Forex 101 – The Basics Of Forex Trading
Contents in this article
Forex stands for “Foreign exchange” which means that foreign currencies are being traded. The Foreign Exchange market is the largest market in the world with a turnover of around $5.3 trillion (yes, with a T!) per day. 1 In the Forex market, there are a variety of different players: banks, governments, international corporations who have exposure to foreign currencies, insurance companies, professional traders, hedge funds and millions of amateur retail traders.
Forex trading is so popular because it’s very easy to get started, it’s possible (although not recommended) to trade with small accounts and the sometimes huge volatility offers great profit potential – but also makes it risky.
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Forex trading sessions
The Forex market does not have the same open and closing times as the stock market or other financial markets. You can trade currencies 5 days a week, 24 hours a day from Monday morning when the Australian financial markets open, until Friday night when the American market closes.
When it comes to Forex trading, there are 4 main sessions throughout the day:
Sidney: Australian trading session (AUD, NZD)
Tokyo: Asian trading session (JPY)
London: European trading session (GBP, EUR, CHF)
New York: American trading session (USD, CAD)
When you select the Forex pairs that you trade, it’s important to understand that the individual currencies move most during their ‘own’ trading time. This means that the USD/JPY usually moves most during the New York (USD) and the Asian (JPY) session. The AUD/USD is most active during the Australian (AUD) and the New York (USD) session. Generally, the overlap between the European and the American session is the most active trading session overall.
No-gaps, over-night exposure and risk
As a Forex trader, you’ll always be able to find a moving market any time of the day. Furthermore, the 24-hours open characteristic also means that there are no opening-closing price gaps like in stock trading which many Forex trader enjoy – the stock markets close over night and when they open the next day, you can often see large price gaps.
However, as a Forex trader, you have over-night exposure and sometimes volatile price movements happen during the night when you are not in front of your screens which has to be factored in as well and can be a risk factor.
News and Forex trading
News and macroeconomic events are heavily influencing currency and Forex prices. As a Forex trader, it’s essential to keep track of important news events. Even if you are a purely technical trader, knowing when news events are scheduled is important to make the right trading decisions.
Before, during and after a news release a trader has a few choices and here are our top tips for dealing with news as a Forex trader:
1) Don’t take new trades ahead of important news events.
2) If price is close to your take profit, close your position ahead of high impact news and don’t gamble with your profits.
3) Tighten your stop loss when you are in a trade. In times of high volatility, stops might not get executed at their actual price level. It might, therefore, be safer to close your existing positions before a news event.
4) Wait 30 – 60 minutes after a news release before entering a new trade. Post-news price volatility can be very erratic and unpredictable. Let the dust settle before you make a decision.
The next question is which news events you should follow. ForexFactory has a great news calendar that always gives you the most important news for the day. They also mark the news item based on impact-level and show which currency is most impacted. Here is a list of the biggest market movers for Forex traders:
- GDP (Gross Domestic Product)
- Unemployment data and especially the US NFP
- CPI (Consumer Price Index) which is a proxy for inflation
- Interest rate decisions – interest rates are the main long tern drivers of currencies
- Central Bank meetings (FED, ECB, BOE, SNB, BOJ, RBA)
What is a currency pair?
The fact that currencies are quoted and traded in pairs brings many unique characteristics with it as we will see shortly.
Whenever you look at a Forex quote and chart, you’ll see that the currencies are quoted using two names – the pair. For example, EUR/USD means that you trade the EURO against the US-Dollar. The first currency (the EURO in that case) is called the Base currency ; the second currency is called the Quote currency. The EUR/USD, therefore, shows how many USD you need to 1 EURO.
Bid and ask price
When you look at your broker’s Forex price feed, you will see two different prices for each Forex pair: the bid and the ask price. The ask price is the price that you have to pay when you enter a buy trade and the bid price is the price you have to pay when you want to enter a sell trade; the ask price is always higher than the bid price. The difference between the two prices is called spread (or bid-ask spread) and it represents the costs of trading and the broker’s commissions.
The screenshot below shows a regular MetaTrader view. On the left at (1) you see a list of tradable Forex pairs with their bid and ask price. In the middle you see the order-execution window. You can enter a sell trade for the bid price and a buy trade on the ask.
Majors and minors Forex pairs
Typically, Forex traders differentiate between major and minor Forex pairs. The 6 major Forex pairs are the most actively traded pairs and they are usually preferred and recommended to beginning traders. Furthermore, the major pairs are usually less expensive to trade which means that the ‘spread’ is lower.
The table below shows the 6 Forex majors ranked by daily activity.
Minor Forex pairs are often also called ‘exotics’ and they include lesser traded currencies such as NZD (although the NZD has seen a huge increase in activity), Norwegian NOK, Turkish TRY, Singapore’s SGB, Swedish SEK and many others. The spread, and thus the costs, for the minor Forex pairs is usually much higher though.
Your Forex education. If you want to learn more about trading Forex, here is our additional Forex articles and trading tips.
Aussie – The nickname for the Australian currency
Cable – The nickname for the currency in the UK (GBP)
Candlestick – How traders visualize price information on their charts
Dovish – Looser fiscal policy which typically means lower interest rates to stimulate spending.
Hawkish – Tighter fiscal policy which typically means higher interest rates to encourage saving.
Kiwi – The nickname for the New Zealand currency (NZD)
Loonie – The nickname for the Canadian currency
Long – Traders have a ‘long trade’ when they buy a currency pair
Leverage – A mechanism used by traders in order to trade larger positions with their accounts
Pips – Also ‘price in points’ and it’s a way to measure price distances in Forex trading
Short – Traders have a ‘short trade’ when they sell a currency pair
Spread – The difference between the bid and the ask price. It’s the commission you pay to enter a trade
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