals with commercial banks for their transactions.
Mergers and acquisitions (M&A) between large companies can also create currency exchange rate fluctuations. In international cross-border M&As, a lot of currency conversations happens that could move prices around.
The Speculators
These are the ones in the market to make money off the market. My guess is that you would end up as one also. Comprising close to 90% of all trading volume, speculators come in all shapes and sizes. Some have fat pockets, some roll thin, but all of them engage in the forex simply to make bucket loads of cash.
You can be a part of the ones making money from the market also if you just take your time to follow through with all the lessons presented here.
Now that we have established the background gist behind this Forex market, knowing when to trade the market is another Ace you should add to your knowledge in order to take advantage of when the market moves so you can profit from some of these moves.
The forex market is a 24-hour market but it is not active during these hours. It has its dull moments when the price movements are extremely sluggish and trust me, you don’t want to be trading at those moments.
You can make money trading when the market moves up, and you can even make money when the market moves down.
BUT you will have a very difficult time trying to make money when the market is in its sluggish state.
So let’s take a look at the different trading sessions in the Forex market.
The forex market can be broken up into four major trading sessions:
…the Sydney session,
…the Tokyo session,
…the London session,
…and the New York session.
Sydney Open -
6:00 PM(Est) or 10:00 PM(Gmt)
Sydney Close - 3:00 AM(Est) or 7:00
AM (Gmt)
Tokyo Open - 7:00
PM (Est) or 11:00 PM (Gmt)
Tokyo Close – 4:00 AM(Est) or 8:00
PM(Gmt)
London Open –
3:00 AM (Est) or 7:00 AM(Gmt)
London Close - 12:00 PM (Est) or 4:00 PM(Gmt)
New York Open - 8:00 AM (Est) or 12:00 PM(Gmt)
New
York Close - 5:00 PM (Est) or 9:00 PM(Gmt)
Let me explain this to you. I will use the GMT as the primary time.
When it's 10pm Sunday night, the forex market opens with Sydney traders opening up their charts and placing trades. When it's 11pm (which is just one hour away from Sidney open), the Tokyo traders also resume on their trading desk.
So now we have Sydney and Tokyo traders placing trades in the market.
When it's 7am Monday morning, London guys will be up on their trading desk moving the marking with their trading activities.
And finally, by 12:00pm, the New Yorkers will be ready to start trading.
If we look at this cycle, we would notice some overlapping time where two sessions seem to clash together. When this happens, we see lots of movement and actions in price. These are one of the periods traders can attempt to trade because of price movements being in profit for good speculators (traders).
These overlapping sessions include London open at 7am, which overlaps with Tokyo that closes by 8am. In other words between 7am – 8am (GMT) is a good time to trade. (3:00am – 4:00am EST)
New York opens 12noon which overlaps with London that closes by 4:00pm. This means 12:00 – 4:00pm is a good time to trade. ( 8am – 12:00pm EST).
In forex trading, the term ‘pip’ is one that you would come across often in spot forex. When you earn a pip, you make money and when you lose a pip, you equally lose money.
Take your time with this information, as it is required knowledge for all forex traders. Don't even think about trading until you are comfortable with pip values and calculating profit and loss.
The unit of measurement to express the change in value between two currencies is called a "Pip". If EUR/USD moves from 1.3050 to 1.3051, that is ONE PIP.
This One pip movement can mean 1cent to someone trading with a cent account, $1 to someone trading with a mini account, and $10 to someone trading with a standard account.
In the same way, if EUR/USD moves from 1.3050 to 1.3060, that is TEN PIP. This ten pip movement can also mean $1 to some trading with a cent account, $10 to anyone trading with a mini account, and $100 to anyone trading with a standard account.
Very Important:
There are brokers that quote currency pairs beyond the standard "4" decimal places to "5" decimal places. They are quoting FRACTIONAL PIPS, also called pipettes. For instance, if GBP/USD moves from 1.51542 to 1.51543, it moved ONE PIPETTE.
Notice there are 5 figures after the decimal point. However, what really matters is the 4th figure after the decimal. When that changes, we call it a pip movement.
So you would hear traders say “ I made fifty pips today”. You can interpret that to any amount based on the account type they are trading with, cent/mini/standard account.
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