As a newcomer to the forex trading scene, you’re probably feeling a little antsy, perhaps even a little out of your depth. Don’t sweat it. The mere fact that you are deliberating is an indication that you want to learn more about forex trading. With your curiosity piqued, you have unearthed this forex trading guide and it’s going to help in your trading endeavours. We shall begin with a brief definition of both the forex market, how to trade forex, and a description of its core components. Forex by definition simply means foreign exchange. It’s the fiduciary currency a.k.a. the fiat currency that we are all accustomed to.
In Britain, our fiduciary currency is the British pound, abbreviated to GBP in forex nomenclature. Across the Atlantic, our American and Canadian friends use the USD and CAD respectively. Now that Britain is officially divorced the European Union, there are some question marks about how EUR will function in the UK, but we are all well familiar with GBP and EUR transactions. Were it not for different countries and different currencies, there would be no need to sell one currency and buy another currency a.k.a. forex transactions. With that in mind, let’s move on to the forex market!
What Is So Unique About the Forex Market?
Almost every one of us, except for the very young or the very old who know no better, have all heard of stock markets. Stock markets are institutional trading venues where securities are bought and sold. The ranking stock market in the United Kingdom is the London Stock Exchange (LSE), where important indices such as the FTSE 100 index and the FTSE 250 index exist.
When you buy and sell stocks, the objective is to buy into a public company in the hopes that the company will manage its operations, and your financial investments effectively. When a company performs well over time, the stock price appreciates and you may generate dividends per share (DPS) or earnings per share (EPS). Global stock markets have been performing remarkably well in recent years, although a degree of uncertainty abounds about future performance.
Now, with that in mind we shall turn our attention to the forex market. London is the world’s epicentre of forex trading. This comes as a surprise to many newbie forex traders who believe that New York, Los Angeles, or perhaps even Tokyo serve as the premier forex trading cities. Rather than a single destination however, a locus, the forex market is global in nature and does not occur in any fixed location. Rather, forex is conducted through forex brokers, banks, commercial businesses, central banks and the like.
There are online forex brokers and land-based forex brokers. People exchange currencies amongst one another, or at forex cubicles at shopping centres and airports, and Bureaus De Change. It is clear that traditional markets are centralised and forex markets are decentralised. This makes them accessible to anyone, at any time, anywhere in the world.
When Do Different Forex Markets Trade?
Perhaps you’re sitting in London and you want to trade forex. The London trading session begins at 8 AM UTC time and continues until 5 PM UTC time. The New York session overlaps with the London session between the hours of 1 PM UTC time and continues throughout the night until 10 PM UTC time. Across the Pacific, the Sydney session takes place between 10 PM UTC time and 7 AM UTC time, while the Tokyo session overlaps with the Sydney session between the hours of 12 AM and 7 PM.
Sydney and London overlap between 8 AM and 9 AM UTC time. It’s in your best interests to work with the correct time format to ensure that you can manage your trading activity to derive maximum yield from volatility through session overlaps. The busiest sessions take place when London and New York overlap – that’s when you will see tremendous whipsaw activity and volume trading on forex.
You will read many reports about the daily trading volume of forex activity. The most commonly cited figure is $5 trillion per day, although significantly more has been recorded in recent times. An article in Bloomberg from September 16, 2019 indicates that global currency trading surged to $6.6 trillion a day according to the BIS (Bank for International Settlements) pictured above. This is significant on many levels. For starters, no other market hosts this level of trading activity. According to the BIS, the USD remains the dominant currency that is traded.
The USD features in 88% of transactions taking place. Equally important is the fact that emerging market currencies from countries like Brazil, Russia, India, China, and South Africa (BRICS) countries and others like them now comprise 25% of global forex trading activity. While the USD remains the dominant forex currency as part of pairs that it is traded with, the total share of forex trading in the US is just 17% of overall activity. Euro trades now comprise 32% of all trading forex, and the Japanese yen is measured at approximately 17%.
How Do You Trade Forex?
Your point of departure is to avoid scam forex trading brokerages. You cannot trade forex with a non-regulated operator who offers you terrible rates (the spread), high fees and commissions, and the possibility of fraudulent transactions. Always pick a reputable forex brokerage. Next, choose a currency that you understand. This is usually your home currency, in this case the GBP. There are different types of currency pairs such as major pairs, minor pairs, and exotic pairs. The major pairs have the lowest spreads and offer the best advantage to traders. They are highly liquid and you can virtually trade them anytime you want.
They include GBP/USD (the cable), USD/CHF, USD/CAD, NZD/USD, and EUR/USD, among others. You will notice that all the major pairs have the USD on one side. Minor currency pairs do not include the USD. They include the GBP/JPY, GBP/CAD, GBP/EUR, and so forth. Exotic currency pairs have a major currency and a currency from an emerging market economy such as the BRICS countries listed above. Examples include GBP/ZAR, EUR/TRY, and NZD/SGD. It’s easy to tell which currency is a major currency and which one is the exotic currency.
Example for Illustrative Purposes Only
With your currency pair picked out, it’s essential to understand what you’re doing with the transaction. Every forex trade has two components in the currency – the base currency and the quote currency. If we use the GBP/USD pair as a case in point, the GBP is the base currency and the USD is the quote currency. The exchange rate indicates how many USD 1 GBP can purchase. In other words, if GBP/USD indicates 1.3000, it means that £1 is the equivalent of $1.30. You will typically see forex pairs quoted to 4 points. Small price movements can have outsized impacts on forex transactions.
Not convinced? Let’s say you spend £100,000 on USD. At a rate of 1.3000, your £100,000 is the equivalent of $130,000. If the GBP appreciates by £0.02 to the USD, you suddenly have $2,000 more in your pocket. To get the GBP value, you simply divide $2,000 by 1.30 = £1,538. If you use leverage – and most forex traders do this all the time – you can enjoy leverage as high as 100:1 in certain instances, multiplying your holdings (potential profits and potential losses) by a factor of 100*. Traders are strongly cautioned to read as much as possible on forex trading. Tutorials, guides, demo trading platforms, social trading platforms and videos are useful resources in this regard.
*Forex trading is inherently risky and not suited to traders who are risk averse. Forex is extremely volatile and leverage can increase profits just as easily as it can magnify losses. Trade at your own risk.