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What is Forex?

Understanding the definition of forex and how it is traded.

The FX market is the largest market in the world. Why? Because currency exchange is essential when doing business and trading around the world.

In the foreign exchange market, two currencies can be exchanged at a floating or fixed exchange rate. This allows companies around the world to complete transactions in different currencies. To import products from other countries, you need to exchange currency. For example, a British winemaker exchanges pound pounds (GBP) for Euros (EUR) to buy wine in France. Currency exchange is the basis of all international trade. Unlike the stock market, the foreign exchange market is decentralized and has no central exchange. Most foreign exchange transactions are executed over-the-counter (OTC) on behalf of customers by banks.

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When did Forex trading start?

It all started with the gold standard in 1875. Prior to the birth of the present system, gold and silver were exchanged for goods and services. The problem was that the value of gold fluctuated depending on the supply situation. Gold would depreciate as new veins were discovered. Eventually, several countries began pegging their currencies to an ounce of gold. The difference in that fixed-rate became the exchange rate. After World War I, the system collapsed, and after a few years, the currency pegged to gold disappeared.

FX trading was once only done through banks and foreign exchange brokers. However, as technology has advanced, FX trading has become more accessible. Now individual traders can participate in the FX market via their smartphone and execute trades on the go.

Currently, the foreign exchange market is open 24 hours a day on weekdays. The market opens in Wellington, New Zealand on Monday morning and closes in New York at 5 pm ET on Friday.

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What is FX Trading – Currency Exchange

Currency trading, or FX trading, refers to the exchange of currencies at a price agreed upon by both parties. The counterparties can be financial institutions, multinational corporations, banks, central banks, hedge funds, money changers, insurance companies, speculative traders, and individual traders.

Currency trading is done in pairs. A currency pair consists of a base currency and a display currency. For example, EUR/USD is a currency pair consisting of the base currency EUR and the display currency USD. The EUR/USD exchange rate of 1.1630 means you need $1.1630 USD to hold 1 Euro.

The ultimate goal of FX trading is to find the right market direction. Ultimately, this is to either buy at a low price and close a position at a high price, or sell at a high price and close a position at a low price.

To get started, first select a trading platform where you want to trade your currency. There are many and many trading platforms to choose from, including MetaTrader.

Once a trend in the market has been identified, the trader enters a buy or sell order on their preferred trading platform. If you think the currency pair is going to go up, you would enter a buy order to make a profit when it goes up. If you think it is going to go down, you would enter a sell order to make a profit on the decline. Since the foreign exchange market is a decentralized market, it is traded in financial centers around the world, such as New York, London, Frankfurt, Tokyo, and Sydney.

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Various to trade in the largest financial market

Currency trading is becoming more and more popular now as devices such as smartphones make it easy to transact.

The attractiveness of currency trading is high due to the easy-to-use trading platform and 24-hour trading on weekdays. Due to the high liquidity of the market, traders can trade any quantity at any price and are less likely to experience price manipulation.

Other than that, the $5 trillion daily trading volume, leverage available, and free training materials offered by select brokers attract thousands of traders from all over the world.

There are also many different strategies commonly used among traders.

• Day Trading
• Swing Trading
• Position Trading
• Scalping
• Hedging
• Trend-following trading
• Breakthrough trading
• Box ticket sales
• Channel Trading
• Subjective Trading
• Mechanical Marketing
• Auto Trade
• Trading Economic News

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What is a currency pair?

Example: EUR/USD

EUR = The first currency in the currency pair is the base currency.

USD = The currency that comes later in the currency pair is called the counter currency or the indicator currency.

1. Major currency pairs

All major currency pairs include the US dollar and are the most traded FX pairs.

• EUR/USD (Euro/US Dollar)
• USD/JPY (US Dollar/Japanese Yen)
• GBP/USD (British Pound/US Dollar)
• USD/CHF (US Dollar/Swiss Franc)
• USD/CAD (US Dollar/Canadian Dollar)
• AUD/USD (Australian Dollar/US Dollar)
• NZD/USD (New Zealand Dollar/US Dollar)

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2. Cross currency pairs

A cross is a currency pair that does not include USD and is referred to as an FX “cross”.

• AUD/CHF (Australian Dollar/Swiss Franc)
• AUD/JPY (Australian Dollar/Japanese Yen)
• CAD/CHF (Canadian Dollar/Swiss Franc)
• CAD/JPY (Canadian Dollar/Swiss Franc)
• CHF/JPY (Swiss Franc/Japanese Yen)
• EUR/AUD (Euro/Australian Dollar)
• EUR/CAD (Euro/Canadian Dollar)
• EUR/NZD (Euro/New Zealand Dollar)
• GBP/AUD (British Pound/Australian Dollar)
• GBP/CAD (British Pound/Canadian Dollar)
• GBP/CHF (British Pound/Swiss Franc)
• GBP/NZD (British Pound/New Zealand Dollar)
• NZD/CHF (New Zealand Dollar/Swiss Franc)
• NZD/JPY (New Zealand Dollar/Japanese Yen)

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3. Exotic currency pairs

A currency pair consisting of the currencies of emerging and developing countries and major currencies.

• EUR/TRY (Euro/Turkish Lira)
• USD/TRY (US Dollar/Turkish Lira)
• USD/SEK (US Dollar/Swedish Krona)
• USD/NOK (US Dollar/Norwegian Krone)
• USD/DKK (US Dollar/Danish Krone)
• USD/ZAR (US Dollar/South African Rand)
• USD/HKD (US Dollar/Hong Kong Dollar)
• USD/SGD (US Dollar/Singapore Dollar)
• USD/THB (US Dollar/Thai Baht)
• USD/MXN (US Dollar/Mexican Peso)

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Most Traded Forex Currencies

EURO – Europe

EUR is the official currency of the Eurozone. It is the second most traded currency on the FX market after the US dollar. It is also the second-largest reserve currency in the world.

US DOLLAR – United States of America

USD is the official currency of the United States. Seven countries use the US dollar as their official currency. In addition to the United States, it is the currency of two countries in the British Caribbean.

JAPANESE YEN – Japan

JPY is the official currency of Japan. The yen is the third most traded currency on the foreign exchange market and is often used as a reserve currency along with the British pound, US dollar and euro.

BRITISH POUND – England

GBP is the official currency of the UK. The pound is the official currency of the United Kingdom and the official currency of Jersey, Guernsey, Isle of Man, South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha.

AUSTRALIAN DOLLAR – Australia

AUD is the official currency of Australia. Australia uses the Australian dollar as its official currency. It is a popular currency with currency traders due to its relatively high interest rates.

CANADIAN DOLLAR – Canada

CAD is the official currency of Canada. The Canadian dollar is the world’s fifth most heavily held reserve currency and is popular among central banks because of Canada’s national stability.

SWISS FRANC – Swiss

CHF is the official currency of Switzerland and Liechtenstein. The Swiss franc is also used in the Italian Campione d’Italia. Swiss franc coins are engraved in Latin to account for the many languages ​​spoken in Switzerland.

RMB – China

CNH or RMB is the official currency of China. The Yuan is the basic unit of RNB. CNH or RMB is traded on the offshore (outside China) market and CNY is traded on the offshore (inside China) market.

SWEDISH KRONA – Sweden

SEK is the official currency of Sweden. The krona has been the official currency of Sweden since 1873 and is sometimes called the Crown of Sweden because the krona means crown in Swedish.

HONG KONG DOLLAR – Hong Kong

HKD is the official currency of Hong Kong. The Hong Kong dollar is the 13th most traded currency on the foreign exchange market. HKD is also used in Macau with Maca and Pataca (MOP).

NEW ZEALAND DOLLAR – New Zealand

NZD is the official currency of New Zealand. The currency was introduced late in 1967 and is divided into a total of 10 denominations. NZD is often included in the top 10 most traded currencies.

SINGAPORE DOLLAR – Singapore

SGD is the official currency of Singapore. Just as the Brunei dollar is accepted in Singapore, the Singapore dollar is also accepted in Brunei. It is the 12th most traded currency in the world.

FAQs about Forex trading

Who is a Forex Trader?

FX traders are individuals who trade currencies. Typically, individual traders use various platforms to trade Forex. These platforms include banks, financial institutions, money changers or FX brokers. Since most transactions are completed over-the-counter (OTC), transactions are made through banks rather than central management agencies.

What is a Pip?

A pip (PIP) stands for “point in price” or “percentage in point” and is the smallest unit of price change in the foreign exchange market. For example, if the EUR/USD exchange rate changed from 1.1550 to 1.1552, it would have gone up by 2 pips (ie 0.0002).

What is Scalping?

Scalping is a trading strategy that seeks to profit from small price movements. Scalping traders target intra-day price movements and hold positions for short periods of time for small returns. Scalpers must be prepared to stare at the monitor all day.

What is leverage?

Leverage is what brokers offer to help traders maximize their trading returns. Forex markets offer high leverage compared to other markets, which attracts traders. Leverage allows you to trade large amounts with small amounts. Leverage means borrowing money to eventually increase your potential return, but it also means that your losses may increase.

What is a spread?

The difference between the ask price and the bid price is called the spread. Spreads correspond to transaction costs, and the lower the spread, the lower the cost. Spreads are affected by several factors, including volume sold, trading activity, total buy volume or interest in a stock.

What is hedging?

Hedging is a technique designed to reduce risk when prices move in an unfavorable direction. Investors and traders can also apply hedging to protect their positions from exchange rate fluctuations. Forex options are a common hedging tool that allows you to buy or sell exchange rate futures.

What is Swap?

Swap is simply exchanging one currency for another. Both parties to the swap transaction will get their original currency back at a future date calculated at the forward exchange rate. The futures exchange rate acts as a kind of hedge as it locks a specific exchange rate. Swaps vary widely by financial instrument.

What is Drawdown?

The drawdown is the difference between the relative high and the relative low of the valuation of an investment. After the new high is reached, the % difference between the previous high and the low is a drawdown. In this way, drawdowns are useful for judging the risk of a particular stock.

What is slippage?

The slippage is the difference between the transaction request price and the actual execution price. In general, slippage occurs when trade orders and executions take time due to high market volatility and rapid price movement. Slippage can have either favorable or unfavorable results.

What are foreign exchange reserves?

The foreign exchange reserve refers to the foreign exchange held by the central bank in order to respond flexibly and to stabilize the exchange rate.

Reserves are currencies held by central financial authorities. Reserve assets are used to protect against market shocks if a particular currency depreciates or plummets. Higher foreign exchange reserves ultimately lower the risk associated with currency fluctuations.

Foreign exchange reserves usually consist of US Dollars, British Pounds, Euros, Chinese Yuan or Japanese Yen. This is because these currencies are the most common in the foreign exchange market.

What is a trade signal?

Signals are trade predictions provided by knowledgeable and experienced signal providers.

Signals are based on a series of chart analysis or news events and are used to help traders decide whether to buy or sell a currency pair. In particular, day traders can use a variety of signals for their next trade. Signal systems generate manual or automatic signals.

In a manual system, the trader finds and interprets the signal himself and then decides to buy or sell. In an automated system, software identifies the signal and produces a programmed response.

What is Forex?

Forex is a market for exchanging one currency for another. Trading is always done in pairs. For example, if you want to buy Euros and sell US Dollars, you are trading the EUR/USD currency pair.

Similarly, if you want to sell US Dollars and buy Japanese Yen, you are trading the USD/JPY pair. The price of a currency pair is called the exchange rate. Exchange rates are determined by political, economic and environmental factors.

Forex trading is usually accompanied by high trading volume. The foreign exchange market is called a decentralized market because there is no specific place or building where it is traded. It is traded 24 hours a day and is the largest market in the world.

Macroeconomic indicators

There are fundamental indicators that directly or indirectly point to a weak or strong economy.

Macroeconomic indicators based on gross national product (GNP) and gross domestic product (GDP) are used to estimate economic efficiency.

This data is presented as a report and has a significant impact on the country’s currency. In addition to GNP and GDP, key macroeconomic indicators include:

• Unemployment rate
• Number of bankruptcies
• Retail sales
• Consumer Debt Ratio

Geopolitical event

These types of events directly or indirectly affect the world or a specific group of countries.

Geopolitical events have a profound psychological and emotional impact on stock and currency markets.

Some examples of these events are:

• A trade war between major economic powers caused by escalating tensions between nuclear-armed powers.
• Major decisions of the Organization of Petroleum Exporting Countries (OPEC) that directly affect oil prices.
• Major events like Brexit that bring volatility to stock and currency markets around the world.

Gross Domestic Product and Inflation

Gross Domestic Product (GDP) is a financial economic indicator that measures the total value of goods and services produced in a country during a specified period.

GDP is one of the most important indicators and is used to evaluate a country’s overall economic health. Construction costs, government spending, and investments all contribute to a country’s GDP. Inflation is an economic indicator that measures the price increase of a country’s major goods and services.

The rate at which inflation rises is the rate at which the purchasing power of a currency decreases. To keep the economy running smoothly, the central bank aims to curb inflation and avoid deflation.

Buy signal – Who is the signal provider?

A trade signal is usually an offer to enter or close a trade at a specific price and point in time. Signals can be obtained from specialists or from many knowledgeable and experienced traders. This service can be offered for free or for a fee, and most brokers offer their own free or low-cost signals.

Traders can view the yield performance of all signal providers on the platform and decide whether to accept or reject future referrals. Signal providers protecting their strategies may require you to follow a signal provider unilaterally.

Some brokers can offer their own signals by making them into one trading system with several chart analysis tools. The Pacific Union trading signal is one such example.

Difference between Demo and live trading accounts

1. Demo account

Demo trading accounts are ideal for traders who want to lay the groundwork and practice their trading skills. If you start with a live trading account, you may incur financial losses in the process of figuring out which trading technique is best for you.

We recommend that you try out and practice different approaches with a demo account before starting with a live account. Demo accounts allow you to practice and improve your trading skills without risking losses on a real account.

There are a variety of demo accounts to choose from for traders who want to compensate for weaknesses before real trading.

2. Live account

After you have developed your skills in the demo account and tried out various analyzes and indicators, it is time to switch to a live trading account and trade with real money. A demo account is great for practicing, but a live account gives you all the real advantages of the FX market.

Once a trader has established a trading strategy that works for them and is ready to switch to the live market, he can open his first real trading account. As with demo accounts, traders who wish to upgrade from a demo account to a live trading account have quite a few options to choose from.

FX Trading Tools

Various trading tools for chart analysis.

There are a number of chart analysis tools that traders can choose from when looking for the right tool for daily analysis.

Popular indicators include the Moving Average indicator, which filters price movements to help determine the direction of the trend, two curves centered on the moving average, and the Bollinger Bands showing two standard deviations.

Oscillators based on statistical concepts are also popular tools used by traders. Oscillators are used to determine overbought or oversold conditions. Popular oscillators include Relative Strength Index (RSI), Moving Average Convergence/Divergence (MACD), Momentum, Stochastic, and Average Directional Movement Index (ADX).

Support and resistance lines, Fibonacci retracement tools, and Japanese candle patterns are often used by FX traders when identifying market turning points and analyzing chart patterns.

Aside from FX Trader is head and shoulders, double ceiling / raised floor use chart patterns, such as the trend line often drawn to determine the trend pattern.

• Economic calendar
• Exchange rate calculator
• Margin Calculator
• Pip calculator
• Revenue calculator

There are many FX trading platforms that traders can choose from. Some require a monthly fee, but most are free. Popular forex trading platform providers include Zulutrader, Ninjatrader, TradingStation and more.