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Foreign Exchange, also referred as "Forex" is the largest financial market in the world, with an estimated $4 trillion in currencies traded daily. Forex provides income to millions of traders and large banks worldwide. It is the mechanism by which currencies are valued relative to one another, and exchanged. An individual or institution buys one currency and sells another in a simultaneous transaction. Currency trading always occurs in pairs where one currency is sold to another. The value of a currency is a reflection of the condition of that country's economy with respect to other major economies.
A trader can earn money by either buying or selling the currency.
Forex market operates 24 hours, 5 days a week in a network of banks. No official opening and closing hours for Forex trading due to market is decentralized, it will depend on the Forex broker only.
Every currency has its own standardized codes created by the International Standardization Organization (ISO), known as ISO codes which contain 3 letters. The first 2 letters stand for the name of the country and the last letter indicates the name of its currency.
Now that you have understood the concept of Forex trading, you need to learn the basics before beginning trading. Let us understand some of the common terms used while trading Forex.
Forex Broker: To trade Forex, you need to avail the services offered by Forex brokers. You have a wide array of choices and some brokers allow you to trade forex with just a minimal amount of deposit for creating an account. It is this broker who is responsible for facilitating your purchase and sale orders, by providing you necessary technical analysis, to make an informed choice. This process is carried out by depositing funds and withdrawing profits generated.
Trading Platform: In order to trade Forex, you need a platform, where you place the trades, which are forwarded to the broker for settlement. With a trading platform, not only do you get the opportunity to trade, but also obtain current prices and assistance for conducting technical analysis. Retail brokers generally offer the Meta Trader 4 platform, since it is free of cost and quite easy to use, once you get well acquainted with the system. Through this platform, you will be able to practice with virtual money by opening a demo trading account. This makes it easy to gain experience without experiencing any losses.
Forex Trading Hours: Numerous individuals are of the under the false impression that the forex market never sleeps. However, it is not true, since trading is not possible on Saturdays and Sundays. The remaining days it operates throughout the day, since forex trading is global. In case it is time for the market in one country to shut down, it might be time for another to start. Since, market sessions overlap; it is not possible for the market to sleep during the week.
Currencies quoted in pairs. An example for USD/JPY = 102.018, the first currency mentioned is called base currency while the next currency is called quote currency and the value shown is the exchange rate.
In Forex market, buy is termed as "go long" or "long position" and sell is termed as "go short" or "short position". A "trade" occurs when a position is open. The "bid" is the price traders will sell and the "ask" is the price traders will pay for. The bid price is lower than the ask price and the difference among them is known as "spread".
In Forex, there is a term called "Swap Rate" or "Rollover Interest". Rollover interest is an amount of interest rate that traders pay or earn depending on the pair of currencies traded. As every Forex trade involves borrowing one currency to pay for another, rollover interest is component of the Forex trading. Interest is paid on the currency that is borrowed and is earned on the currency that trader purchased.
"Margin" is the minimum account size needed for a trader to trade. Unlike other markets, Forex enable traders to trade with leverage. Leverage is the ratio that traders can trade using a small account size. Trading account will experience a "margin call" if the equity drops below the margin requirements. In the event of a margin call, the trading system will instantly close a few or all open positions to prevent trader's account drops to negative balance.
Types of Orders
Buy or sell position of a currency pair at the immediate price. Execution of this order results in opening a trade position automatically.
Pending order is the client's commitment to the broker to buy or sell a currency pair at a pre-defined price in the future. This kind of orders is used for opening a trade position provided the future quotes reached the pre-defined level. There are 4 types of pending orders accessible in our trading platform:
Buy Limit - buy when "Ask" price goes equal or lower to the pre-defined value.
Buy Stop - buy when "Ask" price goes equal or higher to the pre-defined value.
Sell Limit - sell when "Bid" price goes equal or higher to the pre-defined value.
Sell Stop - sell when "Bid" price goes equal or lower to the pre-defined value.
Used to minimize losses if currency quotes started to move in an unprofitable direction. If the quoted price reaches this level, automatically the position will be closed instantly. Such orders are attached to an open position or a pending order. Terminal verifies long positions with Bid price for meeting this order provisions, and it does with Ask price for short positions.
Take Profit order is intended for earning the profit when the quote price has reached a particular level. Execution of this order results in closing of the position. It is usually attached to an open position or a pending order. Terminal verifies long positions with Bid price for meeting this order provisions, and it does with Ask price for short positions.
Trailing Stop can be attached to an open position. It is very important to know that Trailing Stop works in trader terminal, not at the server like Stop Loss. This is why it does not work if the terminal is off. In this case, only the Stop Loss level will trigger that has been set by trailing stop.
To set the trailing stop, the user has to set the trailing order through the "Terminal" window. Then the user has to choose the desirable value of distance among the Stop Loss level and the real price in the list opened. Only one trailing stop may be set for each open position. After the above actions have been performed, upon coming of new quotes, the terminal verifies whether the open position is rewarding.
As long as profit in points becomes equal to or higher than the specified level, command to place the Stop Loss order will be given instantly. The order level is set at the specified distance from the live quote price. Furthermore, if price moves towards a more profitable direction, trailing stop will cause the Stop Loss level to follow the price, but if profitability of the position drops, the order will not be changed further. Thus, the profit of the trade position is fixed instantly.