The word ‘Forex’ stands for Foreign Exchange. You can also name it as FX or Currency Trading. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. The forex market is an over-the-counter market where currencies are traded. Traders Buy a currency pair and Sell it back when it is profitable (or vice versa) based on the predictions made by analyzing the market movement. Because, the value of a currency keeps changing in relation to any other currency. The currency pairs are termed Major Pairs, Minor Pairs and exotic pairs based on their association with dollar.
What is Forex trading?
When you place a trade in Forex, it involves buying a currency and selling another currency simultaneously. For example, if you buy EUR/USD, it means you are buying Euros by selling US dollars.
Here is an example of a typical Forex trade. A trader buys EUR/USD when he predicts that the price of Euro in relation to USD will go up. Once the price of EUR has gone up to a reasonable level, he sells EUR/USD to gain profit.
Similarly, It also works the opposite way too. A trader can choose to sell EUR/USD and buy it later when the price of EURO goes down to a reasonable level to gain profit.
Buying is also called as ‘going long’. Likewise, selling is also called as ‘going short’.
What are the types of currency pairs in the forex market?
There are three types of currency pairs: major pairs, minor pairs or cross currency pairs and exotic pairs.
Major Pairs are the ones that contain US dollar on one side. Similarly, currency pairs that don’t have USD are minor pairs or cross pairs. In contrast, exotic pairs consist of a major currency and a less popular and less liquid currency of an emerging economy.
For example, USD/JPY is a major pair while EUR/CAD is a minor pair. USD/SEK is an exotic pair because it contains a major currency (USD) and the currency of Sweden, which is less popular in Forex market.
Minor Pairs or Cross Currency Pairs
A currency pair that doesn’t have USD is a minor pair or a cross pair. The Euro, the UK Pound and Yen are the three major non-US currencies from which most of the crosses are derived. In the ancient days, if you have to convert Japanese Yen to Uk Sterling, you would have to first convert Yen to US dollar. Because of the introduction of cross currency pairs, a person can bypass the conversion to the US dollar. Below is the list of important cross pairs.
An exotic pair consists of a major currency and a less popular and less liquid currency of an emerging economy. Since the movement of these pairs are is very low, only a very few traders trade these pairs. Because of the low liquidity and low popularity, technical analysis on these pairs tend to be less accurate.
When can you trade Forex?
Forex market is open 24 hours a day except weekends. Hence, A retail Forex trader cannot trade Forex during Saturdays and Sundays. There are four trading sessions which are the Sydney session, the Tokyo session, the London session, and the New York session. Each session has its own opening and closing hours and last for 9 hours per day. During any time of the day except the weekends, at least one of the four sessions is open. When more sessions are open, there is more volatility in the market. Therefore, the best time to trade will be the timings when more sessions are open simultaneously.
Avoid trading during the late hours on Fridays as liquidity drops during the latter part of the US session. Likewise, trading on holidays is not recommended as well since a lot of traders won’t be trading during these times.
The exotic pairs and minor pairs are volatile compared to major pairs. So exert caution while trading the volatile exotic pairs and minor pairs. The trading session also plays a major role in the volatility of the currency pairs.
Trading during the major news events is also not advisable unless you have a very good plan. It is extremely risky to trade during a major news event because of the larger moves that follow. So, unless you really know what you are doing, don’t trade right after a major news release.
What do you need to do to trade Forex?
To start trading in Forex, you need to open an account with a Forex broker. You would need to pay a deposit which will be the capital you work with. But, the minimum deposit varies according to the broker. Also, you can open a free demo account with a broker just to practice trading with virtual money.
You need a trading platform, an application that shows the charts of all currency pairs and tools to predict the market and make trades. The trading platform needs to be installed in your computer. Meta trader (MT4 or MT5, the recent version) is the most popular trading platform used by millions of traders around the world. Most of the brokers offer a free download of a customized Meta trader application. You will be placing all your trades in the trading platform you use.
Before you start trading with real money, we suggest you to practice demo trading by opening a free demo account with your broker.