Welcome to the fascinating world of Forex, a dynamic and globally interconnected financial market where currencies are bought and sold. The foreign exchange market, or Forex, serves as the backbone of international trade and investment, enabling the exchange of one currency for another. Participants in this market range from central banks and financial institutions to corporations and individual traders. Currency pairs, such as EUR/USD or GBP/JPY, are traded based on the exchange rates between them. Forex trading is a process where traders aim to profit by either buying a currency when they anticipate its value will rise or selling it when they expect a decline. The market operates 24 hours a day, five days a week, divided into sessions across major financial centers. Leverage is a key feature in Forex, allowing traders to control larger positions with a smaller capital amount, but it comes with the need for responsible risk management.
Analyzing the Forex market involves two main approaches: fundamental analysis, which considers economic indicators and geopolitical events, and technical analysis, which relies on charts and technical indicators to predict price movements. Successful traders employ various strategies, such as day trading, swing trading, or carry trading, each catering to different time frames and market conditions. Risk management is paramount in Forex, with tools like stop-loss orders and take-profit orders helping traders limit potential losses and secure profits. Selecting a reputable Forex broker is crucial, considering factors like regulation, fees, available currency pairs, and the trading platform provided. Navigating the Forex market requires continuous learning and staying informed about economic developments. Educational resources, courses, and webinars are valuable tools for traders seeking to enhance their understanding of this complex but rewarding financial arena. As you embark on your Forex journey, remember that a disciplined approach, thorough research, and a commitment to ongoing education are key components of success.
The foreign exchange market, or forex (FX) for short, is a decentralized market place that facilitates the buying and selling of different currencies. This takes place over the counter (OTC) instead of on a centralized exchange.
Without knowing it, you have probably already participated in the foreign exchange market by ordering imported products such as clothing or shoes, or more obviously, buying foreign currency when on vacation. Traders may be drawn to forex for several reasons, including:
Forex trading is the simultaneous buying of one currency and selling of another. Currencies are traded through a “forex broker” or “CFD provider” and are traded in pairs. Currencies are quoted in relation to another currency. For example, the euro and the U.S. dollar (EUR/USD) or the British pound and the Japanese yen (GBP/JPY). When you trade in the forex market, you buy or sell in currency pairs.
There are three categories of currency pairs:
Major and Minor Currencies: The seven most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, and AUD) are called the major currencies. All other currencies are referred to as minor currencies. The most frequently traded minors are the New Zealand Dollar (NZD), the South African Rand (ZAR), and the Singapore Dollar (SGD). After that, the frequency is difficult to ascertain because of perpetually changing trade agreements in the international arena.
Cross Currency: A cross currency is any pair in which neither currency is the U.S. Dollar. These pairs may exhibit erratic price behaviour since the trader has, in effect, initiated two USD trades. For example, initiating a long (buy) EUR/GBP trade is equivalent to buying a EUR/USD currency pair and selling a GBP/USD. Cross currency pairs frequently carry a higher transaction cost. The three most frequently traded cross rates are EUR/JPY, GBP/EUR, and GBP/JPY.
Exotic Currency: An exotic is a currency pair in which one currency is the USD and the other is a currency from a smaller country such as the Polish Zloty. There are approximately 25 exotics that can be traded by the retail FOREX participant. Liquidity—the ability to buy and sell without substantial pip spread increases; a willing buyer or seller is always available at or near the last price—is not good. Whereas a EUR/USD pair may be traded at two pips at almost any time, the EURTRY may balloon to 30 pips or more during the Asian session.
Liquidity refers to how active a market is. It is determined by how many traders are actively trading and the total volume they’re trading. One reason the foreign exchange market is so liquid is because it is tradable 24 hours a day during weekdays. It is also a very deep market, with over $7 trillion in turnover each day. Although liquidity fluctuates as financial centers around the world open and close throughout the day, there are usually relatively high volumes of forex trading going on all the time.
The global foreign exchange market size reached US$ 753.2 Billion in 2022. Looking forward, IMARC Group expects the market to reach US$ 1,143.2 Billion by 2028, exhibiting a growth rate (CAGR) of 7% during 2023-2028. The rising integration of modern technology in trading platforms, the globalization of businesses resulting in the consequent need for currency exchange services, and the growing influence of various economic factors such as inflation, interest rates, and GDP growth represent some of the factors that are propelling the market.
PIP stands for percentage in point or price interest point. In foreign exchange markets, it is the smallest unit of price change in a currency pair. In terms of value, it is the last decimal place in the currency price. Currency trade follows a four-decimal place convention.
A pip is a unit of measurement for price movements of currencies in foreign exchange (FX) markets. Pip stands for “percentage in point” or “price interest point.” It represents the smallest price variation that a particular exchange rate experiences based on typical FX market convention.
Currency pairs are generally traded on a pricing convention that includes four decimal places (called the “big figures” or “big figs”), with the pip representing the very last digit. Therefore, we can see that a pip is equivalent to 0.0001. It is also the same as a basis point (bps), which is another common unit of measurement for 1% of 1% percentages.
As an example, if the CAD/USD exchange rate were to move from 1.2014 to 1.2015, the change in value would represent one pip.
A lot in forex trading is a unit of measurement that standardizes trade size. The change in the value of one currency compared to another is measured in pips, which are the fourth decimal place and therefore very tiny measures. This means trading a single unit isn’t viable, so lots exist to enable people to trade these small movements in large batches.
The value of a lot is set by an exchange or a similar market regulator, which ensures everyone trades a set amount and knows how much of an asset they are trading when they open a position.
Lots are subdivided into four sizes – standard, mini, micro and nano – to give traders more control over the amount of exposure they have.
A standard lot in forex is equal to 100,000 currency units. It’s the standard unit size for traders, whether they’re independent or institutional.
A mini forex lot is one-tenth the size of a standard lot. That means a mini lot in forex is worth 10,000 currency units. The size of a mini lot means the profit and loss effect is lower than a standard lot.
A micro forex lot is one-tenth the size of a mini lot. That means it’s worth 1000 units of currency. Pip movements result in a cash swing of 1 currency unit, eg €1 if you were trading EUR. Micro lots also require less leverage, so a swing won’t have as much of a financial impact as with larger lot sizes.
A nano forex lot is one-tenth the size of a micro lot. It’s equal to 100 units of currency. A one-pip movement with a micro lot is equal to a price change of 0.01 units of the base currency you’re trading, eg €0.01 if you’re trading EUR.
The spread is measured in pips, which is a small unit of movement in the price of a currency pair, and the last decimal point on the price quote (equal to 0.0001). This is true for the majority of currency pairs, aside from the Japanese yen where the pip is the second decimal point (0.01). When there is a wider spread, it means there is a greater difference between the two prices, so there is usually low liquidity and high volatility. A lower spread on the other hand indicates low volatility and high liquidity. Thus, there will be a smaller spread cost incurred when trading a currency pair with a tighter spread.
To calculate the spread in forex, you have to work out the difference between the buy and the sell price in pips. You do this by subtracting the bid price from the ask price. For example, if you’re trading GBP/USD at 1.3089/1.3091, the spread is calculated as 1.3091 – 1.3089, which is 0.0002 (2 pips).
Instant Execution Mode: In this mode, the order is executed at the price offered to the broker. When sending an order to be executed, the platform automatically adds the current prices to the order. If the broker accepts the prices, the order is executed.
A pending order is the trader's instruction to a brokerage company to buy or sell a security in future under pre-defined conditions. For example, if you want to sell EURUSD at 1.10800, but the price has not risen to that level yet, you do not have to wait. Place a pending order and the broker will perform it, even if the trading platform is closed at that point. Six types of pending orders are available.
Limit orders are placed in the expectation of price "rollback". The trader expects the price reaches a certain level, for example support or resistance, and then moves in the opposite direction. These orders are executed at a price equal to the specified one or better than that.
Stop orders simply expected breakthrough of certain levels. The trader expects the price to reach a certain level, break it through and move on in the same direction. When such an order triggers, a request to execute a corresponding market order is sent to a broker. The order is executed at the price equal to the specified one or worse than that. In other words, if the market price goes opposite, the order will be filled with a slippage. However, unlike limit orders, the execution of stop orders is guaranteed.
Stop Limit Orders: This is a combination of a stop and a limit order. If the price reaches the stop price, a limit order is placed. This type of orders is used when a trader wants to set a stop order and limit the slippage.
Forex brokers usually launch with regulation in only a single country. Obtaining such regulatory approval is usually not an easy achievement, especially in jurisdictions with stricter regulation. New brokerages typically start with regulation in a single country and will then seek to gain regulatory licenses in other countries where they wish to operate. Typically, it makes things easier for Forex brokers to obtain some kind of regulatory certification even in countries where they are not physically based, if they wish to actively market their services there.
Some of the more recognized Forex regulators globally are the FCA in the United Kingdom, CySec in Cyprus and the NFA in the United States. In addition to Forex regulation from bodies established by national governments, some brokers find it important to acquire memberships from professional and cross-border entities. Forex brokers operating in the European Union will need to comply with the Markets in Financial Instruments Directive (MiFID), a European Union-wide regulation ensuring harmonized regulation for investment services across the 30 member states of the European Economic Area.
Margin can be defined as the actual difference between the total value of securities kept in a margin account and the loan amount requested from a broker to execute a trade.
Margin trading is the method of using an individual’s asset to acquire a loan from a broker. Later on, the money obtained is used in the form of trades.
An investor has to open a margin account to buy on margin and make a small initial investment. This sum acts as the leverage, and it is called the minimum margin.
The sum amount invested in the trade is called the initial margin, and the amount of money kept in the margin account is referred to as the maintenance margin.
If the sum amount falls below the value, the broker will call to either deposit more money or pay back all the loan by using the leftover funds or liquidating investment in a practice known as a margin call.
Leverage is the method of borrowing money to finance a project and amplify its future returns. Several companies and consumers make use of the leverage method to achieve goals.
While investors use leverage trades to amplify their returns through options, margin, or future accounts, companies use leverage trades to finance assets with the help of debt financing to invest in several major operations and increasing valuations of equity.
Leverage trade is generally referred to as the ratio between the money invested and the amount of money allowed to trade after taking the debt.
Hence, a person is spending RS 1,000 for every 100,000 in increments; the leverage will be considered as 1:100.
However, there are chances of increasing potential losses; in case if the trade fails significantly, a person will lose an enormous amount of the borrowed money.
FX market structure explains that the operations are segregated into two levels: Interbank market and over-the-counter (OTC) market. Banks are the main participants indulged in trading involving large deals in the interbank market. On the other hand, an over-the-counter market is where companies, individuals, or investors trade on foreign currencies using online platforms and brokers. Furthermore, the academics compared the structure to a pyramid portraying the hierarchy of the FX market structure where brokers, central banks, exporters, and commercial banks fall at different levels given their influence, position, and importance in the market.
The retail traders like amateur investors, speculators, immigrants, tourists, and exporters indulged in trading lies at the bottom of the pyramid, representing the real currency users. Above them comes the position of commercial entities like companies and hedge funds which contribute a lot to fx market analysis and functions. Above them lies the third layer of participants forming the interbank market. They play the essential role of developing a link between commercial and central banks and hold major market information. Finally, the top of the pyramid constitutes the central banks of different nations. They play the most significant role; for instance, they are the custodians of the foreign exchange reserves.
While there is a large number of participants in the market with different goals and motives, we can generally place them into a few categories to understand more easily how the FX market functions. The FX (foreign exchange) market is the largest financial market in the world. Banks, commercial companies, hedge funds, central banks, and individual speculators participate in it and exchange currencies on a daily basis for both speculative and hedging purposes.
Commercial and Investment Banks: Banks need no introduction; they are ubiquitous and numerous. Their role is crucial in the Forex network. The banks take part in the currency markets to neutralize the foreign exchange risks of their own and that of their clients. The banks also seek to multiply the wealth of their stockholders.
Central Banks: A central bank is the predominant monetary authority of a nation. Central banks obey individual economic policies. They are usually under the authority of the government. They facilitate the government’s monetary policies (dealing in keeping the supply and the availability of money) and to make strategies to smoothen out the ups and downs of the value of their currency.
Businesses and Corporations: All participants involved in the forex market do not have the power to set prices of the currency as market makers. Some of the players just buy and sell currency following the prevailing exchange rate. They may seem to be not so significant, but they make up a sizeable allotment of the total volume that is being traded in the market.
Fund Managers, Hedge Funds, and Sovereign Wealth Funds: This category is not involved in defining the prices or controlling them. They are basically transnational and home-country’s money managers. They may deal in hundreds of millions of dollars, as their portfolios of investment funds are often quite large.
To perform trading operations, a trader requires access to the interbank Forex market, which is provided by a broker. In other words, a broker is an intermediary. On the Forex market, a broker fulfills the above-mentioned functions and acts as an intermediary between an interbank currency facility and a trader.
A Forex broker is a legal entity that has all required documents for operating on the Forex market, such as a license, registrations, etc. The entity has the right to provide access to Forex resources to practically everybody who wants it, both individuals and other legal entities. Licenses and permits for providing brokerage services are issued according to the country’s legislation where a company is registered.
The major activity of a Forex broker is providing access to trading on the intrabank currency market to everyone who wants it:
The way that trading on any margin works is that it enables traders to open positions by committing small amounts of money rather than the total trade value upfront. How is this margin decided? The margin is effectively determined by a broker’s system of margin operation. The amount of money that is required for each trade is based on the asset (here, the currency) being traded. Those currencies which exhibit high volatility or greater positions may require larger margins. So, have you understood what is margin in forex trading? It is a way that offers traders leverage.
Pros of margin in trading
Margin can magnify your profits, as any gains on your position are calculated from the full exposure of the trade, not just the margin you put up as deposit. Buying on margin means that you have the potential to spread your capital even further, as you can diversify your positions over a wider array of markets.
Cons of margin in trading
Although margin can magnify profits, it can also amplify losses if the market moves against you. This is because your loss is calculated from the full value of the position, not your deposit, and it is possible to lose more than your initial deposit on a trade. However, there are steps that can be taken to mitigate the negative side of margin, such as implementing a risk management strategy
