Defining The Forex Market
Forex market is a foreign exchange market that individuals can buy, sell, and exchange different currencies mainly for hedging and speculation. The market is known as the largest financial market composed of banks, companies, firms, funds, brokers, and investors.
Are you planning to do Forex trading? If yes, research before putting your money into investments as the market always changes. Listed below are the basic things you need to know before trading in Forex, including the peculiarities of Forex trading and its basic terms like Bollinger bands definition.
Forex Vs. Stocks
Most new traders think that Forex and stocks are the same, but they are very different.
- One of the significant differences between Forex and stocks is their volume. Forex has a larger volume than stocks, with about US$5 trillion trades in a day. In contrast, stocks have US$200 billion trades in a day.
- However, large volume markets have high liquidations. Therefore, Forex has higher liquidity than stocks.
- Moreover, Forex can be traded 24 hours a day and five days a week. Stocks have many variables and factors considered that can affect the trading times.
- Stocks have commissions paid to a broker. Forex has no commissions. Instead, brokers earn through the margin of the spread or the difference between buying and selling prices.
- Forex has eight major currencies that you can trade. On the other hand, stocks have thousands of companies you can choose from.
Forex Basic Terms
Before trading, you need to know the basic terms in Forex so that you won’t have a hard time understanding how the exchanges work. Here are some of the terms you need to know:
- Currency Pair – The two currencies involved for an exchange.
- Exchange Rate – The price of your currency in another currency. For example, SGD/USD, the value of USD in SGD is given as US$1.2.
- Ask Price – The offer price or the price you can buy a currency.
- Bid Price – The price you can sell the currency.
- Quote – The market price consists of the bid/selling price and ask/buying price.
- Spread –The brokerage service costs.
- Account Currency – The currency you choose when you open a Forex trading account.
- Pip – The smallest price change in a given exchange rate.
Reading Currency Pairs
To understand currency pairs, you need to know exchange rates. The rates are directly related to currency pairs since you’ll be buying one currency by selling another.
For example, the price of one Euro costs US$1.5. When reading a currency pair, the first currency, EUR, represents what you want to exchange. Meanwhile, USD is the currency or money you’re going to pay with. To have one Euro, you need to buy it for US$1.5.
How And When To Buy Or Sell For Forex Trades
Buying or selling Forex depends on the appreciation or depreciation value of one currency against another. There are several factors that you can consider to know when prices will go up or down. But how do you keep up?
You can read political news since the currency is directly related to the country. You can also keep an eye on economic policies in a country because their country is affected by the GDP, unemployment rates, and more.
Lastly, traders can do technical analysis to see how the prices move. For instance, if you’re interested in the volatility of a commodity, you can begin with Bollinger bands since this indicator is beginner-friendly.
The principle you need to know in buying and selling with currency pairs is to buy low and sell high. If the technical analysis shows the price will go up, you can buy more to have a profit.
Understanding Forex Trade Risk Management
Like any other market, Forex trade is also volatile, but you can make the most out of your trades by risk management. This applies most when you’re doing leverage trading, where you borrow amounts from a trading platform you’re using to bet whether the price will go up or down.
For example, based on your analysis, the price will increase, so you want to trade with the minimum amounts accepted but only have a small amount of capital. Borrowing with leverage trading can make your money 50x. But if your price prediction is wrong, your money will be liquidated. If you’re a new trader, leverage trading is not recommended since the risks are high, and you may end up losing all your money.
It’s a good practice to take profits and stop losses, especially when you’re a new trader. This is because you may often check prices and panic if it doesn’t go your way. Setting a take profit will help you avoid getting your hopes up when you see prices still going up to avoid losing when the prices suddenly fall. Setting a stop-loss, on the other hand, limits your losses in case you hope the price will recover.
Starting your Forex trading journey can be challenging, especially with the many terms you need to familiarize yourself with. But once you get to understand the market and see how to control your investments, you’ll take home the profits you deserve.