As a newbie forex trader, the first trading guide you should look out for is forex trading for beginners, what is pip, technical, and fundamental analysis. These trading guides will help solidify your trading abilities and enable you to make basic trading choices.
What is Forex Trading?
Forex involves exchanging one currency for another. Foreign Exchange or Forex or Fx is the largest financial market in the world. Its daily trading volume is 5 trillion dollars. The only commodities that are traded in Forex are currencies; US Dollars, British Pounds, and others. Forex trading can be a lucrative opportunity for beginners, but it requires some knowledge and strategy. Technical and Fundamental analysis are two popular approaches to analyzing the forex market. The technical analysis predicts the Forex market’s future price movements by focusing on price charts and certain markers. However, the fundamental analysis considers the impact there is on the currency that political and economic factors possess. Another important term in forex trading is the “pip” which is for “percentage in point”. It is used to express a change in two currencies. It is important to understand these concepts for well-informed trading decisions and effectively manage risk.
A currency pair is a quotation of two currencies. The value of one currency quoted against the other or simply two currencies traded against each other. The first currency in the pair is known as the base currency, and the second in the pair is known as the quote currency. The amount of the quote currency needed to buy a unit of the base currency determines the value of the currency pair.
Consider the USD/CHF, the USD (US Dollar) is the base currency, and the CHF (Swiss Franc) is the quote currency. If the USD/CHF rate equals 1.5300, this means one dollar is worth 1.5300 Swiss francs.
Types of Currency Pairs
There are numerous currency pairs but the pairs are categorized into major, and minor pairs.
The major pairs are the most traded, they are made up of a developed country currency with the USD
and they include;
USD, EUR (Euros)
AUD (Australian dollar)
CHF (Swiss Franc)
JPY (Japanese Yen)
GBP (Great Britain Pound)
CAD (Canadian Dollar)
The USD/EUR is the most traded pair in the world, accounting for nearly 30% of the total daily volume in Forex.
The minor pairs are currencies made up of developed countries except for the USD. For example;
EUR/GBP, EUR/JPY, GBP/JPY, GBP/CAD, CHF/JPY, EUR/AUD, NZD/JPY, NZD, NOK
How to Trade Forex
The idea behind trading forex is to generate profits from exchanging one currency for another. An exchange rate is the ratio of the value of one currency over the other. Understanding Forex quotes helps traders in the market. Currencies are always quoted in pairs; GBP/USD, USD/EUR. The currencies are quoted in pairs because in all foreign exchanges, one currency is bought and the other is sold simultaneously. Consider the example below,
(Base) GBP/USD (Quote) = 1.71258
When buying is initiated, the exchange rate informs of how one has to pay in units of the quote currency
to one unit of the base currency. So from the above, one has to pay 1.71258 USD to buy one GBP.
When selling, the exchange rate informs how many units of the quote currency are gotten for selling one unit of the base currency. So from the example above, one will receive 1.71258 USD for one GPD. The pair is bought if it is believed the base currency will gain value relative to the quote currency and sell the pair if one believes the base currency will appreciate relative to the quote currency.
In Fx trading, profit can be made regardless of whether the market is going up or down. Just as with any field of study, it is imperative to be familiar with terms to succeed, and it’s no different here;
Long: This simply means buying a trade. Traders usually go long when they expect the trade to go above the position they bought it.
Short: On the other hand, going short means selling a trade. When short in trade it means one has a short position and will sell a currency pair below the point they went short.
Remember, the currency pair is either bought or sold simultaneously.
Bullish: Bullish is when one believes a currency pair will go up. The trade is believed to be on the Bull Run.
Bearish: This is when the trader believes the currency pair will go down so the trade is sold.
To go long or short, orders are put in place;
Market Order: simply, it is the order put in place by the trader at the current market price. Since market orders are placed at the best available prices, always remember to check the “bid-ask spread”
Bid-Ask Spread: The Spread is the difference in price at which the currency pair can be bought and sold. The Bid price is the value a broker agrees to purchase a base currency. It is the best price you will sell to the market and is usually lower than the Ask price. The ask price is the price at which the broker sells the base currency for the quote currency. It is the best price you will buy from the market.
The unit of measurement expressing value change between a currency pair is called a PIP.
Consider the examples below;
EUR/USD moves from 1.1050 to 1.1051.
The difference of 0.0001 USD rise is called one pip. It is also said to be the last decimal place of the price quote. Many quotes can have up to 4 decimals but the JPY usually has 2 decimals. For example, EUR/USD = 0.0001 while USD/JPY = 0.01.
They are known as fractional pips. Some brokers quote currency pairs beyond the standard “4 and 2” decimal places to “3 and 5” decimal places. For example, GBP/USD moves from 1.30542 to 1.30543, the difference of 0.00001 rise in USD is called one pipette.
Consider the examples below;
USD/CAD = 1.0200
For simplicity, the above can be expressed as 1 USD to 1.0200 CAD
The pip value ( in base currency) = (value change in counter currency) x Exchange rate ratio
(0.0001 CAD) X (1 USD/1.0200 CAD) = 0.00009804 USD per unit trade.
So trading 10,000 units of USD/CAD, one pip change would be approximately 0.98 USD change in value.
The JPY goes only 2 decimal places to measure 1 pip value change. Hence, one pip move is 0.01JPY.
Pip value (base currency) = (value change in counter currency) X exchange rate ratio
(0.01JPY) X (1 GBP/123.00JPY) = 0.0000813 GBP.
When 10,000 units of GBP/JPY are traded, a pip change in value is approximately worth 0.813 GBP.
There are two ways to analyze the charts; Technical and fundamental analysis.
An analysis method that uses past price behaviors to guide trade decisions. It is usually seen as a short-horizon trading method. Technical traders don’t wait for days or years for exchange rates to return. A set of rules guide the decisions of technicians; relevant data history is incorporated into decision-making, asset prices often move in trends and finally, history repeats itself. To get the predictions right technicians use the charting rule; placing on a graph history of prices over a period. The mechanical rule; requires consistency from the technician and urges the technician to use mathematical rules and older exchange rates.
An analysis method that focuses on factors such as the economy, placing relevance on productivity, employment, manufacturing, international trade, and interest rates. Fundamental analysis cares little about patterns or past asset movements. Fundamentalists seek to consider true value- growth expectation, interest rates, and earnings by considering the economy of such currency. Four basic determinants are used to estimate true value;
- Expected growth rate: use of compound growth for financial decisions.
- Expected dividend payout: the higher the dividend payout, all things staying equal, the greater the stock value.
- Degree of risk: the more respectable or less risky a stock, the higher its volatility.
- Level of interest rate: investors rationally should pay higher prices for stock when the interest rates are lower.