Introduction to Forex
Currency pair trading, also known as FX or forex (foreign exchange), enables traders to take advantage of increases and decreases in a currency’s value.
What is Forex?
The forex market is the world’s most exciting and dynamic market. With $5 trillion traded every day, it is also the largest financial market in the world. Forex (or FX) stands for ‘foreign exchange’ which a traveler will know as the currency that you buy when visiting another country. For example, you may sell euros and buy dollars for your trip to the USA. The online forex market is, however, 90% speculative, which means that you don’t take possession of the actual, physical currency. Rather, you open and close deals and make either a profit or loss which gets reflected in your online account. The forex market is an over-the-counter (or OTC) market which means that trading takes place directly between two parties without dealing through an exchange. This means you can conveniently access the virtual market online anywhere in the world.
What is Forex
Features of Forex
The forex market has several advantages over other types of trading, such as traditional stocks:
Liquidity : The high volumes traded globally lead to high liquidity. The big advantage of liquidity is that you can always find demand to sell or buy the currency pair you wish.
Increased leverage : Leverage is when you ‘borrow’ money so that you can use a small investment to get a greater yield. Most stock markets offer 1:2 leverage. With forex, 1:100 and higher is common. This means your opportunities for gain are greatly enhanced. Remember though that your risk increases too.
Increased opportunities : Forex market conditions can change at any time in response to real-time events. While you must be aware of the risks such as changing markets can pose, remember that volatile markets also offer high profit opportunities.
No commissions : LionTrader does not charge you a commission. Instead, as the market maker, we make our money from the spread (i.e. the difference between the buy and sell price) as well as any rolling/renewal fees if you have kept a trade open overnight.
Easy access : At LionTrader you can start trading forex with a low first deposit. You can fund your account with a debit or credit card and start trading within minutes.
Features of Forex
What Do You Trade ?
In forex trading , you mainly trade currencies, which are always traded in pairs. There are four major currency pairs (called the majors) which are mostly traded against the US dollar. They are the euro/dollar (EUR /USD), the British pound/dollar (GBP/USD) the Japanese yen/dollar (JPY/USD) and the Swiss franc/dollar (CHF/USD). Trading in the four major pairs makes up the majority of the market and the most commonly traded currency pair is the euro/dollar (EUR/ USD). You can also trade hundreds of other currencies against each other (called cross currencies because the exchange rate is calculated via the US dollar), but remember that the majors are the most liquid. At LionTrader you can trade precious metals (like gold and platinum), global equity indices and commodities (like oil, gas, wheat, corn and more).
What Do You Trade?
Who Trades ?
There are two parties involved in an online forex deal: you as the trader and the market maker, for example, LionTrader . A market maker is a company that facilitates trading by offering an ask and bid price on a currency, literally making the market for traders to trade in. Individual forex traders like you make up the fastest-growing segment of the global forex market. The other players include the interbank market which is mostly made up of the largest commercial banks and securities dealers, after which you have the smaller banks, multi-national corporations and hedge funds.
Who Trades?
When And Where Can I Trade?
Because forex is a truly global market, you can trade 24 hours a day, five days a week. As one region’s market day ends, the next region’s market day begins. This means you can trade on any region’s news as developments take place.
Online, anywhere, anytime, on the device of your choice. You have full control to monitor the status of your trades, modify the terms of your open deals, close deals or withdraw profits. The ability to access your deals 24/7 is a great benefit of online trading.
When And Where Can I Trade?
How Do I Make a Profit ?
You can profit from forex trading by correctly determining whether one currency in a currency pair will go up (strengthen) or go down (weaken) relative to the other currency in the pair. With forex, you can profit whether the market is rising or falling. This is because currencies are traded in pairs. The key is to buy when a currency is low and sell it back once it is high. In Getting started we take you to step by step through a trade. Traders develop trading strategies based on technical and fundamental analysis. Technical analysis is the use of charts and other statistical measures to predict future price movements based on past prices, while fundamental analysis looks at how macro-economic data releases, news announcements and , other reports may cause rates to change.
How Do I Make a Profit ?
When looking to trade a currency there are always two prices. On the currency table the price you can buy for is on the right side and is called the ask or the buy price. The price you can sell at is on the left side and is called the bid or the sell price. Remember when you buy a pair you are buying the base currency and selling the counter and when you sell a pair you are selling the base and buying the counter. The difference between these two prices is called the spread, which is the difference between what you pay to buy a currency to what you get when you sell it. The spread is essentially the cost of your trading. You may come across brokers advertising low spreads but be sure to check what other commissions and costs they may be charging you. With LionTrader you only pay the spread.
One pip is the smallest unit of change in price. It stands for ‘percentage in point’. Because most currency pairs are quoted with four decimal points, one pip usually equals 0.0001 but there are some currency pairs such as the USD/JPY where 1 pip equals 0.01.
The forex market is bi-directional, meaning that you can trade both ways. You can buy or sell depending on your strategy. ‘Long’ means to buy, and you will go long when you are looking for prices to appreciate, or rise. If you are going ‘short’ you are selling because you are looking for prices to fall. Going short is just as common in currency trading as going long. If you are ‘square’ or ‘flat’, it means that your buy positions exactly offset your sell positions, or that you have no positions in the market at all.
Through the use of leverage, traders are able to invest a small amount of money and trade much larger deal sizes. This is useful because the movement in currency rates can be very small, and larger trades represent larger profits/losses for every pip change in the rate. Leverage allows you to trade with more money than you have in your account, because you effectively “leverage” your free balance to open a larger trade. Leverage is shown as a ratio, for example 1:100. Note that leverage amplifies both potential profits and losses alike.
Setting a stop loss is a way to limit your risk. You decide upfront what your maximum loss could be by choosing the stop loss rate. If the market reaches that rate, your deal will be automatically closed. Since you are the person setting the rate, you are in control of your investment. Setting a take profit rate works in the same way. You decide on a desirable profit amount and your deal is automatically closed when the profit rate you have chosen is reached. Using a take profit rate helps you to control your trading without having to continuously monitor your position.
If you are day trading, you usually hold your position open anywhere from a few minutes to a few hours and generally not longer than a day – hence the name, “day trading”. A medium-term trader will look to get the general market direction right and profit from more significant currency rate moves. This kind of trading requires many of the same skills that a day trader would use, especially when it comes to entering and exiting positions. However it also demands a broader view on the markets, additional analytical work as well as much more patience. Fundamental analysis and Technical analysis provide you with the basic tools and knowledge to take your trading further.