What Is Forex?
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What is forex trading (FX or Forex) is the largest market in the world. It is the most liquid market because
Forex traders exchange in average $5 trillion daily.
You might be asking yourself is Forex the best market for you? If you want a market that does not sleep,
if you want to keep your full-time job and trade in
Forex, if you need to start with a small account and make big profits, then Forex may be for you.
The advantage of trading Forex is the opportunity to take large trades with small amounts of money.
The different leverages offered by brokers make it easier for traders to open a trading account with small capital.
All transactions in the Forex market involve two currencies. If a trader, a bank, an institution, or a traveler decides to exchange one currency for another, a Forex trade takes place.
Thus, one currency is being bought and another currency is being sold. Currencies must be compared to something else in order to establish value; this is why Forex trading involves two currencies.
Why Trading Forex?
The Forex market is a market that does not sleep. It is open 24 hours a day, 5 and a half days a week, except
the weekends. The reason behind this is because governments, businesses and individuals who require currency exchanging services are spread around the world and in different time zones.
For example, currency pairs with Japanese yen are most traded when it is daytime in Japan. However, since there are always counter currencies to complement the pair, Japanese Yen ends up being traded all day with a spike in activity from 12 a.m. to 8 a.m. GMT.
Why would anyone trade Forex? The market is open after 24 hours and traders with full time jobs are able to trade Forex after work, before work and on Sunday evening.
Another reason is the liquidity of the market. The Forex market is the most liquid market in the world. With most trading concentrated during the New York Session, for example roughly 70% of all Forex transactions involve the
US dollar, there are always a lot of people trading. This makes it very easy to get into and out of trades at any time, even in large sizes.
Forex can be accessible anywhere you go and where there is an internet connection. You can trade from your computer, your laptop, or your cell phone. The only things you need are an internet connection and a trading
account.
How Does Forex Work?
In Forex, the price of a currency is always determined in another currency. Currencies are grouped into pairs to show the exchange rate between the two currencies.
If you plan to visit a foreign country, you must exchange your home currency for the currency of the country you are visiting. This is a currency transaction. For example, when a traveler from Paris comes to visit the United States, he must exchange Euros for U.S. dollars. The traveler is now selling the Euro and buying the U.S. dollar.
In 2016, the traveler would have received about $1.11025 in U.S. currency for every Euro. The exchange rate at that time for the Euro/U.S. dollar was about 1.11025 (see figure 1). Forex traders profit from changes in the exchange rate. Traders tend to buy a currency pair when the price is low and sell it when the price goes up making a profit or loss. The small changes in the exchange rate when traded in a high leveraged account, traders can make a large profit.
FIGURE 1 . Monthly average of Eur/U.S Exchange Rate in 2016.
How Can We Make Money in the Forex Market?
As a Forex trader, you need to open a trading account with a broker and start trading the currency pairs available through the broker’s platform. If you are interested in trading pairs with U.S. dollar – for example USDJPY (U.S. Dollar/Japanese Yen), you either buy or sell the pair. When you execute a buy trade you actually buy U.S. dollar and sell Japanese yen. If you decide to short the pair, you enter a sell position where you sell the U.S. dollar and buy the Japanese yen.
The profit you make from your trades is related to how the pair performs in the market during a certain period of time. For example, if you buy USDJPY at 114.256 and the market moves to 114.370 you make profit as the market moves in your predicted direction. But if the market goes from 114.256 to 114.120, you simply lose money and you need to close the trade because the market is moving in the opposite direction from what you predicted. By analyzing the market, you can decide if you are going long or short in a pair based on your technical analysis.
What Is the Best Time to Trade Forex?
The Forex market is open 24 hours a day from 10 p.m. GMT on Sunday until 9 p.m. GMT on Friday. The reason why Forex market is open 24 hours a day is because currencies are in high demand. Currencies are also needed around the world for international trades, as well as by central banks and global businesses.
The Forex market can be split into three main regions: Australia-Asia, Europe and North America (see figure 2). Within each of these main areas there are several major financial centers. For example, Europe is comprised of major centers like London, Paris, Frankfurt and Zurich. Banks, institutions and dealers all conduct forex trading for themselves and their clients in each of these markets.
FIGURE 2 . Trading Sessions (GMT) and best time to trade forex.
Each day starts with the opening of the Asian session, followed by Europe and then North America. As one region’s market closes another opens, or has already opened, and continues to trade in the Forex market. Often these markets will overlap for a couple hours providing some of the most active Forex trading.
European currencies are most traded from 8 a.m. to 4 p.m. GMT – this is called the London/European session, and from 12 p.m. to 9 p.m. GMT is the North-American trading session. Although the Sydney, Australia, Forex market opens at 9 p.m. Sunday GMT,
it is too thinly traded, so you could wait for the Tokyo market to open an hour later for better trading volume.
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