What is Forex Trading?
- Is Forex Trading Legal In Your Country?
- Is Forex A Way to Get Rich Quick?
- Why is it Important to Have Training?
- What Are The Forex Market Trading Hours?
- Why Do We Have a Forex Market?
- Who Participates in The Forex Market?
- How is The Currency Price Derived?
- Who Are You Trading Against?
- What Should You Learn About Next?
Forex is the abbreviation for Foreign Exchange Trading. Currency trading began in the 1880s but modern trading started in the early 1970s when Forex went online. As online brokers opened their doors, the growth of Forex has been exponential and it continues to grow. It has become so easy for the man on the street to open an account and trade online.
Is Forex Trading Legal In Your Country?
Forex is legal in most countries with a few exceptions.
At the time of writing, these are:
- Saudi Arabia
- South Korea
Check with your financial authorities as to restrictions on Forex Trading in your country.
Forex represents the global market of one country’s currency quoted against that of another country. A Forex trader decides if one currency is likely to be stronger than another and places the trade. If the trade wins it closes with a profit. If the trade loses you wave goodbye to your money. The trade itself is as simple as that. Simple, yes, but not easy for the novice trader.
Forex forms the basis for anyone in the world to agree to an exchange between one currency and another. The Forex market has no centralized exchange such as stocks or futures. Without market rates being quoted, there would be no agreed standard to set these rates. This would be chaotic, unreliable, and time-consuming. You may understand the process of exchanging currency for foreign travel. You see a screen displaying different exchange rates for available currencies. So, the rate you receive is the exchange price of the currency from your country to the currency of the country you are travelling to.
The Forex trader takes advantage of fluctuations in market exchange rates. They assess the future direction of a currency, and trade when their strategy aligns with the market. All currency rates are quoted in pairs i.e. EURUSD, USDJPY, GBPUS
Is Forex A Way to Get Rich Quick?
You won’t get rich quick with Forex. Yes, there is much information online suggesting trading is a fast and easy way to make money. These sites may show photos of big, expensive cars, parked on the driveway of huge, perfect houses. They may fabricate their account figures and convince you to trust them to teach you, or worse, trade for you. So many novice traders get caught out by this overdone theme which is little more than a scam.
You can find hundreds of Facebook groups, lots of people offering to teach you the ‘right way’. But, one of two things will happen if you take this route –
1. You will become overwhelmed with the sheer volume of conflicting information.
This will impact your trading ability. Without a clear trading plan, your trading will be chaotic. You will lose confidence as one loss follows another.
3. You will adopt one way of trading that doesn’t work for you.
All traders are different. You have to learn fundamental FACTS to align your plan with how the market moves. Then you work out how it fits in with your temperament and personality.
Why is it Important to Have Training?
Becoming a professional trader is hard work. Correct training is a must. Armed with correct information, you stand a greater chance of success. Forex is a high-risk business. But with a solid education, you learn to minimise your risks. A professional trader takes calculated risks. There are no gambles or blind speculation. Their trading plan formulates from technical and/or fundamental analysis of the market. They have watched and waited for the best moment to enter the market. Some traders may take only one or two trades a week. Good trading is not about placing many trades and hoping they’ll come out on top. This is a quick way to blow a trading account.
Study this training in-depth. Start trading small and commit yourself to the time it takes. Isn’t it worth the time to get it right, so you enter the market knowing what you are doing? Time, practice, and patience will shape you as a trader. It will help you to get your head in the right place so you aren’t screaming and crying at your losses. Nor are you yelling from the rooftops with your wins. Forex trading and impulsiveness are not a good pair. With practice, you learn to regulate your emotions. This enables you to become the confident trader who swoops into the market and jumps out again with profit.
What Are The Forex Market Trading Hours?
Forex is the largest market in the world trading 6.6 trillion US dollars every day (2020). The market trades 24/7 five days a week. Whatever country you are in, you will be trading in different sessions according to time.
See the table below.
For example, if you are in the UK and trading at 21:00 you are trading in the US market. So as one market closes, the next one opens.
Remember: Times change by one hour with summertime adjustments.
It’s important to know that the market can be unstable between session overlaps. You may be trading USD/JPY (US Dollar/ Japanese Yen) during the Asian session and liquidity is good. The market is moving. Then you cross over into the London session and this currency pair stalls. To trade a currency pair you need market liquidity. This means people are buying or selling the pair you are trading.
Note: During the change of session, the market can go nuts! The spread on pairs can be huge. This is known as gapping up. So, it’s always advisable NOT to place a trade near these times. Wait for the markets to settle and spreads to come back into acceptable levels. Don’t worry, we’ll talk about spreads later in the guide.
Why Do We Have a Forex Market?
Forex makes it easy for companies to conduct international trade. It's easy for businesses, banks, and governments to convert one currency to another. For example, a UK company may want to buy supplies from the US. The company would pay in the currency of the company supplying the goods. So, the transaction is then converted from the sterling pound to the US dollar. The price a company pays is the market price at the time of processing.
Who Participates in The Forex Market?
It is good to know who the participants are in the Forex Market. Sometimes movements happen which don't make logical sense. Understanding who is making the market move gives you an advantage.
Market makers provide a service to their paying clients. These are the big retail banks. These banks have funding to manage the multi-billion-dollar transactions of the corporate world. Market makers are diversifying into proprietary trading. Forex provides an opportunity for the banks to make large profits in this growing market. Market makers create market movement because of the sheer volume of money available. When a large sum of money lands in the market it can create a significant shift in a currency movement.
Large Corporate Companies
These are typically blue-chip companies. They are trading as part of their business. They need currency exchanges to pay for imports and to receive payments for exports. These companies try to save money by setting fixed rates. Or they wait for the best time to extract profit from the market.
Speculators aim to make a profit by market analysis. They will watch and wait for the peak moment to enter and exit the market based on their analysis. Typically, speculators are banks trading their own money. They are Hedge Fund Managers and Commodity Trading Advisors. They are high-risk traders who trade high volumes of money. When they lose, their losses may be great. The sheer volume of money traded by this group is enough to create intraday movement in the market.
The central banks are responsible for managing the economy of their country. These banks do not like to see their currency used for speculation. So, they will often try to influence their currency to reduce volatility. The bank of Japan will often step in if there is a risk of currency price affecting Japanese imports. The role of the central bank is to manage monetary policy to ensure economic stability.
This is you and me. We are known as retail traders. We have no interest in holding currency. We aim to get in and out of the market for a profit. There's a 95% failure rate for retail traders. So there is always a constant supply of funds for the market to take our money. Retail traders' money is not enough to move the market. Our role is to figure out how to swim next to the big fish without them eating us alive! This way you can gather up your profit as they do.
There is no need to be concerned about the high failure rate of retail traders. The fact that you have committed to this training already puts you ahead of most novice traders. The misconception of Forex being a get rich quick process leads to a gambling mindset. Novice traders have little emotional regulation around loss and end up losing everything. They fail to learn from their mistakes. So, they keep pushing into the market like a bluebottle against a glass window.
So, take a deep breath. You’re in the right place to educate yourself for the Forex market. So, let's continue.
How is The Currency Price Derived?
The major retail banks set central exchange rates. This is because of their interbank trading known as a liquidity pool. They can move the market to influence prices to suit their requirements. Yes, this is unfair. It puts you on the back foot as an independent Retail Forex trader. But don’t despair because you can learn how to follow these movements. This guide is part of your education on how to do this. This group of major banks set the wholesale rates for the rest of the markets. The brokers then quote their rates allowing them to make a profit.
These banks will use world economic news to push the market price back and forth. This creates volatility which forces retail traders into positions of weakness. This causes them to lose money so the banks make their hefty profits.
This may sound negative and unfair. But you will learn how to know when there is no volume and liquidity in the market. You can then choose to stay out and avoid entrapment from the undercurrent.
Who Are You Trading Against?
Generally, you are trading against other retail traders. If you are buying a currency, someone else is selling it to you. If a price goes down, the market is dumping the currency. If the currency price goes up, the market sentiment is to buy. You will never be trading against the market makers and central banks. You are a tiny little minnow in their HUGE pond of cash. That said, you have a plethora of free tools to help you understand how the big players work. And, by the end of this training, you will feel confident to jump into the Forex pond.
You are also kind of trading against your broker. They have to make their money somehow and some of them make it from you losing the trade. Some brokers will be trading against you directly. Others take a commission on your wins and losses. Don’t worry, we’ll be discussing brokers in detail further on in chapter 4.
What Should You Learn About Next?
In this chapter, you have learned what the Forex market is and how it works. You know why the exchange exists. You understand that your Forex education is important. You know who the big boys are on this playing field and you are going to learn how to play alongside them.
Already, you are ahead of the game because you have this knowledge. This training will help you to lay down strong foundations for profitable trading. The more time you spend building the foundations the greater chance of your success.
In the next chapter, we are going to look at exactly what you need to get started as a Forex trader.