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The Forex or FX market, which is short for the foreign exchange market, is the place in which individuals, companies, and governments all trade different currencies with one another. Put simply, the Forex market is the marketplace where money is bought and sold.
Open 24 hours a day and 5 days a week, unlike stock or bond markets, the Forex market does not close at the end of each day. Instead, trading just shifts to different financial centres around the world. The day starts with the Sydney session and moves to Tokyo, London, Frankfurt and finally New York before it is time for Sydney to do it all over again!
When compared to various stock, commodities, and bond markets worldwide, the Forex market is by FAR the biggest financial market in the world. The NYSE sees an average of $22.4 billion per day in volume traded, while the London Stock Exchange sees an average day turn over $7.2 billion in volume traded.
They sound like big numbers, don’t they? Well the Forex market does a massive $5.3 TRILLION, monstering them all in comparison!
The most appealing thing about trading Forex is just how accessible it is to trade for regular people like you! Known as ‘retail traders’, these are the people trading the Forex market from their own homes with nothing more than a computer, a connection to the internet and their own personal trading account with a Forex broker such as IVZ FX.
If you were to ask someone on the street what their opinion of Forex trading was, you’d most likely get the following responses:
For one reason or another, Forex is unfortunately seen by many as a risky, get rich quick scam. But is that a fair assessment? Well the answer is actually both yes and no.
Like most things in life, people fear what they don’t actually understand and if you don’t educate yourself and dive in head first with your life savings trading Forex with an unregulated broker, what the heck do you expect? Of course, you’re likely to lose your money…
On the other hand, if you put in the time to properly educate yourself as a Forex trader, understand the leverage available to you, your broker’s financial regulation and most importantly how to manage your risk, then Forex could well be the perfect market for you to trade!
So what are some of the advantages that Forex trading has over trading stocks and other markets?
Forex trading is easy – Unlike other forms of investing, Forex trading is easy to get started. When you compare what you need to get started trading Forex with what you need to get started in stocks, options, or futures trading, they all pale in comparison.
All you need to trade Forex is a computer, an internet connection and a mind that wants to learn! Open an account with a Forex broker such as IVZ FX with as little as $200 and take advantage of the copious amounts of free Forex education that is on our website!
Forex trading is cheap – As you just read, Forex trading doesn’t require you to deposit tens of thousands of dollars into your account just to get started. You can open an account and begin trading Forex with as little as a $200 deposit.
Another huge advantage that Forex trading has over stocks, options and futures is costs to enter and exit a trade. With other financial instruments and markets, you can pay huge fees to simply enter and exit a one size fits all trade. Forex on the other hand allows you to trade just 0.01 of a standard lot, paying just the spread.
The ability to trade Forex anywhere, anytime
unlike your 9 to 5 day job, Forex trading doesn’t restrict you to your desk or worksite. If you don’t want to be inside, then don’t be inside! Forex gives you the ability to trade anywhere, anytime. Trade wherever and whenever you want, it’s up to you.
Access your MetaTrader 4 account on a computer, laptop, web browser, tablet, or mobile phone. All you need is an internet connection. Always be connected to the market and never let a trading opportunity go by wishing you could have profited from it!
Now here’s a question for you – How many stock charts have you looked at and seen gaps scattered throughout the chart?
Remember that gaps mean that you can’t get in or out of a trade at those prices because there is simply no one looking to buy or sell there. This adds a whole other element of risk to stock traders that Forex traders don’t have to worry about.
As we outlined in our what is Forex section, the Forex market is open 24 hours a day and 5 days a week. As one part of the world wakes up, the centre of trading focuses around that section of the globe and slowly shifts between financial centres as the day unfolds throughout the world.
The major Forex trading sessions are outlined in the following table:
As a basic rule, you are better off trading the respective currency pair during its corresponding session. For example, AUD/USD is more likely to move during the relatively quiet Sydney session because of market moving news releases. On the other hand, EUR/GBP probably isn’t going to experience the same types of moves during Asia as both Europe and the UK is asleep.
Now, as you can see some of the Forex trading sessions actually overlap one another. During these session cross over times, it is seen as one of the optimal times to be trading Forex as you have highly liquid market conditions where good quality moves often come. But why are they seen as good quality moves? Shouldn’t a move be a move? Well the simple answer here is no, not all moves are good for trading.
For example, a move during the illiquid end to the New York trading session might be prone to a fake out rather than a sustained, more predictable move. You could be much better off taking a breakout trade during the London session open when the market is at its most liquid and moves are better. On your Forex sessions diagram, take note of important times such as session open and closes when major market participants might look to open or close major orders.
As with everything in Forex, nothing here is actually set in stone. Just because a breakout happens during the relatively quiet Asian session doesn’t mean that it will automatically be a fake-out like the textbooks may tell you.
Now we know a little more about what the Forex market is, let’s take a look at the currencies that are traded and how they are traded. We have talked about how massive the Forex market is as a whole, so let’s now dig down a little deeper into the individual currencies that make up this huge market.
Below is a list of the most popular, actively traded currencies in the Forex market as well as their abbreviations that traders use:
But in the Forex market, you cannot simply buy or sell these single currencies alone. In Forex, currencies are actually quoted and traded in pairs, hence the name currency pairs. It makes sense when you think about trading currencies with real world applications and not simply as a paper share in a company or a futures contract. When you want to buy a specific currency, what are you going to pay for it with? Of course, another currency. This is where the idea of Forex currency pairs comes from.
Here we have listed the most commonly traded Forex currency pairs:
Now let’s look at an example of a Forex trade. Say that your analysis is telling you to buy EUR/USD. This essentially means that you are buying the Euro and selling the US Dollar. Because each currency pair is actually a relationship between the two different currencies quoted, you have a few different scenarios that could put your trade in a profitable position.
Put simply, you will profit if the Euro rises and the US Dollar falls. But the currency pair relationship also means that you will profit if both currencies are rising but the Euro rises more and likewise if both currencies are falling but the USD is falling faster.
Here we can see the different parts that make up a Forex currency pair.
The first currency listed in the pair is known as the base currency and the second currency listed in the pair is what’s known as the quote currency.
Have you ever noticed that a currency pair is always written in a set order? For example, EUR/USD is always written with the EUR as the base currency and not the other way around. This is due to standards that have been universally set, whereby each currency has a ranking relative to one another. If one currency is ranked higher than another, when quoted as a currency pair it will receive base currency status.
The universally accepted ranking order is as follows:
EUR
GBP
AUD
NZD
USD
CAD
CHF
JPY
The rankings were established according to the relative values of the currencies at the time, but new currencies such as the Euro were subjectively inserted.
When a Forex currency pair is displayed as a quote like the example above, the price shows how much of the quote currency (in this case, the USD) is required to buy 1 unit of the base currency (in this case, the EUR). For example, EUR/USD at 1.2000 means that 1 Euro can buy 1.2000 US Dollars.
In a Forex currency quote, the first number is what is called the bid price, or the price at which you are able to buy the currency pair. The second number is called the ask price and is the price at which you can sell the currency pair. The difference between the bid and ask price is what is known as the spread and is the price that you must pay to enter your trade.
Sometimes when talking to other Forex traders you might hear a reference to a nickname that you don’t understand.
“I’m looking to long 10 lots in Cable, what are you thinking?”
“Hmm, have you taken a look at Fiber? Support looks like it might be breaking across the board.”
Wait, what? I thought we were talking Forex trading over here? Although It may seem strange at first, these are actually nicknames for different Forex currency pairs!
Let’s take a look at the two Forex currency pair nicknames that get used the most, Cable and Fiber.
GBP/USD – Cable:
Back in the mid-19th century, before the invention of satellites and fiber optics, the exchange rate between the British Pound Sterling (GBP) and the US Dollar (USD) was actually transmitted
across the Atlantic Ocean via submarine cable. The first such cable between the London and NY exchanges was laid in 1858 and the rest as they say, is history!
Traders love to talk about the good old days and this piece of Forex trading history has stuck with traders’ generations onward.
EUR/USD – Fiber:
What about the brand spanking new Euro that was first introduced in only 1999? EUR/USD of course doesn’t quite have the same romantic history to draw upon that Cable does. So what do traders do? Well, being the funny bunch that they are, they’ve gone and simply ‘upgraded’ the old Cable to a state of the art Fibre Optic line. Hence the nickname Fibre!
The nickname Fiber is simply a play on words on the first nicknamed Cable. Isn’t it funny how nicknames like this just stick!
Of course, there are many more Forex currency pair nicknames going around which we’ve listed for you here:
You may have heard traders discussing the ‘majors’ or maybe even saw someone talk about shorting an ‘exotic’ Forex currency pair. No they weren’t talking about a soldier trading from an exotic beach while sunbathing naked (zing!) on the sand, they were actually talking about the different types of Forex currency pairs that are available!
The Majors are typically the most traded currencies, paired with the USD, although some traders may refer to any Forex currency pair featuring the USD as one of the majors. The majors are the most actively traded Forex pairs which means they most liquid. This increased liquidity means that Forex brokers such as IVZ FX can offer tighter spreads between the bid and ask price on the majors.
The Minors are normally referring to any of the remaining, non-USD Forex currency pairs. These slightly less popular pairs often experience more wild swings in both directions due to less liquidity in the market. This also means that their spreads are often wider than those of the majors.
What about The Currency Crosses? Once again, the Forex currency crosses are just another example of the minors where USD is no longer required to complete the trade. Historically you see, anyone who needed to trade one currency for another would first have to convert their original sum into USD. The currency crosses were first developed to bypass the step of first having to go to USD. While that sounds normal today, at the time this was ground-breaking in its business functionality.
And finally, sometimes you may also see some of the minors referred to as The Exotics. This just simply means that the currency pair is something that is rarely traded or spoken about in mainstream financial circles.
The characteristics of both majors and minors are different and the personalities of the currency pairs that you are trading have to be taken into account when you are determining the pairs on which to employ your trading strategy on.
Maybe the wider spreads on GBP/CHF might prohibit you from effectively scalping the pair? But at the same time, maybe the big moves might be much more effective for you as a swing trader? These are all things to consider when building your trading plan and deciding on which Forex currency pairs to trade.
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