The Foreign exchange market (also known as Forex, currency market or FX market) is, by far, the largest financial market in the world. It includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions.
The average daily trade in the global Forex and related markets is currently over US$ 3 trillion.
Lots of traders are starting to trade Forex due to the Forex market advantages. Here are the most important Forex market advantages:
- – 24 hours a day market:
The Forex market is open 24 hours a day (except on weekends). So, no matter where you are based, you can trade Forex at your favourite time.
- – High liquidity:
Forex market is the biggest financial market in the world averaging over 3 trillion USD daily.
- – Leverage:
The leverage on Forex can be as high as 200:1 which means that you can trade up to $100K with just $500.
- – Easy short selling:
On Forex it’s as easy to buy a currency pair as to short sell it.
- – Free commission fees:
Commission fees are 0 on Forex. The only cost in buying a currency pair is the spread.
- Commercial banks.
Commercial banks buy or sell the foreign currency for their customer or for their own account. So, there is major part of structure which is covered by commercial banks. They try to buy or sell the foreign currency on the rate which their customers are ready to give or take but it is not necessary that they will get success on their desired rate of forex. There are lots of other factors which will decide the rate of forex.
- Forex brokers.
Second major part of the structure of the forex market is the forex brokers. They are commission agents; they help to bring buyers of forex near to the sellers. Like other industry brokers, they sell or buy the forex on behalf of their customers. They are very close to the forex market.
- Foreign exchanges.
|UNITED STATES DOLLAR||USD|
|POUND GREAT BRITAIN||GBP|
|NEW ZEALAND DOLLAR||NZD|
- FOREX TERMINOLOGIES
What is a spread?
The spread is the difference between the buy (bid) price and the sell (ask) price. Two prices are given for a currency pair and the spread represents the difference between what the market maker (type of a broker) gives to buy from a trader and what the market maker takes to sell to a trader. Every market has a spread and so does forex, a spread is simply defined as the price difference between where trader may purchase or sell an underlying asset. Traders that are familiar with equities will synonymously call this the bid: ask spread.
What is leverage?
One of the benefits of this market is the ability to trade on leverage. You do not need $10,000 in your trading accounting to trade any currency pair. Currency pairs can have a leverage ratio of up to 50:1, this means you can control a large potion ($15 000) with a small amount of money ($500). Many traders find the leverage that most forex brokers offer very appealing, but you should know that trading this way can also be risky. It can produce substantial profits as easily as it can cause substantial losses. Leverage is simply borrowing money from the forex broker so that you can get even bigger exposure to the markets and you do not pay interest on the loan.
What is a “Pip”?
Pips are the last numbers on the price.
E,g the USD price is on 1.13456
The ZAR price is on 1.13450
5. FOREX TRADING WITH METATRADER
The FOREX market has a specific platform whereby you can buy and sell all your favourite currency pairs, which is Metatrader 4.
Metatrader 4 is an application that has all the price action and charting tools that you need as price action trader. There are also news alerts that you can get on the application if you are a fundamental trader. The application makes it easier for one to be able to execute trades at no costs. The forex market opens 24hours a day and 5 working days a week, on the platform.
5 Myths about Forex Trading
1 – If I know how to trade stocks, I know how to make money on Forex:
If you have experience trading stocks and think you can simply apply your knowledge on Forex and make money, you’re going to be disappointed. The Forex market is much more complex. Firstly, the Forex market is open 24 hours a day. This may not seem a big deal but it’s a significant difference in relation to the stock market. As the Forex market is open 24 hours a day, this brings more complexity to a trader. If in the stock market you have periods of higher and lower volatility, in the Forex these differences are even higher.
Many stock traders think the Forex market is easy because it is open 24 hours a day. They think they can trade whenever they want and make their quick bucks. Truth is you can make money in Forex. But for that, you need to have a deep knowledge about this market.
The indicators that work in stocks don’t always work in Forex. The Forex market is more complex and, this way, the indicators that you use on stocks don’t work so well here.
Brokers are another huge difference between stocks and Forex. In the Forex market, due to the lack of regulation, a lot of Forex brokers don’t act in their clients’ best interest. It’s a lot more difficult to find a good Forex broker than a stock broker.
- – Since the market is open 24 hours a day, you can make money anytime you want:
Once again, this is not true. In order to make money, a trader needs volatility. Although this market is open 24 hours a day, in the majority of the time there isn’t enough volatility to make good trades. This is a big challenge because volatility can appear at any time of the day and the trader can’t be watching the market all the time. He has to adjust his strategy in order to trade only in high volatility periods.
- – Commission trades are free on Forex market:
You don’t pay a commission fee when you place an order. Although, you pay the spread, which is the difference between the bid and the ask. This way, the more you trade, the harder it will be to make money in Forex because you’ll have higher fees. In the Forex market, as in any other market, a trader must avoid the overtrading at all costs.
- – You need to predict what will happen in order to make money in forex:
In order to make money in Forex, you need to react to what is happening. This is not the same thing as predict. A good trader simply reacts to whatever the market is telling him. He analyses charts, reads the news and all information he has at his disposal in order to react as fast as possible to market movements. A good trader is always looking to evolve and learn.
- – The more complicated my strategy, the best:
This is another myth that has nothing to do with reality on Forex trading. The truth is that usually the simple strategies or systems outperform the complicated ones. So, there’s no need to use plenty of different indicators at the same time. Study the market, find your favourite system or strategy, and stick with it.