Welcome to the most exciting and most liquid market to trade in the whole-wide-world, namely the Forex market. Let’s look at a couple of factors and questions every beginner Forex trader will ask:
What is Forex?
The word Forex, or FX stands for Foreign Exchange. This is how businesses convert one currency to another. Forex is traded by large institutions, Hedge Funds and retail traders like you and I, and is the largest market in the world, with trade volumes exceeding $4 trillion a day.
Currency pair trading?
Currencies are always quoted and traded in pairs, e.g. EUR/USD - the most traded currency pair in the global forex market.
If we look at the EUR/USD, the EUR is called the base currency or primary and the USD will be your quote or counter currency. If the value of EUR/USD is 1.1136, you will need $1.11 to buy 1 Euro.
When trading forex you are simultaneously buying one currency and selling (shorting) another. In essence you are betting on the price movement that the base currency will either strengthen or weaken against the counter currency.
What is a pip?
PIP stands for percentage in point, it is the smallest price move that a given exchange rate can make. For example: EUR/USD is 1.1136 and moves to 1.1137, this would represent a move of 0.0001 or 1 pip.
Looking at other currency pairs e.g. when trading the Yen as the counter currency to the British Pound GBP/JPY, you will look to the second decimal point e.g. if the value of GBP/JPY is 141.42 and moves to 141.43 this would represent a move of 0.01 or 1 pip.
Majors, Minors and Exotics:
Majors are the most popular forex pairs in the market. These pairs are the main drivers and the most liquid currency pairs of all global currencies. Some examples: EUR/USD, GBP/USD and USD/JPY.
Minors, also known as crosses and refer to currency pairs not associated with the USD. Although not as liquid as the major currency pairs, they do however offer sufficient market liquidity to trade. Some examples: EUR/GBP, EUR/CHF and GBP/JYP.
Exotics, are Emerging Market currency pairs and are the least liquid and least traded pairs in the global forex market, with a select number of brokers providing liquidity. Some examples: South African Rand (ZAR), Mexican Peso (MXN) and the Russian Ruble (RUB).
Forex sessions:
One can literally trade Forex 24 hours a day, 5 days a week. The FX market does not have closing hours like a Financial Market e.g. Equity markets and has 4 main trading sessions:
- Australian session
- Asian session
- European session
- American session
In general, the liquidity of FX pairs increases during the official opening times of the currency pair e.g. GBP/USD will be more active during European and US market trading times. As a rule, the major currency pairs tend to be more active over the European and American session overlap.
News events:
It is very important to know when key market indicators will be released throughout the trading day, as major news and economic releases can heavily influence the global forex market. It’s imperative to have access to an economic calendar to keep you abreast of key releases around the world. Some of the major data releases and events to take note of are:
- US NFP (US Non-Farm Payrolls).
- GDP (Gross Domestic Product).
- CPI (Consumer Price Inflation).
- Interest rate decisions.
Central Bank meetings (FED, ECB, BOE, BOJ and RBA).
FOREX nicknames:
- Australian Dollar (AUD/USD) - Aussie
- British Pound (GBP/USD) – Cable or Cable Rate
- New Zealand Dollar (NZD) - Kiwi
- Canadian Dollar (CAD) - Loonie
- Swiss Franc(USD/CHF) – Swissy
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