WHAT IS FOREX

 

#1.What is forex? Get a soft copy here

Forex is Foreign exchange.

It is the opportunity to trade two currencies against each other.
If you think one currency will be stronger versus the other, and you end up correct, then you can make a profit.
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 into the currency of the country you are visiting.

The foreign exchange market, which is usually known as “forex” or “FX,” is the largest financial market in the world. The Forex market is a global, decentralized market where the world’s currencies change hands. Exchange rates change every second so the market is constantly in moving. Most of the currency transactions that occur in the global foreign exchange market are bought (and sold) for speculative reasons. Currency traders (also known as currency speculators) buy currencies hoping that they will be able to sell them at a higher price in the future.

#2.What is traded on Forex?

The simple answer is MONEY.
Because you’re not buying anything physical, forex trading can be confusing so we’ll use a simple (but imperfect) analogy to help explain. Think of buying a currency as buying a share in a particular country, kind of like buying shares in a company. The price of the currency is usually a direct reflection of the market’s opinion on the current and future state of a country’s economy.

In general, the exchange rate of a currency versus other currencies is a reflection of the strength of a country’s economy vs other world economies.

Every country has a currency. The major pairs are the four most heavily traded currency pairs in the forex market. The four major pairs are the EUR/USD, USD/JPY, GBP/USD, USD/CHF.

#3.HOW TO TRADE ON FOREX?

Forex trading is the constant buying of one currency and selling another. Currencies are traded through a broker or dealer 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 only in currency pairs.
Exchange rates fluctuate based on which currency is stronger at the moment. There are three categories of currency pairs:
1.  The “majors“ - These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded.
2.  The “crosses“ - Currency pairs that don’t contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the “crosses
The “exotics“ - Exotic currency pairs are made up of one major currency paired with the currency of an emerging economy, such as Brazil, Mexico, Chile, Turkey, Hungary, and many others.

The forex market is considered an over-the-counter (OTC) market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period. This means that the FX market is spread all over the globe with no central location.Trades can take place anywhere as long as you have an Internet connection!

You’ve probably noticed how often we keep mentioning the U.S. dollar (USD). In fact, according to the International Monetary Fund (IMF), the U.S. dollar comprises roughly 62% of the world’s official foreign exchange reserves!

#4.When to Buy or Sell a Currency Pair?

Forex trading involves trying to predict which currency will rise or fall versus another currency. How do you know when to buy or sell a currency pair? In the following examples, we are going to use a little fundamental analysis to help us decide whether to buy or sell a specific currency pair. The supply and demand for a currency changes due to various economic factors, which drives currency exchange rates up and down. Each currency belongs to a country (or region). So forex fundamental analysis focuses on the overall state of the country’s economy, such as productivity, employment, manufacturing, international trade, and interest rates.

Lot size - When you go to the grocery store and want to buy an egg, you can’t just buy a single egg, they come in dozens or “lots” of 12.In forex, it would be just as foolish to buy or sell 1 euro, so they usually come in “lots” of 1,000 units of currency (micro lot), 10,000 units (mini lot), or 100,000 units (standard lot) depending on your broker and the type of account you have (more on “lots” later).

Leverage – When you don’t have enough balance to buy 10000 Euros - You can! By using leverage.
When you trade with leverage, you wouldn’t need to pay the 10,000 euros upfront. Instead, you’d put down a small “deposit”,  Leverage is the ratio of the transaction size (“position size”) to the actual cash (“trading capital”) used for margin.
-For example, 1:100 leverage, means $2,000 of account balance  is enough to open a position size worth $200,000.


A small deposit can lead to large losses as well as gains- If not used properly. It also means that a relatively small movement can lead to a proportionately much larger movement in the size of any loss or profit which can work against you as well as for you.

Pips - You’ve probably heard of the terms “pips”
A pip is usually the last decimal place of a price quote, or in other words – the smallest price movement on the market.
Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places).

#5.Types of Forex Orders

There are some basic order types that all brokers provide and some others that sound weird.
Orders fall into two buckets:
1)Instant marker execution/ Market order:

an order instantly ex-ecuted against a price that your broker has provided.

2)Pending order:

an order to be executed at a later time at the price you specify.

Pending Orders - Limit Order/ Stop Orders
Limit Order 

- A limit order 

is an order placed to either buy below the market or sell above the market at a certain price.This is an order to buy or sell once the market reaches the “limit price”.
•  You place a “Buy Limit” order to buy at or below a specified price.
•  You place a “Sell Limit” order to sell at a specified price or better.
Once the market reaches the “limit price” the order is triggered and executed at the “limit price” (or better).

Pending Orders - Limit Order/ Stop Orders
Stop Order 

- A stop order “stops” an order from executing until price reaches a stop price. You would use a stop order when you want to buy only after price rises to the stop price or sell only after the price falls to the stop price.A stop entry order is an order placed to buy above the market or sell below the market at a certain price.
•  You place a “Buy Stop” order to buy at a price above the market price, and it is triggered when the market price touches or goes through the Buy Stop price.
•  You place a “Sell Stop” order to sell when a specified price is reached.

#6.Different ways to trade Forex

Because forex is so easy to learn, traders came up with a number of different ways to invest or speculate in currencies.
Among the financial instruments, the most popular ones are retail forex, spot FX, currency futures, currency options, currency exchange-traded funds (or ETFs), forex CFDs, and forex spread betting.

The most common and most available way to trade Forex is CFD,
A contract for difference (“CFD”) is a financial derivative. Derivative products track the market price of an underlying asset so that traders can speculate on whether the price will rise or fall. The price of a CFD is “derived” from the underlying asset’s price. A CFD is a contract, typically between a CFD provider and a trader, where one party agrees to pay the other the difference in the value of a security, between the opening and closing of the trade. In other words, a CFD is basically a bet on a particular asset going up or down in value, with the CFD provider and you agree that whoever wins the bet will pay the other the difference between the asset’s price when you enter the trade and its price when you exit the trade. A forex CFD is an agreement (“contract”) to exchange the difference in the price of a currency pair from when you open your position versus when you close it.

#7.How to Make Money Trading Forex

Placing a trade in the foreign exchange market is simple. The mechanics of a trade are very similar to those found in other financial markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy ONE unit of the base currency.
First, you should determine whether you want to buy or sell. If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. When traders talk, this is called “going long” or taking a “long position.”
         Just remember: long = buy.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called “going short” or taking a “short

All forex quotes are quoted with two prices: the bid and ask. In general, the bid is lower than the ask price.

Bid - The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency. This means the bid is the best available price at which you (the trader) can sell to the market. If you want to sell something, the broker will buy it from you at the bid price.

Ask -  The ask is the price at which your broker will sell the base currency in exchange for the quote currency. This means the ask price is the best available price at which you can buy from the market. Another word for ask is the offer price. If you want to buy something, the broker will sell (or offer) it to you at the ask price.

Spread - The difference between the bid and the ask price is known as the SPREAD.
Example - On the EUR/USD, the bid price is 1.34568 and the ask price is 1.34588..
•  If you want to sell EUR, you click “Sell” and you will sell euros at 1.34568.
•  If you want to buy EUR, you click “Buy” and you will buy euros at 1.34588.

Forex Beginners Summary

✅1)What is forex?
✅2)What is traded on Forex?
✅3)How to trade on Forex?
✅4)When to Buy or Sell a Currency Pair?
✅5)Types of Forex Orders

Coming next we will be discussing about Types of Forex market analysis 

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