The forex market is one of the most volatile and liquid globally. It has an average trading volume of over $6 trillion. Many investors choose to trade currencies over other instruments due to easy access and the ability to speculate the markets in long and short directions via CFDs.
While traders have the opportunity to get rich via forex trading, there is also a high chance of losing your capital. Our article will discuss all the vital features and see how traders can take advantage of the available facilities.
What is a currency pair?
A currency pair consists of two currencies. A slash usually separates them. The one at the beginning is called the base, while the latter is the quote. Buying or selling is done at the bid and ask prices, respectively.
When a trader purchases a currency pair using the bid, they buy the base instrument and sell the quote and vice versa. The difference between the base and quote currency is called the spread.
Fundamentals In Forex
Economic situations that cause significant movement in the markets are called the fundamentals. They are responsible for driving the currency rate for the long and short term. Some of the powerful fundamentals are:
- Interest rate
- Political influences
- Employment figures
Fundamentals are a good way to analyze the markets for the long term. For scalping or day trading, traders usually use technical instruments such as trend lines, support/resistance, supply/demand, Fibonacci intervals, etc.
Image 1. This chart shows us a good technical analysis of a trader. They plot out the support and resistance lines along with key levels. The arrow represents the short trade when the market touches the respective levels.
Forex trading involves various trading sessions. These happen as each country’s respective banks and economy open or close. We have the following major sessions in the financial markets:
The volatility of the markets can increase or decrease for a particular pair depending on the session. For example, Japanese pairs are more volatile and liquid during the Tokyo hours. The same can be said for GBP currencies during the London session.
Important Terminologies Traders Should Know
Forex traders must understand a few important terms that come with currency trading. Let us go through a few of them:
- Broker. Forex brokers provide traders with respective quotes and a means to access the market. Depending on the conditions, they can list multiple instruments. As the competition is high between exchanges, they present the best spreads and customer service.
- Pip. A pip in forex is equivalent to 10 points. Traders can measure their stop loss and take profits in terms of pips.
- Lots. The position size of your trade is determined in terms of lots. A single lot is equivalent to 100000 units of the base currency. For a single pip movement at EURUSD, the change in equity for 1 lot size is equal to $10.
- Platform. A trading platform provides the means to witness all the currencies and their respective spreads. Traders can enter their positions through the software and make their analyses using various tools. Algorithms can also be implemented through these programs.
- Margin. Margin is necessary for forex trading for opening trades with bigger lot sizes than the current value of the account. While leverage is useful for opening bigger positions and making profits quickly, it can also be detrimental if misused.
Other than these factors, risk management, strategy, and psychology are the bread and butter for making money in the financial markets. A proper mindset is more important than anything else.