WHAT IS FOREX TRADING?

As a new forex trader, it's important to know some basic definitions both to
understand the currency market and to help define your strategy. This brief video
describes what a currency pair is, who the forex market participants are, why the forex
market is an OTC or over-the-counter market, and what liquidity means there.

Currency pairs

When you trade forex, you trade one currency for another. Forex markets enable
you to trade any two currencies in the world. The currency pairs traded most often are
called the major currency pairs. Other currency pairs are called minor or emerging
currency pairs. When you and your fellow forex traders buy and sell currencies, you
create opportunities for other forex traders to sell and buy. Forex traders include
individual traders as well as companies, financial institutions such as pension funds
hedge funds and brokers, and banks.

Market participants

The motivations of the market participants vary. Individual traders trade for profit,
Manufacturing companies may wish to protect physical investments by hedging,
Financial institutions may also hedge or simply invest, and central banks may wish to
affect prices and trade volume. For example, if a national bank wants to weaken its
currency so the country remains competitive for exporting goods and services. It may
buy foreign currencies against its own currency.

Over-the-counter (OTC) market

Foreign exchange transactions are not performed on any central exchange but
are conducted mainly bilaterally between market participants over-the-counter OTC.
These forex transactions have facilitated mainly through trading platforms enabling
buyers and sellers to see real-time bids and offers for multiple currency pairs.

Liquidity

The ease of transacting something at the desired price and volume when you
want to is called liquidity. Some currency pairs are traded a lot and are said to have
good liquidity because any given trade does not really affect the price. Other currency
pairs are traded less and typically has less liquidity. Several factors affect liquidity but
fundamentally it's about traders being able to buy or sell what they want, when they
want to, and at what price. This comes down to pricing and volume other factors such
as geopolitical events economic news and certain participants can also affect volume or
pricing and thus liquidity. As an example of how an event might affect liquidity, it flaws a
pass that are thought detrimental to a country's international trade forex traders might
sell the currency. This may result in a very high liquidity market with a high volume of
trades but it could also trigger a low liquidity situation if participants are reluctant to buy
the currency expecting further decline.

HOW TO TRADE FOREX?

When you trade Forex, you trade one currency for another. Since their value is
rarely one-to-one, the currency amounts are different this reflects the exchange rate.
Any two currencies involved in a forex trade are called the currency pair. The value of
the first currency, the base currency, is shown in terms of the other currency (quote
currency). The base currency is what you buy or sell and the quote currency shows how
much you will pay or receive. For example, so you want to sell 10000 euro for some US
dollars. Your trading platform will show the currency pair and the price. The price is the
amount of the quote currency that you will receive when you sell 10,000 of the base
currency. Forex markets enable you to trade any two currencies in the world. The
currency pairs traded most often are called the major currency pairs. Other currency
pairs are called minor or emerging currency pairs. In trading, profit is made by buying
low and selling high and that happens in forex too.

Spread and Pip

The difference between the buy price and the sale price is called the spread. The
spread is measured not in whole dollars or pounds but in so called pips. This is the
smallest possible price change on most trading platforms. For most currency pairs this
is the fourth number after the decimal point. The monetary value of each pip depends
on three factors. The currency pair being traded, the size of the trade, and the exchange
rate. A very liquid currency pair often has tight spreads of only a few pips whereas less
liquid currencies have larger spreads. Since the profit or loss is so small for each
currency unit traded, many trades are very large. For example, say that you believe that
the euro will rise. If you buy 1000 euro by selling US Dollars and sell them again once
the euro has risen 10%, you will make 110 US dollars a profit. Similarly, if you buy 1
million euros against US dollars on a 10% rise, you would make 110 thousand US
dollars profit. To achieve this result, traders often use margin accounts to leverage or
borrow money that enables them to make such large market orders.

HOW TO CHOOSE YOUR FOREX BROKER?

One of the most important decisions you make as a trader is choosing your
broker. Let's look at three things you should consider.

Broker Regulation

First, regulatory bodies enforce minimum standards for the brokers and guard the
client’s rights. Here are the three common regulatory bodies:

Cyprus Securities and Exchange Commission (CYSEC) - Cyprus is a popular base of

operations for European forex brokers. The Cyprus Securities and Exchange
Commission provides a basic regulatory framework for financial services such as
deposit protection up to 20,000 euros. It is not as stringent as other European
regulators. Given London's position as a financial hub the financial conduct authority of
the United Kingdom regulates many European brokers.

Financial Conduct Authority (FCA) - The FCA is stricter and offers Deposit Protection of
up to 50,000 pounds in addition it requires segregated accounts for client’s funds and
has rules for faster processing of withdrawals.

Financial Market Supervisory Authority (FINMA) - The Swiss financial market

supervisory authority is the Swiss government body responsible for financial regulation.
Clients benefit from deposit protection up to 100,000 Swiss francs. To offer forex
services, Swiss brokers must be licensed banks which are held to high standards of
service security and capital requirements. A handful of brokers are also publicly listed
on a stock exchange. Some traders enjoy doing business with them because their
finances are transparent due to their listing.

Trading conditions

Once you have considered the regulatory body of your potential brokers the next
step is to consider your own needs.

Trade Sizes - For example, some brokers prescribe certain trade sizes or attach
conditions to them. Ensure that your broker enables you to make the trades you desire.

Spreads - You might also look at spreads since they can heavily influence transaction
costs. Some brokers offer tighter spreads but apply a commission on every trade while
others add markups to spreads. A combination of both is also possible. It is important to
pay attention to these different models when comparing spreads between brokers.

Other costs and conditions - You might even find other hidden costs such as withdrawal
fees. While checking such stipulations also ensure that the funding and withdrawal
methods for your account are convenient and that there are no imposed limits that
would hinder you. Traders who tend to hold physicians overnight should also check the
rollover policy as brokers apply different rates.

Restricted Strategies - In addition, some brokers or platforms restrict trading strategies

such as prescribing scalping or limiting automated trading. If you're interested in such
strategies ensure that your broker supports your preferences.

Premium Services

the third topic to consider when selecting your trading broker is everyday
interactions and services. For example, does the broker offer charting tools? a
newsfeed? and market analysis. At some point in your trading career, you will probably
have a question issue or request and you want to make sure that your broker offers
prompt and reliable support. Are they available when you need them through phone
email and or live chat? Reading reviews and studying the trading conditions of potential
brokers carefully will help you pick the right broker. However, the best way to insure a
broker is right for you is to test their services for yourself by opening a demo account or
even a live account with minimum funding before increasing your trading equity and
position sizes.

WHAT AFFECTS THE FOREX MARKET?

Many things you notice in daily life also affect the forex market. When people talk
about mortgages, they are talking about interest rates. When companies or politicians
make economic announcements, traders take note, and when news reports cover
political events or natural occurrences there may be opportunities to trade. Such
opportunities can be found in both the fundamental sense of what will happen for
example after a change in interest rate by a central bank and in a more psychological
sense in guessing how other traders and thus the forex market will react to the
information. Sometimes announcements and events have both short term and long-term
effects and you can decide to trade one or both. Let's say you believe that in the short
term the new interest rate decided by a central bank will strengthen the domestic
currency. In this case you could buy or go long on the currency until it appreciates and
then sell it for a profit. You could also choose to sell or short the currency when the
announcement is made because you believe that other traders will sell it in the short
term. There is also another way to look at interest rate changes namely buying
currencies that have high interest rates. There is in fact a word for buying high interest
currencies while selling low interest currencies namely carry trade. Because so much
money is involved, only big announcements or events really move traders to move the
market.

INVESTING BASIC: FOREX

The foreign exchange, or forex market, is the world's largest financial market,
and it plays a vital role in the global economy. Every day, trillions of dollars are
exchanged from one currency to another. This kind of currency exchange is essential
for international business. Forex market participants include governments, businesses,
and of course, investors. Governments use the forex market to implement policies. For
example, when conducting business with another country, whether it's borrowing
money, lending money, or offering aid, a country needs to convert its currency into a
foreign currency. Businesses use the forex market to facilitate international trade. For
example, they may need to convert payments for goods and services bought overseas,
or to exchange payments from international customers into their preferred currency.
And investors use the forex market to speculate on changes in currency prices.

Currency prices change almost constantly during the week, because the forex
market is open continuously from Sunday at 4:00 PM until Friday at 4:00 PM Central
Time. A trading day starts at 4:00 PM and ends at 4:00 PM Central Time the following
day. The market has to be open around the clock because of the global nature of the
economy.

When you trade forex, you're not just trading one product, you're trading two
currencies against each other. This is known as a currency pair. The quote for a forex
currency pair defines the value of one currency relative to the other. The easiest way to
understand any quote is to read the pair from left to right. Let's look at an example of
using the euro versus the US dollar currency pair. If the EUR/USD is trading at 1.20,
that means 1 euro is equal to 1.20 US dollars. Here's another example of using the US
dollar versus the Canadian dollar currency pair. If the USD/CAD is trading at 1.25, that
means 1 US dollar is equal to 1.25 Canadian dollars. Even though there are two
currencies involved, the pair itself acts like a single entity. It's similar to a stock or a
commodity. And just like when trading stock, investors profit when they buy a currency
pair and its price increases. Investors can also profit if they sell or short a currency pair
and the price decreases. Let's look at an example. Suppose an investor who thinks
Europe's economy is going to grow faster than the United States, and as a result, she
thinks the euro will strengthen against the US dollar. She can buy the euro versus US
dollar pair to speculate on her assumption. If the price of the currency pair rises, she'll
make money. Conversely, if the price falls, she'll experience a loss. Now that we've
covered the basics, let's look at a few key aspects of the forex market.

Key aspects of Forex Market

Margin – When you trade in margin, you only need to put up a percentage of the total
investment to enter into a position. This amount is known as the margin requirement.
When you trade other securities like stocks, trading on margin means you're borrowing
funds from your broker. However, forex trades can only be covered using funds in the
investor's forex account. Investors can't borrow funds to enter a forex trade. If they don't
have funds in their forex account, they need to transfer funds before placing a trade.
Forex margin requirements vary depending on the currency pairs and the size of a
trade. Currency pairs typically trade in specific quantities known as lots. The most
common lot sizes are standard and mini. Standard lots represent 100,000 units, and
mini lots represent 10,000 units. Depending on your brokerage firm, you may also be
able to trade forex in 1,000-unit increments, also known as micro lots. Margin
requirements can be as small as 2% of a trade or as large as 20%, but the margin
requirement for most currency pairs averages around 3% to 5%.

To understand how margin is calculated, let's look at an example using the euro versus
US dollar pair. Say this pair was trading at 1.20, and an investor wanted to buy a
standard lot or 100,000 units. The total cost of the trade would be $120,000. That's a lot
of capital. However, the investor doesn't have to pay that full amount. Instead, she pays
the margin requirement. Let's say the margin requirement was 3%. 3% of $120,000 is
$3600. That's the amount the investor needs in her forex account to place this trade.
This brings us to another key element of the forex market leverage.

Leverage - Leverage enables investors to control a large investment with a relatively

small amount of money. In this example, the investor is able to control $120,000 with
$3600. The leverage associated with currency pairs is one of the biggest benefits of the
forex market, but it's also one of the biggest risks. Leverage gives investors the potential
to make large profits or large losses.

Financing - This is the calculation of net interest owed or earned on currency pairs, and
it happens when an investor holds a position past the close of the trading day. The US
dollar is associated with an overnight lending rate set by the Fed, and this rate defines
the cost of borrowing money. Similarly, each foreign currency has its own overnight
lending rate. Remember, when you trade a currency pair, you're trading two currencies
against each other. Even though the currency pair acts like the single entity, you're
technically long one currency and short the other. In terms of financing, you're lending
the currency that you're long and borrowing the currency you're short. This lending and
borrowing occurs the overnight lending rate of each respective currency. In general, an
investor receives a credit if the currency he has long had a higher interest rate than the
currency he is short. Conversely, an investor is debited if the currency he is long has a
lower interest rate than the currency he is short. Let's look at an example. Suppose an
investor has a position in the Australian dollar versus the US dollar currency pair. Say
the overnight lending rate for the Australian dollar is 2% and the overnight lending rate
for the US dollar is 1%. The investor is long the currency pair, which means he is long
the AUD and short the USD. Since the AUD has a higher interest rate than the USD, the
investor will receive a credit. However, if the investor was short the AUD/USD currency
pair, he'd have to pay the debit because he's short the currency that has a higher
interest rate. Financing is performed automatically by your brokerage firm. However, it's
important to understand how it works and its financial impact on the trade.

As with all investment opportunities, the forex market has a unique set of risks
and benefits, and education is the first step to determine if this is the right opportunity
for you.