A Beginner’s Guide to Forex Trading
Welcome to the exciting world of Forex trading. In this guide, you will be introduced to all the basic techniques in currency market. This beginner’s guide will also cover common forex terms and ISO codes for trading in currencies. Including the common terms used by traders and brokers, and ISO codes for each traded currency. This guide will familiarize you with the history of forex, currency standards, charting basics and the difference in forex trading platforms. By the end of the guide, you will be ready to open your demo account, and begin learning how to trade.
What is Forex?
Forex, or Foreign Exchange simply refers to the transaction involved in converting one form of currency into another. While a lot of foreign exchange transactions is done for practical purposes, a larger majority of the transactions is done with the aim of making profit. The forex market is the largest financial market in the world with a daily trading volume in excess of $5 trillion.
A brief history of Forex
Even though some form of foreign exchange transactions has been in existence long before, the Forex Market as we know it can be traced to sometime in 1971. After the Second World War, England and other Europeans countries faced great instability while the American currency and economy remained strong. This brought about the Bretton Woods Conference of 1944 where the international standard for currency was tied to the US Dollar. The Bretton woods conference agreement lasted until 1971 when the US Dollar was once again allowed to float. This paved the way for Forex trading as we know it today. In this system, the strength of a country’s currency is tied to the economy of the country, their political stability and a wide range of other economic indices. As any of these factors change, so will the value of the country’s currency when measured against that of other countries.
Forex Charting Basics
Reading and understanding a forex chart can be said to be a form of science, this is because they look complicated at a first glance. But once you get used to it, it can be quite easy. Using forex charts for your trading strategy means using technical analysis. A forex chart can normally display in three formats. It can be displayed as a line chart, it can be displayed as a bar chart and it can be set to display as a candle stick chart.
Line Chart: Line charts are a good way to show a simple display of the price. The line chart will show you the closing price for each period by drawing a line from one closing price to the next. When put together, these lines show the general price movement of a particular currency pair over a period of time.
Bar Charts: A bar chart is a bit more complex than a line chart. A bar chart shows where the price opened at the start of trade, the high points and low points and where the price closed.
At the bottom of the vertical bar is where the lowest traded price for that time period is indicated, while the top of the bar the highest price paid is indicated.
Bar charts are usually called “OHLC” charts, because they show the Open, High, Low, and Close for a particular currency.
How it is interpreted:
- Open: The little horizontal line on the left is the opening price
- High: The top of the vertical line indicated the highest price of the time period specified
- Low: The bottom of the vertical line indicates the lowest price of the time period specified
- Close: The little horizontal line on the right is the closing price
Candle Sticks: Candlestick charts are the most commonly used method for displaying the price on a Forex chart. Some technical analysts argue that a candle stick chart can be used to make a near exact prediction on the market. Candlestick charts show the information as a bar chart, but the display comes in a more graphic format. A candlestick chart still indicates the high and low price range with a vertical line, however, the larger block in the middle of the chart indicates the range between the opening and closing prices within the specified time period.
Forex Trading Standards
Gold Standard: The gold standard is a system where the value country’s currency has a direct link to the value of gold. Countries that used gold standard will set a fixed price for the value of gold. This fixed price is used to determine the value of the currency and the country cannot issue out currency that is in excess of the gold it has in its reserves. From the mid 1940s to the early 1971, gold determined the value of most major currencies in the world as a result of the Bretton Woods agreement. This gold system or standard was completely abandoned in 1971 after then US president Nixon ordered the U.S. Dollar completely removed from the gold standard.
Floating Standard: A floating system of currency exchange rate is a system where the price of a country’s currency in the forex market is based upon the demand and supply of the currency compared with others. What this means is that if the demand of the Japanese Yen is lower than the demand for the US Dollar, then the price of the Japanese Yen will be lower than the price of the US Dollar. Since the collapse of the Bretton Woods agreement in 1971, the majority of the world’s currencies is based on the floating standard.
In this monetary system, central banks buy and sell their country’s currencies to adjust the exchange rate value or to cause an effect in the foreign exchange market.
Currency Trading Codes
Currency codes are symbolic codes used to identify currencies as defined by the ISO 4217 international standard. There is a three digit code for every national currency.
Some of the most common are:
|Hong Kong Dollar||HKD||344|
|New Zealand Dollar||NZD||554|
|United States Dollar||USD||840|
Common Forex Terms
It is important to know the terms and meanings of any business you want to get involved in, the same applies to forex trading. Here are some common forex terminologies and their meaning.
- Cross rate – The exchange rate between two currencies
- Exchange Rate – The value of one currency in terms of another. For example, if EUR/USD is 1.2300, 1 Euro is worth US$1.2300.
- Pip – The smallest movement in price a currency can make
- Leverage – Leverage is the ability to trade with a larger amount of money than you have in your total account margin.
- Margin – The deposit required to open or maintain a trade.
- Spread – The difference between the bid and offer price. For example, if USD/JPY quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips.
- Currency Pair - The currencies currently involved in your forex transaction for instance EUR/USD
- Base currency - The first currency in a currency pair.
- Quote currency - The second currency in a currency pair.
Forex Trading Platforms
One of the first steps every forex trader must make before he or she can begin to trade is to decide on a choice of trading platform. There are many different types of trading platforms of brokers, but they all fall into two broad categories. Dealing Desk and Non Dealing Desk Platforms.
Dealing Desk Broker
A dealing desk platform or broker refers to a broker who takes the other side of a client’s trade by setting the deal and ask price and waiting for another trader to take advantage of the terms. For instance, you place a buy order for USD/JPY for 10000 units, your dealing desk broker will first try to find a similar sell order from its other clients, and if none is available, pass your trades on to its liquidity provider.
Non Dealing Desk Broker
As the name suggests, a non dealing desk broker does not pass your trade through a dealing desk, they simply link buy and sell clients together.
How is Forex Market Regulated
The Forex market is the single largest financial market in the world with more than $5 trillion traded daily. To meet this trade demand, hundreds of forex brokers carry our services all over the world. Despite this huge size, the forex market is relatively unregulated as there is no single global body or association to watch over foreign exchange market activities. Nevertheless, at individual country level, there exist a number of bodies and policies that oversee and regulate the forex market operations in their country. These agencies handle cases that involve fraud and breach of their rules.
After completely this guide, your next step will be to open a demo account. A demo account is an account where you practice trading with the full features and conditions of a forex trade without committing your money.
Forex is an exciting platform for platform for individuals and corporations to try their hand at foreign exchange and in the process make a profit. It also carries with it an element of risk, just like any other business.