Introduction to Foreign Exchange Trading

Forex or else Foreign Exchange is a global market where two national currencies are traded against its other. These two currencies form an exchange rate and are called a Forex pair. For example, Euro against the US Dollar create the EURUSD, or else the Eurodollar pair.

Forex is an OTC market where two national currencies are traded against its other...Exchange rates are the subject of investment and speculation. Apart from central banks, these are the major Forex market participants:

  1. Commercial and investment banks
  2. Retail traders (common people) via Forex brokers
  3. Institutional investors (investment firms, hedge funds, etc.)
  4. Trade companies (importers/exporters) and other companies that are exposed to currency risk

The Foreign Exchange market operates 24/5, from Monday to Friday.

Where is Forex Market Situated?

Actually, Forex has no center, it operates as a decentralized electronic network, almost the same way as the World Wide Web. Every buy/sell order is executed according to demand and supply. This electronic infrastructure is called the ECN network (Electronic Communication Network) of Banks.

The Advantages of Forex Trading

The decentralized nature of the Forex market creates a lot of advantages for its participants:

(1) Reliability, fast execution, and trading anonymity via the ECN network

(2) Transparency and equal terms for all orders, no matter where they come from

(3) Extreme liquidity (Forex daily volumes exceed 5 trillion US dollars)

(4) Tight trade cost (especially true for highly-liquid pairs such as EURUSD, GBPUSD, and USDJPY)

(5) Trading 24 hours per day (24/5) and access via desktop and mobile devices

Categorizing Currency Pairs

As mentioned before, Forex currencies are traded in pairs, you buy one and at the same time you sell another currency:

  • the purchased currency is called the Base Currency
  • the sold currency is called the Quote Currency

According to their importance and liquidity-depth, Forex pairs are divided into three categories:

(a) Forex Majors -These are the most liquid and less expensive currency pairs to trade (EUR/USD, USD/JPY, GBP/USD, USD/CAD, USD/CHF, AUD/USD, and NZD/USD)

(b) Forex Minors -Popular currency pairs, but not as liquid as the majors (i.e. EURUAD, GBPCAD)

(c) Forex Exotics -Less popular and more expensive to trade (i.e. USDTRY)

 

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THE THREE KEY STEPS BEFORE STARTING TRADING FOREX

 

(1) Define your Trading Style according to your Time Frame

You must choose a trading style according to your risk profile. There are 4 questions that every trader should answer before starting to trade Forex:

(i) How much money are you willing to risk?

(ii) What is your level of experience?

(iii) What are your targeted annual returns?

(iv) What is your time frame and how much time can you dedicate to Forex trading?

After answering these 4 questions you will be able to determine what kind of trading style is suitable to your particular profile:

TRADING STRATEGY

TIMEFRAME

EXPERIENCE REQUIRED

DEDICATED TIME

RISK

CARRY-TRADING

A few months to several months

MEDIUM

A few hours per month

LOW

SWING-TRADING

A couple of days to a couple of weeks

MEDIUM

A few hours per week

MEDIUM

DAY-TRADING

A couple of hours

HIGH

A few hours per day

HIGH

SCALPING & EA TRADING

A couple of minutes

VERY HIGH

Many hours per day

VERY HIGH

 

(2) Choose the right Forex Broker

Choosing the right Forex broker can make the difference between winning and losing in the long-run. Here are the most important factors categorized into 4 general categories:

(A) Safety of your Funds

  • Forex broker regulation level
  • Segregation of funds
  • Forex broker headquarters
  • Forex broker existence in the market (in years)
  • Compensation scheme in case of insolvency

(B) Cost of Trading

  • Trading Spreads & Trading Commissions
  • Overnight rates (for swing and carry traders)
  • Withdrawal or Maintenance Fees
  • The existence of a Cash Bonus or of a Trading Rebate

(C) Trading Options

  • Forex Asset Index
  • Other Financial Instruments (Futures, Options, CFDs on Futures, etc.)
  • Allowance of Hedging/Scalping » What is Fx Scalping?
  • Deposit and Withdrawal Methods

(D) Level of Technology Provided

  • Trading Platforms
  • FIX/API
  • PAMM/MAM accounts
  • Automated Trading (Expert Advisors)
  • Mobile Traders

□ Learn about the » Forex Rating Formula at TradingCenter

Using our Forex Broker Reviews, you may find information regarding the world’s most popular Forex brokers.

 

(3) Start with a Demo Account and then move to Micro-lot Real Trading Account

Opening and using a demo account means you are buying an experience for free. Meanwhile, you may test many aspects of your Forex Broker’s trading efficiency (spreads, slippage, overnight rates, etc.). It costs nothing and it is very easy to do it. Finally, a demo account can be used also as a measuring tool for your trading performance, instead of using paper-trading.

Forex Lot Sizes

A Lot in Forex Trading is the standard unit size for any transaction. There are three lot sizes, if you are a beginner the choice for you is the micro lot:

(i) Micro Lot → Suitable for Forex Beginners the size is $1,000 (that means you may open a position worth a couple of US Dollars)

(ii) Mini Lot → Suitable for Advanced Traders, the size is $10,000

(iii) Standard Lot → Suitable for Pro Traders, the size is $100,000

 

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■ Introduction to Forex Trading

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