Forex trading is primarily an active exchange between two different currencies for financial gain or benefit. Let’s talk about forex trading in terms of cash exchange. Forex trade is not entirely based on changing or switching your currencies.
Forex trading is something that you have been hearing or searching about lately. In our blog, we will make Forex trading uncomplicated and will try to give you the answers you’ve been looking for all along and give you one insight of Forex and its profits.
FOREIGN EXCHANGE MARKET
The Foreign exchange is an over-the-counter marketplace that helps determine the exchange rate for currencies all around the globe. It is also known as the Forex or Fx market. In the Forex market, there is an exchange between the two currencies.
To define it further here’s an example;
Somehow and somewhere, we all have been a part of the Exchange Market. Now you’d be wondering how, when, where. Keep guessing. Maybe if you’d think hard, you’ll find it out. Do you remember the time when you bought a ZARA shirt? And you paid in PKR? No! You were trading your Rupees for USD. So my point is you’ve been changing money all along without making any profit and just getting a shirt?!
Given that, what do you think of investing the same amount in USD or some other currency? And maybe you’d buy two more ZARA shirts from it. You never know.
Some for example will need to exchange currencies for the traditional purpose of buying goods and services overseas, but others will be participating in the market simply to earn short term profits from movements in the market or to influence exchange rates.
In terms of Forex trading the highly active individuals who are exchanging currencies for the sole purpose of gain through a currency price movement often are referred to as Speculators.
Any individual, a bank or a hedger using their institutional platforms for the purpose of trade are known as “Forex traders”
Traders always choose the dominating currencies for example US dollar, Euro, pound or Japanese yen.
FOREX MARKET HOURS:
The Fx market has five different trading sessions, it operates 24 hours a day five days a week. It opens on Monday 03:00am and closes on Friday midnight UTC+5 is the closing time. On weekends the market is closed. The five trading sessions are
| SESSION | TIME ZONE (UTC+5) |
| Sydney | 3:00 am – 11:00 am |
| Tokyo | 4:00 am – 12:00 pm |
| Frankfurt | 11:00 am- 07:00 pm |
| London | 12:00pm- 08:00 pm |
| New york | 05:00pm – 01:00 am |
Making the London, New York and Tokyo session popular amongst the traders. To become a part of trading it is very wise for the trader to understand the sessions and their impact on the market although the Fx market allows one the flexibility to choose the time zone but it doesn’t provide you with enough information in respect to the markets volume, liquidity and volatility which are very important parts of a trading strategy.
MAJOR PARTICIPANTS
In terms of Forex trading, it is very important to understand and know who the major participants are in Forex trading. These players have a very big impact on the demand and supply; hence they influence the exchange rates in the current time period. Here is a look at those players.
Central banks
Central banks have their own role to play in trading but the main role of the banks is to manage the interest rate and inflation rate which ultimately leads to the right conditions for trading. These banks also have an influence on the money supply and availability; in terms of a dampened economy they play their part by intervening in the Forex market to uplift economic and financial imbalances. For example, if the Japanese yen wants to control the money supply the Japanese central bank will perform open market operations (OMO’s) so that it can perform the balance of payments with other countries.
Commercial and investment banks
Commercial banks constitute a significant proportion of all trading; they have their own part to play whether it’s of speculative nature or commercial investment, also known as interbank market. In this market most of the investment takes place by buying and selling of currencies, it also helps the banks to trade. It uses an electronic network that helps a Forex participant trade. Just like retail investors, commercial banks also invest and predict the future movement of currency pairs, they buy and sell those currency pairs to generate profit. In Forex trading commercial banks make a pool of their client’s investment and in return give them the desired profit. Banks have Forex accounts which are available for their customers in which they provide you with Forex trades using those assets. This opportunity could be provided to you only if you have a large transactional account; such services aren’t for the small transactional account.
HEDGE FUNDS
The investors in the hedge funds are regarded as accredited investors which includes high net worth individuals alongside those having a minimum level of income or assets. They’re relatively new to the market as compared to the other players. They make large pool investments via partnerships.
In hedge funds the investment/trade is likely to be a long term trade, meaning that these individuals or companies keep their funds for over a year although withdrawal happens by two intervals annually or quarterly.
RETAIL INVESTORS:
They are small-time nonprofessional investors with small amounts of equity, often invest for personal gains and usually conduct their trading through an investment bank or broker.
Every participant in the market has their own role to play and has their own way to influence it. Retail investors do the same; they make up a very large portion of the most popular indices.
CURRENCY PAIRS:
It is a term referring to the pairing up of two different currencies which are equivalent to each other i.e. one versus the other, making these pairs available for trade in the Forex market. Forex market currency pairs are the major financial instruments that traders trade for a gain.
- The currency you sell for the purpose of buying a currency is THE QUOTE currency
- And the currency you get in return of selling one currency is referred as THE BASE currency
When one buys a currency pair you actually buy a base currency with the exchange of quote currency, the one you receive in return.
There is no such thing in currency or its pairs as “good” or “bad”. If you know your way through the market and have proper education regarding it, you can make the bad currencies your good currencies or vice versa.
| Major Currency Pair | Minor Currency Pair |
| EUR/ USD | GBP/ JPY |
| GBP/ USD | EUR/AUD |
| USD/ JPY | CHF/ JPY |
| USD/ CAD | GBP/ CAD |
| NZD/ JPY |
Currency pair price
To determine the currency pairs price movement let’s look into the factors that impact the currency individually or in pairs.
- Interest rate; having a greater interest rate for one currency makes it a better trading option then the one with lower.
- Economic policies; low inflation monetary policies have their impact on the economy hence it improves and makes the currency stronger.
- Stability of a country; it is a very well-known fact that if a country has a stable and well-established economy, that country’s currency is the most suited currency for investment.
STOCK
The purpose of the stock market is to help buy, sell and issue stocks that can be traded in the stock market or over the counter. The second name for stock is equities. This market mainly comprises companies giving the public a right to invest in their shares, by doing that the stock market efficiently plays its role in the development of the economy by providing companies an opportunity to have access to capital from the public.
STOCK MARKET INDICES
It measures the statistical changes in the market. There is a tool in stock usually referred to as STOCK INDEX. In this index, there is a selection criteria in which the groups with similar stock among the securities mentioned on the exchange are made, having almost the same size of the company or the industry. These securities if rise/fall has an overall impact on the index, making it fluctuate accordingly.
In any market there are sentiments and moods that are associated with it. Indices are the representation of those moods, by looking at the previous fluctuation of the indices one can predict the future outcome for the stock market or which stock is going to win this time.
Apart from helping figure out the patterns of the market indices also gives a comparison between all the stocks hence act as an indicator of stocks comparison.
There are different types of indexes, NASDAQ and S & P500 are two of those. The S & P500 index has the top 500 companies in the US. Those companies and their shares are formed into an index as a whole for it to be traded by the participants. These indexes are codependent on the companies’ price movement. To find out the pattern of the stock such indexes are observed by the traders and by evaluating them they lead to a conclusion regarding their performance and the current situations of the market.
What is Crypto?
It is a digital currency that does not depend on banks or any other platform for its transaction. The currency traded in it is not physically carried but it’s digital and there is a cryptography technique used to form these currencies. It’s a ‘one on one’ way of trading by which you can send and receive payments anywhere. You can buy and sell through a decentralised system. In this system the transactions are verified through software called blockchain. All the transactions are encrypted.
There are thousands of cryptocurrencies, the major that are traded these days are
- Bitcoin
- Etherium
- Litecoin
- Ripple etc
Forex vs. Stock vs Crypto
| FOREX | STOCK | CRYPTO |
| It is great for swing trading | For long term potential | Has a high long term potential |
| The spread commissions are low | Secure trading platform | Perfect for day trading |
| With low leverage the relative risks are low. | Commissions are low | Easy to short sell |
| There are Forex apps that can provide you education and tell you how to trade at your convenience. | Works for both (day/swing) traders | Prediction in it is easier |
Trade in Forex?
Trade can have only two styles: long term trade or short term trade. If you’re a beginner wanting to invest in trade, short term trading is not your go to trade as the desire of making more profit and having less patience can be a drawback. The best way of trading is choosing the style which is flexible. Here’s a look at four different trading styles. Let’s see if you can find your trading style at the end of this.
Styles of trading
Day trading:
If a trader enters and exists the trade within the same trading day it is referred to as DAY TRADING. As there is a short time period for the trade, the traders try his/her best to maximise gains and minimise losses by setting up a profit target and a stop loss.
Swing Trading
The price action and technical analysis act as significant determinants in swing trading. Such traders are looking for the fluctuations in the market that can generate a high/reasonable gain. In this type of trading the positions can be withhold for a day or two and can prolong to weeks or months.
Scalp Trading
In scalp trading the trader trades within a second to minute, it’s actually a very short term trade. These types of traders trade hundreds to thousands of trades within a day making a small amount of profit out of each one, which when mounted becomes a big gain for them. They are constantly buying and selling and are the most active kind of traders.
Position Trading
If you have to approach a steady type of trading pattern then POSITION TRADING is your style of trade.in this trading pattern one looks for both the fundamental analysis and the technical one. They both go hand in hand. Their approach to trade is ‘buy & hold’. They keep a monthly/yearly check on their assets and make a profit out of it accordingly.
RISK MANAGEMENT:
- Leverage
Generally Leverage is you investing a smaller amount of your money for the purpose of controlling and accessing a big amount in the capital. In regards to forex, brokers help you by letting you trade more assets then your account balance can hold. In this regard you get to make more profit and pay back the broker his/her favor.
For example a broker offers you 1:100; this will give you a free pass to trade for trades worth 100 times more than your account balance.
If your margin based leverage is around 1-2% it might not affect the profit or loss but the real leverage is the one that can impact your gain or loss.
Leverage is a function of risk. It is mostly as high as 1:1000 in Forex meaning for every $1000 you can trade $1million in value.as said earlier it’s all about risk although the risks can be managed or reduced.
- LOT
It is the unit of measurement in financial instruments mainly traded in CFDs which is traded in specific amounts. There is a standardized size for a lot. There are 3 types of lots. Micro, Mini, standard
In micro lots there are 1,000 units of the base currency.
Mini lots there are 10,000 units of the base currency.
Standard lots there are 100,000 units of the base currency.
- Margin:
As you’ve understood the dynamic of leverage margins comes somewhere in the middle of all of that. The moment you’ve decided the leverage with your broker he provides you with a marginal account that will provide you a loan amount or the account balance it has in it would be yours to use so the broker is lending you on MARGIN for you to trade.
- Free Margin
The gap between equity and used margin is termed as free margin.
Used margin are the positions that are under your control, while equity is the current price of those positions.
- Equity
The current value of your account
Equity= account balance + wanted gains/loss
- Bid and Ask
Bid is basically the amount at which the buyer is willing to pay and ASK is the amount at which the seller is willing to sell. The gap between the two amounts is the SPREAD.
An investor who wants to buy (PERSON A) wants to buy shares for $10(BID). There is an investor (PERSON B) in the market who wants to sell his shares for $11(ASK). There is a top-up of $1 (SPREAD). So now if person A wants to buy that share he/she has to pay that amount to buy them.
Types of analysis:
To be able to make a comprehensive market analysis in forex, it is important to understand the types of analysis.
Let’s start by talking about each of the different approaches.
Fundamental Analysis
It deals with all the economic fundamentals like inflation rate, interest rate, unemployment rate, GDP and political issues. In this analysis one is able to understand the dynamic between them and the trades and their relationship.
Technical Analysis
In this analysis, the future behaviour of the market is foreseen by observing and analysis the past patterns
There are different systems and ways to perceive such patterns.
Sentiment Analysis
The third type of analysis involves the attitudes and the feelings one has about the market.
BROKERAGE FIRM:
These firms act as an intermediary between buying and selling of trades. Their role is to provide you access to the financial market. Many financial companies have brokerage houses as a part of their broader service. These firms provide you with the required services and in return have a fee or commission which is paid to them by you at the end of the transactions.
These firms exist so that they can help trade between traders and connect you with the legitimate individuals for that.
It is very important to find the right brokerage firm that provides you with the right information.
EDUCATION:
As you all know how important education is, in terms of everything you do if you’re not aware of the good and bad one thing has to offer how would you protect yourself from the hazards it might cause?
As in trading, it’s all about making smart decisions and knowing your way through them or understanding the diversity the market has to offer.
Worry not we are here to help. Trendvest consultancy, we are one of the best platforms to offer trading education in PAKISTAN. We provide you with online courses, and consultancy with experts in terms of trade and help you become a better trader every day.
The services we provide are
- Educational courses from basic to advance level (strategy selection)
- Mentorship program
- Incubator service
- Financial consultancy
It always starts from the rest step to the right direction once you take it the rest shall fall along.
