Forex Trading, Worth Getting Hyped Up About

That alone is worth the hype. Catching even a tiny sliver of this market can produce great returns. In the forex market, currencies are traded in pairs, with the value of one currency relative to another.

The most commonly traded currencies are the US dollar, euro, Japanese yen, British pound, Swiss franc, Canadian dollar, New Zealand dollar, and Australian dollar. Forex trading is typically done through a broker who acts as an intermediary between buyers and sellers.

Traders can participate in the forex market using various strategies, including technical analysis, fundamental analysis, and algorithmic trading. Trading strategies also vary in terms of time frame. Some traders take very quick trades that last seconds or minutes.

Other traders take longer-term positions that may last months or even years. The forex market is open 24 hours a day, five days a week, allowing traders to enter and exit positions at any time. That means you trade on your own schedule — part-time, full-time, any time.

The market opens in Sydney, Australia on Monday morning and closes in New York on Friday evening. However, the market is closed on weekends and on certain holidays if there are no banks open for business at that time.

On Sunday, Sydney opens at 5 PM EST. Then Tokyo opens, followed by London and New York. This cycle progresses through the week, allowing for continuous trading.

Come Friday, when New York closes at 5 PM EST, the trading week ends. There is no forex trading until Sydney opens again on Sunday (Eastern Time).

The two currencies together make up a currency pair. For example, if you buy the EUR/USD currency pair, you are buying euros and selling US dollars.

If that sounds confusing, imagine that you live in the US and you’re taking a trip to Europe. You want some euros while you are there. You could go to your bank with some US dollars and ask for them to be converted to euros. You are buying euros and you are giving them (selling) US dollars.

Each pair has a rate attached to it, such as 1.3696. Whenever you see an exchange rate related to a pair, it is how much of the second currency it takes to buy one unit of the first. For example, if the rate above is for the GBP/USD, that means it costs 1.3696USD to buy one GBP.

Currency pairs are identified by a three-letter code. The most commonly traded currency pairs in the forex market are called the major currency pairs, and they are:

EUR/USD: Euro/US Dollar

USD/JPY: US Dollar/Japanese Yen

GBP/USD: British Pound/US Dollar

USD/CHF: US Dollar/Swiss Franc

AUD/USD: Australian Dollar/US Dollar

USD/CAD: US Dollar/Canadian Dollar

NZD/USD: New Zealand Dollar/US Dollar

These currency pairs are the most actively traded pairs in the market. They are also the most liquid and have the highest trading volumes, making them the most popular among forex traders. However, there are many other currency pairs available for trading in the forex market, including minor and exotic pairs.

These include currencies from other countries around the world which are traded less. There are about 180 global currencies, which means thousands of potential currency pairs. However, most forex traders stick to trading the pairs mentioned above, or just pairs involving major global currencies.

Forex trading profits are typically calculated in pips. A pip is typically equivalent to 1/100th of a percent, or 0.0001 in decimal form. The exception is pairs that include the Japanese yen. For these pairs, a pip is the second decimal place: 0.01.

The first currency in the pair is the “directional” currency. For example, if you buy the EUR/USD, you are expecting it to go up, and you will profit if it does. If you sell the USD/JPY, it is because you expect the USD to go down, and you will profit if it does. Here is an example:

You buy the EUR/USD at 1.1515. You sell it at 1.1535. This means you made 20 pips. The price may move 20 pips in a few seconds sometimes; other times, it may take half an hour or more for the price to move 20 pips. That profit could be worth $200, $2000, or $20, depending on how many euros you purchased.

With trillions of dollars being exchanged each day, you can basically buy as much or as little currency as you want, throughout the day. That is what makes the forex market so opportunistic.

Remember that, as mentioned earlier, currency pairs including the JPY calculate pips at the second decimal point. As an example, if you sold the USD/JPY at 125.63 and then you closed the trade at 125.10, your profit is 53 pips.

The value of a pip depends on the currency pair being traded, the account currency, and the size of the position. The best way to calculate pip value is to use a pip value calculator. This way, you can assess your risk and potential profit accurately.

Assume you deposited euros in your account, and now you want to buy the EUR/USD. You want to know how much each pip of movement is worth if you buy 10,000 units. The calculator shows you that each pip of movement will increase or decrease your profit by €0.94. This number will shift as the exchange changes.

Alternatively, what if you were trading the USD/JPY with an AUD account, and you only wanted to buy or sell 1000 units of currency? The pip value calculator shows how much you will make or lose each time the price moves one pip. This will again change as the exchange rate changes, so you need to calculate pip value for each trade.

Based on that information, you can determine how much your profit or loss will be if you make or lose 10 pips, 50 pips, 125 pips, and so on. The larger the position size, the bigger the profits and losses.

“It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.” ― George Soros

The amount of capital needed to start trading forex can vary depending on a number of factors, including your trading style, risk management strategy, and the broker you choose to trade with.

Most forex brokers offer “micro” accounts. This means you can trade one micro lot (or more). These types of accounts can typically be opened with as little as $50. That’s great news for many people who want to get into trading but don’t have a ton of capital to start out with.

Remember that a micro lot is 1000 units of currency. If you only put $50 into the account, you can’t technically afford to trade 1000 units of currency. That is why forex brokers offer leverage, often up to 30:1 or more. Leverage allows you to trade larger positions than you could otherwise. It allows you to buy/sell a micro lot with only $50.

It works for larger accounts, too. If you deposit $10,000 and have 30:1 leverage, you are allowed to take positions worth up to $300,000. This highlights the importance of risk management when trading forex. Leverage must be used responsibly. That means using stop losses on each trade, so no single trade ruins your account.

What is a forex margin call?

When you trade on leverage, you’re required to maintain a certain amount of money in your account to continue holding the position(s). This is called margin. If the amount in your account falls below this level, the broker will close your positions or ask that you deposit more money (“margin call”). In forex, margin calls are rare. Typically, the broker will start closing positions instead.

What is a forex spread?

The spread is the difference between the bid and ask price of a currency pair. It represents the difference between the price you can buy and sell at. The smaller the spread, the better for the trader.

What is a forex stop-loss order?

A stop-loss order is an order to automatically close out a position at a specified price level in order to limit potential losses.

What is a forex take-profit order?

A take-profit order is an order to automatically close out a position at a specified price level in order to take profits.

What is the best time to trade forex?

The best time to trade forex depends on the currency pair being traded. Currencies tend to be most active when their “home” market is open. For example, the EUR/USD is most active during the London and New York session. The USD/JPY is most active during the New York and Tokyo sessions.

What is the difference between forex fundamental analysis and technical analysis?

Fundamental analysis involves analyzing economic, political, and social factors that may affect currency values, while technical analysis involves analyzing charts and using indicators to identify trends and potential price movements.

Final Thoughts

Forex is an exciting market brimming with opportunities. There are trillions of dollars changing hands in this market every day, and prices are moving 24 hours per day during the week. It has low barriers to entry in that an account can be opened with as little as $50 in some cases.

However, just because it is easy to open an account doesn’t mean profits will come flowing in right away. Profit in the forex market requires learning a strategy, practicing it (practice for free in a demo account), and implementing strict risk management protocols so that losing trades don’t significantly hurt the account.