What is forex trading and how does it work?
What is Forex trading?
How can a person trading forex to earn money?
How does this whole thing works?
In this article, I will try to answer all these questions and also list out the other related information for you.
In this post I will cover:
- What Is Forex?
- Types of Forex Market
- What Moves Currency?
- Who Involved In The Market?
- Currency Pairs
- Forex Market Opening Time
- Is Forex A Scam?
- What Is Forex Trading and How Do You Profit With It?
- Leverage In Forex Trading
- Why Choose To Trade In The Forex Market?
Feel free to skip to the sub-topic that you are interested. But if you have no idea what is Forex, then I encourage you to start from the top.
Forex stands for foreign exchange. the “FOR” of Forex is the first 3 letters of foreign; the “EX” of Forex is the first 2 letters of exchange.
Normally it is called forex or FX.
Combine two to the words, we will have the phrase of Foreign Exchange.
So what is Foreign Exchange?
It is meant by exchange of two different country’s currencies.
E.g. you want to travel to other countries. So you need to exchange your money in your country’s currency to the country’s currency that you want to travel.
The exchange of two different currencies is the Foreign Exchange.
So this is a simple example for you to understand what is foreign exchange.
Thus, the Foreign Exchange Market is the place where all of the buying and selling of currencies take place.
In this Forex market, there are also include several types of market…
There are typically 3 market for forex. When a person says he/she is trading in forex, it is normally refer to the…
- Spot Forex Market. In the spot forex market the traders or other players trade for the currencies on the spot. When trade in the spot forex market, the price may change very fast. This is due to the high volume of trading. It is the most usual forex trading market that traded by the players. Other than that, trading in this market is having 2 settlement days after transaction being made.
Then there are another two types of Forex market:
- Future Forex Market. For the Futures, it is a form of contract that the buyer and seller already agreed with the price of the currency that wanted to trade. The currency also will be traded based on the date stated in the contract. These contracts are often legally binded.
- Forward Forex Market. In this market, a contract is made and agree to buy and sell the currency at a certain price in the future. The date of buying and selling is normally one month, three months or even longer than a year. Unlike the currency futures, the currency forward do not need advance payment when the large companies and banks used them.
When we said trading in the forex market, we are referred to trading in the spot forex market. It is the market that the retail traders get into.
Now we know the market, but…
The simple answer is the Supply and Demand.
E.g. In EUR/USD, when there are more people tend to sell their Euro for US Dollar than people want to buy the Euro with US Dollar, the exchange rate of Euro to US Dollar will drop.
When there are less people want to sell their Euro Pound for US Dollar than people want to Buy Euro Pound with US Dollar, the exchange rate of Euro Pound to US Dollar will rise.
But what cause the changes of supply and demand in the Forex Market?
There are many reasons with it since it is related to tons of factors.
But there are 3 main categories that can cover most of the factor.
Economic of the Country
Economy of the Country is formed by various factors. There are like Economic Policy, monetary policy, budgeting of government, Balance of trade levels and trends, Inflation levels and trends, Economic growth and health, Productivity of an economy.
Political Condition Of The Country
The major political events or stability of government conditions are the main political factors that can affect the economic. When there is no major negative changes, there will be more benefit and less harm to the country’s currency.
The Market Psychology
The market psychology is the main reason of the fluctuations of the market. It is the reaction of people to the market. Where there are changes in economics and politics, the market will react, either in the long-term or in the short-term. The psychology also include the fear and optimistic reaction of the market toward the news of economics and politics.
There are many big players that are involved in the market. They are the biggest in the global economy and this means that the forex market is one of the largest markets in the world.
Below is the players that involved…
Central Bank produce effect to the forex market when they started to adjust the inflation rate and the interest rate of its country.
When the central bank print more money and supply to the economy, it also affects the forex market.
Central Bank also involved in buying and selling of currencies when the country’s currency is too high or too low. This help the Central Bank “stabilized” the market price.
Large Commercial Bank
The big banks contribute a huge number of volume in the forex market.
They are involved in the market when they help the customers to complete the currency exchange order.
Most of the customers are the companies that having business in multi-countries.
Other than that, they themselves also trade for themselves in the market.
The International Companies like Samsung and MacDonald’s involved a lot in the forex market for the business purpose.
When they want to buy materials or selling products to other countries, exchange in currencies is needed.
The magnitude or size of the exchange of currencies is not larger that the super banks out there.
Normally they will finish their order of currency exchange through the commercial bank they used.
Investment Management Firm
Investment firm helps their customers to invest in the financial market. Many of the firm choose to invest in the foreign country financial market. These financial markets are like stocks, real estate and many more.
So currency exchanges are needed for investing in the other country and also when taking the profit back to their own country.
Thus, investment firm are also involved in the forex market regularly.
Money Transfer Company
The money transfer company help the normal people or small business to transfer their money to foreign country.
They get involved in forex market to help their clients and earn some commission from that.
Retail Forex Trader
As a retail forex trader, they speculate in the forex market and try to profit from the market.
A trader will buy and sell the currency through the help of the forex broker.
The forex broker they traded with are largely regulated with their own country.
Profiting or losing money in the forex market is based on the trader’s performance.
In forex trading, pairs is traded.
What is currency pairs?
Currency Pairs is shown as below.
EUR is the code of Euro and USD is the short form of US Dollar.
The EUR is the Base Currency and the USD is the Quote Currency.
Every currency pair consists of two currencies. When we buy(long) this pair, we are actually buying the currency of Euro (EUR) and selling US Dollar (USD).
On the other hand, when we sell(short) the pair, we are buying the US Dollar(USD) and Selling Euro (EUR).
Name and Code of Currency
For every currency, they have their own code started with 3 letter words.
The name are examples like:
- US Dollar – USD
- Euro – EUR
- Japanses Yen – JPY
- British Pound – GBP
- Canadian Dollar – CAD
- New Zealand – NZD
- Australian Dollar – AUD
- Swiss Franc – CHF
For the other financial instrument, they also have their own code. The examples are:
- Gold (1 Troy Ounce) – XAU
- Silver (1 Troy Ounce) – XAG
The Major Pairs are the currency pairs that have the highest volume traded in the market.
It is better to involved trading in major pairs because there have a closer buying and selling price gap, thanks to the high volume.
High volume means there will be a lot of trades be made in a period of time.
Which means that the supply and demand of the market is high.
As a trader, this is very important because high volume will let your buy and sell order filled fast.
Fast filled order can let traders get the maximum profits and minimal losses by exit the market quick.
The Major Pairs in Forex Market are:
|US Dollar/Japanese Yen||USD/JPY|
|British Pound Sterling/US Dollar||GBP/USD|
|US Dollar/Swiss Franc||USD/CHF|
|Australian Dollar/US Dollar||AUD/USD|
|US Dollar/Canadian Dollar||USD/CAD|
|New Zealand Dollar/US Dollar||NZD/USD|
From the above pairs, can you identified that US Dollar is involved all the major pairs.
This can show you that the USD has a very solid position in the global financial market.
So how big is the major pairs?
For the single pair of EUR/USD, it already took over 20% of the trading volume in the forex market.
Forex operating hours is 24 hours a day and 5 days a week (Monday to Friday).
Because it is a global market, the working hours of each country will be overlaps with each other.
Below shows the time lapping of forex market hours time map.
As you can see, every country market’s operating hour “joint” with the other countries’ market operating hours.
Because of this, the Forex Market did not take any rest during the weekdays.
Other than that, the market also have different opening time in the Summer and Winter time.
In Summer, most of the countries market will open an hour earlier than the Winter Market.
The period of winter market is from October or November until March or April.
The summer market is start from the end of the winter market to the start of the new winter market, which is March or April to October or November.
For forex trading, the period of trading in the right market hour is a benefit. It is beacuse, the right period have a higher volume and will be more opportunity than other hour in the day.
The best period to trade is often the laping of two or more market opening time.
The laping of US and British market hour will be the major time period to look at since both of them have the highest share of volume traded in the forex market.
Forex trading is not a scam.
From the above introduction you know that what is forex and what the players do in the forex market.
It is just like buying an item and selling it at a higher price.
But be aware that there are scams that using the name of forex trading.
In the market, there are scammers that using the name of forex trading to operate scamming activity.
Many of these “companies” provide service to “help” an individual to trade in forex.
They also giving commission to the people who introduce others to enter this “forex-trading-investment”.
The method they used is similar to the MLM method.
Which these companies are Ponzi Scam.
Often people will being scam when they have the greed to earn money without doing the job.
You should avoid it and don’t let your savings scammed by them.
Don’t be greedy.
What Is Forex Trading?
Forex trading is an activity of buying and selling of currency in a certain period of time.
As an individual, when they decide that they want to trade in the market, they will need to open an account with a broker.
Then they can access the trading platform and open a trade order in the forex market using the trading platform like MT4, MT5 or Ctrader that provided by their brokers.
As a trader, their responsibility is to have a profitable trading system to consistently profit from the forex market.
How Do You Make Money With It?
This activity requires you to have money to make money.
A profitable forex trading occurs when the trader buying a currency at a lower price and selling at a higher price.
There are brokers that lower the barrier of entry and let people opened an account with just $100 or less. but you will need more than that to be really profit in the market in the long run.
So how traders know when to get in the market?
A trader will have two approach to analyze the market to determine when to enter and profit in the market.
The two approaches are Technical Analysis and Fundamental Analysis.
There are tons and tons of ways and analysis method to profit from the market.
Many of the traders can profit from the market by using only one approach of the analysis method.
But, the main thing to do is to have an edge in the market, so that a trader can profit in the market in the long-term.
Other than that, traders also need to have a good trading psychology and risk management to help them to profit in the market.
For the beginner to know that, forex trading is not get rich quick. It is a skill that develops with knowledge and experiences across years of a traders’ life.
How does leverage works in forex trading?
Leverage allowed forex trading to trade in the market with a smaller amount of money.
When we want to trade in the forex market, we need to buy a minimum of a Lot of a currency. A lot is the standard size for single trade, it is also mean by 100,000 units.
How much is 100,000 units?
100,000 units is about $100,000.00 based on the currency.
E.g. buying a lot in EUR is equal to $100k Pound, buying a lot in USD is equal to $100k USD.
So, to involve in forex trading, the minimum amount you need to open a trade is $100k.
But thanks to the leverage provided by brokers, a trader can use far less amount to trade in forex.
E.g. a trader can open a trade with buying just a 0.01 lot. This is equivalent to 1% of capital needed than the standard lot.
Why choosing trading in forex market instead of stock and commodities?
The main reasons are: it is a large market and it operates 24/5. The volume trades per day is larger than any of the stock exchange.
That means you will have multiple opportunities all day long.
For a student or a working adult, it is very difficult to find free time during work hours to login to your stock trading platform.
But the forex market is different, you can find trade opportunity before and after your working hours.
You also don’t need to be afraid of low volume, because the market volume is large enough that your orders will be filled within seconds or milliseconds.
In the other post, I also covered other advantage of forex trading that you can have a look with it.
So now you know what is forex trading and how does it work.
Forex Market is the bridge of each country’s currency. When there are business relationship form between each country, then the currency exchange is needed.
At the above, I also covered what is traded in the forex market and the market opening hour.
Forex Market is just another market like the stock exchange market, it itself is not a scam and trading on it requires a set of skills.
When you want to trade in the forex market, there are many things that need to be learnt.
If you want to learn forex trading, you need to pay the effort. The journey may not like you expected. I have a post on Advantages and Disadvantages of Forex Trading which can let you know more about forex trading.
Thanks for spending your precious time together.
Let us grow and learn together.