Forex trading is a fast-paced, exciting option and some traders will focus solely on trading this asset class. They may even choose to specialise in just a few select currency pairs, investing a lot of time in understanding the numerous economic and political factors that move those currencies.
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What is forex?
Forex is short for foreign exchange – the transaction of changing one currency into another currency. This process can be performed for a variety of reasons including commercial, tourism and to enable international trade.
Forex is traded on the forex market, which is open to buy and sell currencies 24 hours a day, five days a week and is used by banks, businesses, investment firms, hedge funds and retail traders.
The Forex Market
With approximately $6 trillion traded in the market every day, the forex market has the highest liquidity in the world. This means that one can buy almost any currency he wishes in high volumes any time the market is open. The forex market is open 24 hours, five days a week – Monday to Friday. Trading begins with the opening of the market in Australia, followed by Asia, and then Europe, followed by the US market until the markets close on the weekend. The only market open on the weekend is the cryptocurrency market.
The forex market start time during the summer is on Sunday at 9:00pm GMT, and ends at 9:00pm GMT on Friday. In the winter it’s 10:00pm-10:00pm accordingly. That results with currencies being traded at all times, day or night. Unlike in other markets, in the forex market you can always find buyers and sellers.
Forex market hours
The foreign exchange market is open 24 hours a day, five days a week – forex can be traded from 9pm Sunday to 10pm Friday (GMT). These long hours are because forex transactions are completed between parties directly, over the counter (OTC), rather than through a central exchange. And because forex is a truly global market, you can always take advantage of different active session’s forex trading hours.
It is important to remember that the forex market’s opening hours will vary in March, April, October and November, as countries shift to daylight savings on different days.
Does forex trade on weekends?
The forex market closes on Friday night at 10pm (UK time) and does not open again until 9pm (UK time) on Sunday evening. However, because the market is only closed to retail traders (not central banks and related organisations), forex trading actually does take place over the weekend. This means that there can be a difference in price between Friday close and Sunday open – known as a gap.
Traders need to be highly aware of the weekend forex trading hours and alter their positions accordingly. If you do not want to expose your position to the risk of gapping, you may want to consider closing your position on Friday evening or placing stops and limits to manage this risk.
Spreads and pip in forex
Spread
As a forex trader, you’ll notice that the bid price is always higher than the ask price. The difference between these two prices is the spread. In other words, it is the cost of trading. The narrower the spread, the cheaper it costs. The wider the spread, the more expensive it is.
For example, if EUR/USD is trading with an ask price of 1.1918 and a bid price of 1.1916, then the spread will be the ask price minus the bid price. In this case, 0.0002.
In order to make a profit in foreign exchange trading, you’ll want the market price to rise above the bid price if you are long, or fall below the ask price if you are short.
Pip
A point in percentage – or pip for short – is a measure of the change in value of a currency pair in the forex market.
It is the smallest possible move that a currency price can change which is the equivalent of a ‘point’ of movement.
Currency Pairs
There are hundreds of currencies in the world, and each one has its own three-letter symbol. For instance, the American Dollar is represented by USD, Euros are EUR, Swiss Francs are CHF, and British Pounds are GBP.
Currencies are divided into two main categories – Major currencies and Minors. The major currencies are derived from the most powerful economies around the globe – the US, Japan, the UK, the Eurozone, Canada, Australia, Switzerland and New Zealand. When you pit them against a counterpart. they become a currency pair. For instance, the GBP against the USD becomes GBP/USD where one’s value is relative to the other. If the GBP goes up against the USD, then the USD goes down.
When going to a store to buy groceries, we need to exchange one valuable asset for another – money for milk, for example. The same goes for trading forex – we buy or sell one currency for the other. The currencies in the pairs are referred to as “one against another”.
There are three types of forex pairs; Major pairs, Minor pairs and Exotic pairs. The major pairs always involve the USD, and are the most traded ones. The seven major pairs are EURUSD, USDJPY, GBPUSD, USDCAD, USDCHF, AUDUSD and NZDUSD. In the minor pairs the major currencies are traded between each other, excluding the USD. These can be EURGBP, GBPJPY and others. The exotic pairs have one major currency and one minor, such as EURTRY, USDNOK and many more.
What Is Financial Leverage?
Financial leverage results from using borrowed capital as a funding source when investing to expand the firm’s asset base and generate returns on risk capital. Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment.
Leverage can also refer to the amount of debt a firm uses to finance assets.
What Is a Forex Trading Strategy?
A forex trading strategy is a technique used by a forex trader to determine whether to buy or sell a currency pair at any given time.
Forex trading strategies can be based on technical analysis or fundamental, news-based events. The trader’s currency trading strategy is usually made up of trading signals that trigger buy or sell decisions. Forex trading strategies are available on the internet or may be developed by traders themselves.
Risks of forex trading
- Small market movements can have a big impact. Most FX trading products are highly leveraged. You only pay a fraction of the value of your trade up-front, but you are still responsible for the full amount of the trade.
- Exchange rates are very volatile. They tend to move around a lot even within very short periods of time. There are significant investment risks as currency fluctuations may move against you, causing you to lose money.
- Currency markets are extremely difficult to predict. Many difference factors affect exchange rates
- Limited protection from risk management systems. Stop loss orders will only cap your losses. You may also pay a premium price to guarantee your stop loss order.
- Forex scams and fraud. Offers and advertisements that sound too good to be true probably are. Read what the US Commodity Futures Trading Commission has to say about foreign currency trading fraud.
- Forex provider risks. If your FX provider became insolvent, you may not get your money back.
- Trading delays can severely affect results. You may not be able to make trades when you’d like to, because of a lack of liquidity in the market, excution ricks, or computer system problems.
Bottom line
For traders—especially those with limited funds—day trading or swing trading in small amounts is easier in the forex market than in other markets. For those with longer-term horizons and larger funds, long-term fundamentals-based trading or a carry trade can be profitable. A focus on understanding the macroeconomic fundamentals that drive currency values, as well as experience with technical analysis, may help new forex traders to become more profitable.