What is forex trading

The world's technologies are rapidly developing. And today, there is no need to go to the stock exchange every day. Thousands of people can trade online and make profits on the Forex market without leaving their homes. Forex - a large-scale platform created for exchange transactions involving world currencies. The volume of trade in this market exceeds the total volume of all other foreign exchange markets. The daily trading turnover of the site is more than 6 trillion dollars.

The Forex market is the leading trading platform among all world currency markets. The main characteristics that distinguish it from others: the highest liquidity, profitability, as well as the ability to trade in both directions (buying and selling).

Forex trading is based on making a profit from the exchange rate difference in terms of the free and constant change of exchange rates. The change in exchange rates is governed only by supply and demand. Investors who carry out such transactions are called traders. Currently, anyone can try themselves as a trader in the Forex exchange market. You can become a trader at any age, and education and previous work experience do not matter as long as you have good analytical skills and understanding of Forex trading strategies.

Though, to start trading currencies and other assets, you first need to find a reliable Forex broker. It is a company that provides traders with access to a Forex trading platform through which they can buy and sell orders at a strike price.

Popular currency pairs
Popular currency pairs

 George Soros is the most famous trader. His best deal was the sale of the previously accumulated reserves of GBP in September 1992. He sold currencies and shares of British companies for about 10 billion US dollars, and after a sharp fall in Black Wednesday, he acquired them again, earning more than a billion US dollars within one day.

 Currency pairs

There are more than 200 countries in the world, and almost every one of them has its own national currency. Currently, there are about 150 different currencies and all of them participate in trading every day. Traders never trade individual currencies but currency pairs. The price of such a pair is a quote. An example of a currency pair is JPY/USD 1,265. What information does it give us? JPY / USD is the international symbol for a pair of currencies. Here we can read that JPY (Japanese yen) is the base currency and USD (US dollar) is the quoted currency. 1,265 is a quote that shows the price. So for 1 yen you can buy 1,265 US dollars. It is how you can read the Forex quotes. In other words, a quote shows the amount of one currency needed to buy another.

There are so-called major currency pairs which account for about 75% of all transactions in the Forex market: EUR/USD, GBP/USD, USD/CHF, USD/JPY. As we can see, the US dollar is present in all represented pairs, so if currency pairs contain a dollar, then this pair is considered the main currency pair. Pairs that do not contain the US dollar are called cross currency pairs or cross courses. The following cross-exchange rates are most actively traded - EUR/CHF, EUR / GBP, EUR/JPY, GBP/JPY, AUD/JPY, NZD/JPY.

USD/CHF currency pair price chart
USD/CHF currency pair price chart

 Types of forex trading analysis

How can a trader predict the price movements, and what factors influence them? To do this, there is a fundamental and technical analysis of the foreign exchange market.

Fundamental analysis helps evaluate the economic and political situation of countries whose currencies are traded in the Forex market. The task of fundamental analysis is to assess the possible impact of certain events on the movement of exchange rates. It includes the analysis of many factors - employment rate, productivity, inflation. These factors reflect the state of the economy of a particular country, and, consequently, the demand for its currency. Other major fundamental factors include the size of bank interest rates, gross national product, etc. The greatest attention of investors is attracted by the state of the US economy because up to 80% of forex transactions are carried out with the US dollar.

Technical analysis studies the market via graphs. In other words, all fundamental factors of the market are embodied in a chart.  Technical analysis is a forecast of price changes in the future, based on the results of past dynamics. Such an analysis can be carried out based on a chart aimed at finding trends as well as points convenient for entering the market.

The main and oldest method is a graphical analysis based on charting. Graphs clearly demonstrate the behavior of prices in Forex, forming typical patterns by which you can easily determine the direction of price movement and plan sell stop and buy stop deals.

 List of the main technical indicators for Forex

The Moving average (MA) is one of the simplest and, at the same time, one of the most popular indicators. It shows the average price indicator for a certain period of time. MA is displayed as a line directly over the price chart. It perfectly shows the direction of the trend - a declining moving index indicates the presence of a downtrend or the bear market, a growing moving signal shows an upward trend or the bull market.

The Moving Average indicator
The Moving Average indicator

The Exponential moving average (EMA). This indicator is similar to a simple moving average. However, it concentrates on the most recent prices. It means EMA will react faster to price changes.

Fibonacci Retracement. It is a grid of several correction levels that is superimposed on the price chart. Fibonacci retracement levels are applied over a selected price impulse. Then you need to wait for the completion of the corrective movement at one of these levels, after that you can enter the deal in the direction of the initial impulse.

The relative strength index (RSI) indicator shows the position of current prices in relation to the previous period. The best signals are given in a sideways trend, showing how far the price has deviated from the average values. The RSI indicator is calculated in a separate window below the price chart. To track trading signals, the levels 30, 50 and 70 are distinguished. The area above level 70 is called the overbought zone and is recommended for selling deals. The area below 30 is called the oversold zone and opens good buying opportunities.

Bollinger Bands. This indicator consists of three lines: the central line is a classic moving, the other two are its standard deviations up and down. The combination of three lines makes Bollinger Bands very convenient for visual perception. This indicator is displayed directly on the price chart. The upper and lower lines of the indicator form a kind of price channel in which the quotes chart moves. Traders watch the price deviation from the indicator lines for making the deals.

Bollinger Bands
Bollinger Bands

The Moving Average Convergence/Divergence (MACD) indicator is based on a combination of MA with additional parameters. It is considered an oscillator, but in fact, it is more of a universal indicator. It is displayed in a separate window under the price chart. MACD has two lines, one of which is represented as a histogram. One of the strongest indicator signals is divergence. This signal can predict the end of a price movement and the beginning of a correction or even a market reversal.

Moving Average Convergence Divergence (MACD)
Moving Average Convergence Divergence (MACD)

Average Directional Index (ADX) belongs to the group of trend indicators and consists of three lines. ADX is the main line, + DI is the index of positive movement and -DI is the index of negative movement. The ADX indicator is calculated in a separate window directly below the price chart.

The Ichimoku Cloud indicator combines several useful features. It determines the trend, identifies support / resistance levels, searches for zones to enter/exit positions. This trend indicator efficiently tracks the direction and potential of the current trend.

Ichimoku Cloud
Ichimoku Cloud

Stochastic Oscillator shows the current position of the closing price in the range of high and low prices for the specified period. This indicator is actively used by short-term traders since this indicator takes into account not only closing prices (such as RSI), but also highs / lows, giving a more accurate price position at the moment.

Stochastic Oscillator
Stochastic Oscillator

 Basic Forex trading strategies

A trading strategy is a list of conditions for making a deal. The market operates according to specific laws. The price movements depend on the psychology of the main market participants. Against this background, traders track and forecast the rules of price behavior. Profitable trading strategies are based on the use of these patterns. If each deal is opened in a chaotic way, you will not be able to make money on Forex.

Forex trading strategies are made for different frameworks. There are long time trading and short time trading strategies. Many strategies belong to day trading. It is an approach when traders buy and sell within a single trading day. The most popular ones include:

Swing trading is a general active trading strategy to profit from market fluctuations. These oscillations consist of two parts: the body (swing body) and the turning point (so-called Swing High and Swing Low). The main task of a trader to open and close trades in a way to get as much profit as possible from the movement between swing points.

EUR/USD price movement
EUR/USD price movement

Scalping is another Forex day trading strategy. It is a very quick closing of an order, as soon as at least a small profit (about 10 points) is obtained on it. Market professionals call Forex scalping strategy highly profitable, which allows a trader to complete dozens and hundreds of trades a day, keeping a position open for only 10 seconds to 5 minutes.

Positional trading is a style of trading in which traders buy orders and sell orders holding them for weeks or months. Trading position approach typically uses a combination of daily, weekly and monthly charts, along with fundamental analysis when making trading decisions.

Buy and Hold is a passive investment strategy. According to it, a trader buys an asset and holds it for a long time waiting for the best spot price. An investor who uses this strategy does not take into account short-term price changes and does not use technical indicators for short time intervals. Typically, this system is popular among stock traders. However, it is also used by currency market participants, but rather as a means of passive investment, relying primarily on fundamental analysis. It is recommended for sell limit and buy limit deals.

The chosen strategy should be very clear to the trader. Even a profitable but difficult to understand strategy will not bring all the advantages because of the lack of trader's experience. At the same time, a trading strategy should not be understood as the only guide to action. It should be always adapted to individual needs of a trader.

 Create a forex trading strategy

There are many ready-made trading strategies on the market, both simple and quite complicated. Beginners, as a rule, start using the simplest ones. However, over time, they realize that trading can be more effective with a personal strategy based on their own experience and preferences.

It is not necessary to develop a strategy from scratch. You can take a ready trading plan and add some changes to it like technical indicators and other parameters.

Each strategy should include certain points, which together will contribute to the trading success:

  •         Rationale. This is the main idea behind the trading strategy. It is a starting point on which all other components are based;
  •         Currency pairs for trading;
  •         Timeframe and trading time (trading session);
  •         Entry rules (signals to open a position);
  •         Exit rules. How stop loss and take profit are set;
  •         Trading lot volume and risk limitation.

If all these parameters are taken into account, you can start testing the strategy on a free account.

A demo version is a training account, where you can see how to conduct operations in the Forex market, learn trading terms and master different strategies. It is the best approach to start trading with a demo version to develop enough practical skills for profitable financial management on a real account.


How difficult is Forex?

Forex trading is not a game. If you want to achieve success and profits, you must be prepared for hard work that is quite complex and stressful both mentally and psychologically.

It is important to go through special training and test your skills on a demo account. Each trader should develop a trading plan with stop loss orders to minimize financial risk.

Pip is the smallest price movement between two assets traded on the exchange. Pip is traditionally used in foreign exchange markets where trading pairs are shown with several decimal places.

Yes, some brokerage companies allow you to open an account with a minimum deposit of $5. The lowest deal amount is $1.

A trading strategy is a set of rules that coordinates all the actions of a trader in the process of trading on financial markets.

It is impossible to give a correct answer, since there are many strategies. They all differ, and the only criterion that separates good from bad one is the mathematical expectation. If you see positive results from a chosen strategy for a period of three months and more, it can be considered good. If the strategy does not lead to a profit, you do not need it.

It depends whether you are looking for instant profit or favorable investment. In the first case, pay attention to day trading, and in the second case – focus on longer investments.

You should try all time frames available on the market and then choose the one which suits you best.

Forex operates around the clock five days a week (except for national holidays). It means that you can trade at any convenient time.

There is no universal indicator that fits the styles of all traders. But the good thing is that there is a wide range of Forex indicators. Over time, you will be able to find the ideal indicator that will work ideally for you.

Experts say that day trading is the most popular and profitable type of trading. Its main advantage is the possibility to complete multiple deals within one day.

The trend is the general direction of a market on an asset price. All analytical instruments can help you predict the market direction.

Select a few technical indicators to check the current direction of the market.

Many day traders suggest paying attention to candlestick and bar charts. These graphs are considered more informative than traditional line charts.

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