Forex Trading
Online Forex Trading
All you Need to Know to Start Trading FX
So, you’re looking to learn the basics, perhaps even get a detailed understanding of Forex Trading. Well, you’ve come to the right place!
In this guide we’ll be addressing all of the important things that you need to know before you start forex trading in order to understand how to enter the markets safely, with an effective strategy in place.
Firstly, we’re going to explain what Forex Trading actually is and how it works. We’ll then be examining basic terminology so that you can become accustomed to the words and phrases used while trading foreign exchange. Following the basic terminology, we’re also going to examine the calculations that you’ll be using in your day-to-day life as a forex trader.
Our guide aims to fully equip you with the tools to further your knowledge and understand the details of fx trading before you enter the global markets. If you’ve had some experience with trading Forex before then feel free to skip ahead to the sections that you’d be interested in. Simply click on the menu titles below to be redirected to the relevant information for you.
What Forex Trading is and How it Works
The Forex Market’s sheer size attracts a wide range of different participants, including Central Banks, Investment Managers, Hedge Funds, Corporations, Brokers and Retail Traders – with 90% of those market participants being currency speculators!
So, what exactly happens in the forex market, to make it so attractive to investors across the globe? Well, imagine that you’d like to exchange one currency for another. You’re effectively selling one currency while buying another, or ‘exchanging’ it.
Now, the exchange rate between those two currencies is what’s important when trading forex. The exchange rate is constantly fluctuating, and it’s these fluctuations that allow market speculators to earn from trading or potentially lose their investment. These fluctuations are driven by the supply and demand of each currency!
It’s also important to note at this point that, while you are trading, millions of other traders are also entering the forex market.
So, when you ‘sell’ a currency, there is a buyer for that currency somewhere else. The more people that are trading, the more money there is in the market, which is what we call the ‘liquidity’. As we’ve mentioned, the forex market is huge with millions of traders across the globe Because of this the liquidity in the forex market is really high!
What is Forex?
There are around 13.9 million traders across the globe that are simultaneously buying and selling currencies. As we mentioned before, this means that the liquidity of the forex market is really high.These high levels of liquidity mean that traders can enter and exit a trade, as there will normally be a buyer for the currency that you’re selling, or a seller for the currency that you’re buying!
High liquidity levels have other implications too. If the levels of liquidity are high, then there are a lot of market participants, so trading costs, like the spreads could potentially be lower. It also means that the market is way less susceptible to market manipulation! If someone opens a huge trade in a market with low liquidity, it’ll have a huge impact on price. This doesn’t happen in forex because there is such a large volume being traded!
Now, the forex market, as it encompasses all of the currencies in the world, is actually open 24 hours a day, from Monday until Friday. The trading that is done on these currencies is what we call over the counter or OTC for short. This means that there isn’t a physical exchange like there is for stocks. It’s actually a global network where there’s a network of financial institutions and banks that oversee the market rather than a central exchange like the New York Stock Exchange.
As an individual, you’re likely to be categorized as a ‘retail trader’. However, the largest portion of forex trades are actually conducted by ‘institutional traders’ like banks, funds and large corporations. They’re not necessarily going to actually buy or sell the currencies but are speculating about price movement or hedging against upcoming changes in the exchange rate.
Currency Markets and Currency Pairs
The first thing to know, is that currency pairs are expressed in terms of the ‘Base Currency’ and the ‘Counter Currency’. The base is always expressed first and the counter second – so in our example, the EUR is the base currency and the USD is the counter.
Once you’re ready to begin (we’ll get to that a little later in the guide) and are familiar with the platform and want to open your first trade, you’ll see two prices quoted for the EURUSD; the Sell or ‘Bid’ price, and the Buy or ‘Ask’ price, as shown below. It’s important to always remind yourself that when you click buy or sell, you’re buying or selling the first currency in the pair.
What is a Pip?
You’ll need to become very familiar with the term ‘Pip‘ if you’re going to indulge in online forex trading.
As an acronym for ‘price in point‘ or ‘percentage in point‘, a pip is the fourth decimal point used in pricing. It’s equivalent to 1% of one basis point. As most currency pairs are priced to 4 decimal points, it’s the smallest price move that an exchange rate can make (0.0001).
Now, it’s an important term to know for currency trading because the spread (we’ll get to that later) is actually quoted in pips. We’ll look at the spread a little later!
Let’s look at an example to make it a bit clearer:
You’d like to trade the EURUSD. The price of the EURUSD is 1.1060. Before you’re about the enter the trade, you see that the price changes to 1.1059. This means that there has been a fall in price by one pip, or 0.0001.
It’s important to remember that although most currencies are quoted to 4 decimal places, some currency pairs, like the Japanese Yen is actually quoted to two decimal places.
What is a Pipette?
Now that you’re familiar with a pip, it’s also important to know that the MT4 trading platform actually shows prices beyond the standard 4 or 2 decimal places.
A pipette is a fractional pip and can be up to 5 or 3 decimal places. It’s effectively 1/10th of a pip. Check out the image below so you can get a better idea of how pips should be read.
Comfortable with what a pip and pipette is?
What You Need to Start Forex Trading
One of the first things you’ll need is a stable internet connection, as forex trading is done online. The most important factor is that your connection is stable and readily available. This is especially important for monitoring your trades and accessing your account should you need to make changes or catch an opportunity.
A Forex Broker
Next, you’ll need a Broker. This is one of the most important decisions you will make when you start forex trading. So, here’s some important factors to consider
1. Regulation
Now, when you’re choosing a broker, it may appear to be really attractive to trade with one who can offer you 1:1000 leverage so you can trade with minimal investment. However, with great leverage comes great risk. Although the reward for a profitable trade may be vast, the market could also move in the opposite direction, meaning that you could lose a significant portion, or all your initial investment.
A regulated broker however is not able to offer such high leverage to their clients and will offer you a leverage that’s far more realistic in terms of appropriate risk to reward ratio.
Moreover, a regulated broker should be offering clients Negative Balance Protection. This means that should you be trading, and the market moves against you (or gaps), then you’re protected from generating a negative balance. This ensures that you’ll never lose more than your original investment.
By working with a regulated broker, you’re also protected should the broker become insolvent. Regulated brokers are required by law to be a member of a Financial Service Compensation Scheme. These compensation schemes are contributed to by the broker and, should the broker go bankrupt, will cover your deposit up to a certain amount!
Finally, regulated brokers also protect their clients by always having ‘segregated client accounts’. These special accounts hold Client funds separately from those of the broker, ensuring that your broker can’t use your funds for other purposes.
2. Trading Conditions & Account Types
Generally, the account types that are available depend on the volume that you’ll be trading. A standard lot is 100,000 base units, a mini lot is 10,000 base units and a micro lot is 1,000.
So, should you decide to start forex trading small, you’d be better suited to something like our Classic Account. Larger accounts like our Pro and VIP are available, but more appropriate for traders who are trading larger volumes. For a comparison you can check out our Accounts Overview page here. We’ll look at what you’ll need to open an account later on.
After selecting your account type, you should also be looking at the trading conditions that are on offer, like the spreads & swaps which will be directly related to your costs, and the margin and leverage which will determine how you trade!
First, let’s look at the different types of spreads available, which are called fixed and floating.
Fixed spreads are generally provided by brokers that are defined as ‘market makers’. Rather than transferring your trades directly to the interbank market, they’ll match them up with other trades internally. This means that they’re ‘making the market’. Due to this, they offer fixed spreads as it’s not going to the external market.
In contrast, some brokers offer floating spreads, whereby your trades are passed on to a liquidity provider. This means that you’re getting market prices with a ‘mark-up’ which is generally where a broker will make their money from. These spreads tend to be lower than those you would incur with a ‘fixed spread’ broker.
Because of this, brokers with floating spreads have a general incentive to make sure that their clients trade sustainably, so that they can keep profiting. It’s not in their best interest for a client to come, lose their money and then leave. Sustainability is key here! Now, working work a broker that provides floating spreads also has disadvantages. At times of high market volatility spreads may widen which is done to account for the significant market movement that is occurring.
3. Trading Instruments
When you’re making this kind of decision it’s important to have your trading strategy defined and understood so that you can choose a broker which will give you everything you need
4. Trading Support
Looks for a broker that offers 24/5 support at the minimum so that should there be an issue, the team will be on hand to help.
5. Trading Platform
We actually offer our clients the world-renowned MT4 and MT5 platform! It has a wealth of tools available to enhance your trading including the ability to use custom indicators, charts and a notification system so you don’t miss any trading opportunities.
6. Trading Account
We’ll guide you through the process when you come to the point of opening a live account, but just as an overview, we’ll need an identification document and your proof of address to open your account.
7. Trading Funds
It’s important to note that a good broker will have a variety of options available to you.
How to Trade Currencies in Forex
It’s all about working out the value.
The value of each currency depends on the supply and demand for it, thus determining the ‘exchange rate’ between the two currencies. The exchange rate itself is basically the difference between the value of one currency against another. And, it’s this exchange rate that determines how much of one currency you get in exchange for another, e.g. how many Pounds you get for your Euros.
At this point, it’s important to remember that the exchange rate is continually fluctuating.
Now, investors involved in currency trading look at many different factors that could potentially affect the value of each currency, and they speculate how these factors will affect the value of those currencies. If a trader thinks that the currency’s value will increase, they’ll buy that currency. Conversely, if they think the value of a currency will decrease, they’ll sell it instead.
Now, when you’re trading forex, you’ll be trading currency pairs. So, two different currencies will be involved, and you’ll be speculating about their value in relation to each other.
For example, an investor may believe that the value of the Euro will depreciate against the value of the British Pound, because of an imminent data release. So, the investor would sell the Euro, believing its value will fall, and buy the British Pound simultaneously, believing its value will rise. If the investor is correct, then he or she will make a profit!
It sounds pretty straightforward right? Well, bear in mind that to speculate effectively you’ll need a good understanding of the market, and knowledge about how to analyse the market movement.