What is Forex Trading and how does it work?
At FXTM, we are committed to ensuring our clients are kept up-to-date on the latest products, state-of-the-art trading tools, platforms and accounts.
For those just getting started, we have created a comprehensive Beginner’s Guide to introduce you to forex terminology, answer common FAQs and, most importantly, keep things simple.
Looking for a breakdown of forex terminology? Head over to our glossary page.
What is the forex market?
What is forex trading?
What is a forex broker?
Foreign exchange (also known as forex or FX) refers to the global, over-the-counter market (OTC) where traders, investors, institutions and banks, exchange, speculate on, buy and sell world currencies.
Trading is conducted over the ‘interbank market’, an online channel through which currencies are traded 24 hours a day, five days a week. Forex is one of the largest financial markets, with an estimated global daily turnover of more than US$5 trillion.
Forex trading is the act of buying or selling currencies. Banks, central banks, corporations, institutional investors and individual traders exchange foreign currency for a variety of reasons, including balancing the markets, facilitating international trade and tourism, or making a profit.
Currency is traded in pairs, in both spot and futures markets. The value of a currency pair is driven by economic, political and environmental factors, such as wars, natural disasters, or national elections.
Brokers act as intermediaries, facilitating trades by providing clients access to the 24-hour interbank
in order to conduct trades.
FXTM offers a number of different accounts, each providing services and features tailored to our clients’ individual trading objectives. Discover the account that’s right for you on our account page. New to forex trading? Learn about the markets by opening a demo account page.
All transactions made on the forex market involve the simultaneous purchasing and selling of two currencies.
These are called ‘currency pairs’, and include a base currency and a quote currency. The diagram below represents the forex pair EUR/USD (Euro/US Dollar), one of the most common currency pairs traded on the forex market.
Sell 1 Euro for 1.0916 US Dollars
Buy 1 Euro for 1.0918 US Dollars
Ask Price - Bid Price
1.0918 - 1.0916 = 0.0002 (2 pips)
Ask Price - Bid Price
1.0918 - 1.0916 = 0.0002 (2 pips)
The base currency is the first currency that appears in a forex pair. This currency is bought or sold in exchange for the quote currency.
So, based on the example above, it will cost a trader 1.0916 USD to buy 1 EUR.
Alternatively, a trader could sell 1 EUR for 1.0916 USD.
The second currency of a currency pair is called the quote currency. In EUR/USD for example, USD is the quote currency.
TThe ask price is the value at which a trader accepts to buy a currency .
The bid price is the value at which a trader is prepared to sell a currency.
A spread is the difference between the ask price and the bid price. In other words, it is the cost of trading.
For example, if the Euro to US dollar is trading with an ask price of 1.0918 and a bid price of 1.0916, then the spread will be the ask price minus the bid price. In this case, 0.0002.
A point in price – or pip for short – is a measure of the change in a currency pair in the forex market.
The acronym can also stand for ‘percentage in point’ and ‘price interest point’. A pip is used to measure price movements, and it represents a change in a currency pair. Most currency pairs are quoted to five decimal places.
Note: Forex prices are often quoted to four decimal places because their spread differences are typically very small. However, there is no definitive rule when it comes to the number of decimal places used for forex quotes.
On the forex market, trades in currencies are often worth millions, so small bid-ask price differences (i.e. several pips) can soon add up to a significant profit. Of course, such large trading volumes mean a small spread can also equate to significant losses.
Always trade carefully and consider the risks involved.
A ‘position’ is the term used to describe a trade in progress. A long position means a trader has bought a currency expecting its value to increase. Once the trader sells that currency back to the market (ideally for a higher price than he paid for it), his long position is said to be ‘closed’ and the trade is complete.
A short position refers to a trader who sells a currency expecting its value to decrease, and plans to buy it back at a lower price. A short position is ‘closed’ once the trader buys back the asset (ideally for less than he sold it for).
For example, if the currency pair EUR/USD was trading at 1.0916/1.0918, then an investor looking to open a long position on the euro would purchase 1 EUR for 1.0918 USD. The trader will then hold on to the euro in the hopes that it will appreciate, selling it back to the market at a profit once its price has increased.
An investor going short on the EUR would sell 1 EUR for 1.0916 USD. This trader expects the euro to depreciate, and plans to buy it back at a lower rate if it does.
There are seven Major currency pairs on the forex market. Other brackets include Crosses and Exotic currency pairs, which are less commonly traded and all relatively illiquid (i.e., not easily exchanged for cash).
Major currency pairs are the most commonly traded, and account for nearly 80% of trade volume on the forex market.
These currency pairs could typically have low volatility and high liquidity.
They are associated with stable, well managed economies, are less susceptible to manipulation and have smaller spreads than other pairs.
Cross currency pairs – Crosses – are pairs that do not include the USD.
Historically, Crosses were converted first into USD and then into the desired currency, but are now offered for direct exchange.
The most commonly traded are derived from Minor currency pairs (e.g. EUR/GBP, EUR/JPY, GBP/JPY); they are typically less liquid and more volatile than Major currency pairs.
Exotics are currencies from emerging or smaller economies, paired with a Major.
Compared to Crosses and Majors, Exotics are much riskier to trade because they are less liquid, more volatile, and more susceptible to manipulation.
They also contain wider spreads, and are more sensitive to sudden shifts in political and financial developments.
We’ve created a table below which showcases several different currency pairs from each bracket, as well as some nicknames which were coined by traders themselves.
N. Zealand Dollar
A candlestick is a chart, also known as a Japanese Candlestick Chart, that is often favoured by traders due to the wide range of information it portrays. The chart displays the high, low, opening and closing prices.
A candlestick has three points: open, close and the wicks.
The wicks show the high to low range and the 'real body' (wide section) shows investors if the closing price was higher or lower than the opening price.
If the candlestick is filled, then the currency pair closed lower than it opened. If the candlestick is hollow, then the closing price is higher than the opening price.
A bar chart shows the opening, close, high and low of the currency pair’s prices.
The top of the bar represents the highest paid price and the bottom indicates the lowest traded price for that specific time period.
The actual bar represents the currency pair's overall trading range and the horizontal lines on the sides represent the opening (left) and the closing prices (right).
A bar chart is most commonly used to identify the contraction and expansion of price ranges.
A line chart is easy to understand for forex trading beginners. In a line chart, a line is drawn from one closing price to the next.
When connected, it is easy to identify a general price movement of a currency pair throughout a time period and determine currency patterns.
A broker such as FXTM acts an intermediary between the traders and the liquidity providers. It facilitates in the execution of clients’ orders.
It is recommended to choose a licensed, regulated broker that has at least 5 years of proven experience. If your broker abides by regulatory rules, then you can be sure that they are legitimate.
Once you have an active account, you can trade — but you will be required to make a deposit to cover the costs of your trades. This is called a margin account.
However, it’s really important to remember that becoming a profitable trader isn’t an overnight process. It takes time to become familiar with the markets, and there’s a whole new vocabulary to learn. For this reason, reputable brokers like FXTM offer a Demo account. This is a great way to experiment with different trading strategies – but with virtual money and none of the risk!
Once you’re ready to move on to live trading, we’ve got a great range of trading accounts to suit you.
As a global broker, we’re firm believers that developing a sound understanding of the markets is imperative to a trader’s potential to succeed. That’s why FXTM offer a vast range of industry-leading educational resources in a variety of languages which are tailored to the needs of both new and experienced traders.
These include free webinars, Ebooks, articles and more. Prefer to learn from an expert in person? We also hold insightful seminars and workshops in various regions around the world that a cover a multitude of topics.
There are also many forex tools available to traders such as margin calculators, pip calculators, profit calculators, economic trading calendars, trading signals and foreign exchange currency converters.
Forex widgets can help to enhance your trading experience. Some of the more popular widgets include Live rates feed, Live Commodities Quotes, Live Indices Quotes, and market update widgets.
A forex trading platform is an online software which enables investors to access the foreign exchange market. It can be used to open, close and manage trades from the device of their choice and contains a variety of tools, indicators and timeframes designed to allow you to monitor and analyse the markets in real-time.
As a leading global broker, FXTM are committed to providing services tailored to the needs of our clients. As such, we’re s proud to offer our traders the choice of two of the industry’s leading forex trading platforms; MetaTrader 4 (MT4) and MetaTrader 5 (MT5). They are both available on a PC, Mac, mobile (iOS and Android) or tablet.
MetaTrader 4, also known as MT4, provides access to a range of markets and hundreds of different financial instruments, including foreign exchange, commodities, CFDs and indices.
It provides you with all the tools you need to both manage your trades and analyse the markets, whilst also being completely free to download.
With the MetaTrader 4 platform, you’ll enjoy easy-to-read, interactive charts that allow you to monitor and analyse the markets in real-time. You’ll also have access to more than 30 technical indicators which can help you to identify market trends and signals for entry and exit points.
MetaTrader 5, or MT5, is the newest and most advanced online and free trading platform. Trading on MT5 via FXTM gives you even greater access to financial markets including foreign exchange, commodities, CFDs, stocks, futures and indices.
Its diverse functionality, fundamental and technical analysis tools, copy trading and automated trading equip you with the best tools and instruments available.
Other great benefits of MT5 include a multi-threaded strategy tester, fund transfer between accounts and a system of alerts to keep up to date with all the latest market events. Traders can also communicate through the embedded MQL5 community chat to network with other traders and share tips and strategies.
These platforms, combined with innovative services such as FXTM’s Pivot Point tool and FXTM Invest, as well an award-winning Customer Support team, ensures FXTM traders have all the resources they need to trade with confidence.
You can find out more about our trading platforms, or download MT4 and MT5 from our trading platforms page.
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