The foreign exchange market or forex is becoming more and more prominent as we speak. A large number of people around the globe have heard about it and some have already made a decision to begin exploring this phenomenon and start trading on a daily basis even if they have never been a part of the world of finances and economy.
However, there are some burning questions that should be answered and explained in a simple way when it comes to forex market.
Question 1: What makes the foreign exchange market different from the other markets out there?
The global nature of the forex market is what makes it so unique. It stretches across the time zones and it is available to anyone at any given time. The foreign exchange market is completely decentralized, meaning that there is no source or a single place in the world which runs the market, but instead it is a web of large financial centers scattered around the planet. The working hours of those centers overlap and they create an easily accessible market open for every trader whenever they want to participate in trades and exchanges.
Another feature which makes the foreign exchange market stand out is the fact that there is no single governing body in charge of every transaction. Surely, some countries did implement the laws which are protecting the investors but they are still not regulating the entire market.
The liquidity of the forex market is exceptional and you will rarely be stuck with the currency you cannot exchange. The daily turnover is staggeringly high and the market is constantly moving, placing it among the most active trading places in the world.
Question 2: What exactly is traded on the foreign exchange market?
If you have read the answer to the previous question, you already know that every single exchange completed on the foreign exchange market is done in a non-physical way, meaning that the trading is done online. Traders are doing business from their own homes or offices without any face-to-face interaction with brokers or any other traders.
The foreign exchange market is the place where currencies are exchanged via the internet. The funds you are using in your trades are on an online account and every profit you make is stored there too. Of course, in case you lose the funds, they are taken from your online account as well. Clearly, you are dealing with the money which is intangible but that doesn’t make it any less real. Every move you make in the foreign exchange market has consequences whether they are good or bad and the money you have on your online account is very much real.
Question 3: Which currencies are you allowed to trade? Are there any limitations?
Basically, you are free to decide which currencies you wish to trade, no matter how obscure or unknown they are, but it is not recommended to trade absolutely any currency that comes to your mind. You need to remember that not all currencies are equal and in order to be successful, you need to know which ones are more profitable. In order to complete a currency exchange, you need to pair up two currencies and create a pair. The currency pairs are divided into three groups – major currency pairs, minor currency pairs, and exotic currency pairs.
The list of the major currency pairs includes the pairs which are most commonly traded in the foreign exchange market. These pairs have high liquidity and they are the most popular ones among the traders. The minor pairs are not traded as frequently as the majorsbut they still make a large percent of the daily trades in the market. While the exotic pairs are the most challenging of them all since they require a more research and analysis, they are nevertheless interesting to traders. They are recommended to more experienced investors who are willing to approach them with a solid trading strategy. If you are a beginner, the major currency pairs are the perfect choice for you to get a hold of how the trading really works and learn the basics of the trading in the foreign exchange market.
Question 4: What does a term ‘pip’ means?
To put it as simply as possible, a pip is the smallest change in price of a currency. The prices of currencies are written with four decimals and that change happens in the fourth or the last decimal of the price number. The only exception to this rule of four decimals is the Japanese yen which is presented with only two decimals. And finally, pip as a term is short for “percentage in point”.
Question 5: Are trends and patterns the same thing?
Even though they might seem similar, trends and patterns are two entirely different things. When it comes to trends, the data is laid out in front of a trader and their aim is to identify the direction in which a trend is heading to. Trends can be divided into three different categories, and those are uptrends, downtrends, and sideway trends. Trends also have lengths, meaning that they don’t last forever. Some are long-term or short-term, and some are intermediate trends. Surely, traders might have difficulties identifying a trend in the beginning, but once they gain experience in the foreign exchange market, spotting trends will become easier and quicker.
Patterns are something different. Just like the name suggests, they are formations which can be found in the charts. Two most common patterns are head and shoulders and triangle. Identifying a pattern might be a bit more difficult than identifying a trend because a trader should also analyze the history of patterns on a given chart more thoroughly.
A trader who wants to be successful in trading on the foreign exchange market should learn to spot both patterns and trends fairly quickly. Doing so can improve their trading system drastically. It is of paramount importance to be capable of identifying the direction in which the market will move and invest accordingly.
Question 6: Is there a universal winning trading strategy?
No, trading strategies are purely individual. Each trader should design their own approach to trading that suits their needs. Of course, there are many steps which are common in every strategy such as fundamental and technical analysis, but there is no safe trading strategy which will bring you the money fast and without the risk.
Once a trader sets up the trading strategy they want to use in the future, they can test it out by using a demo account. If the performance of the strategy is not satisfactory, a trader can adjust it and make some changes in order to improve the strategy before they put their real money on the line.
Since we live in the age of social networking, any trader has an opportunity to connect with the rest of the forex trading community, whether through blogging or forums. Users often share their strategies and approaches to trading and if a trader gets stuck with a strategy that is not working, they can take a look at what the other traders are doing and how they fix their problems regarding the foreign exchange market. They can also follow the well-known and successful traders and learn a thing or two from them. A large number of notable forex traders do have their personal blogs and they update them regularly with some useful information which can transform a trader’s previous trading strategy or simply inspire them to reconsider the way they view the market and urge them to try out something new.
Question 7: What is leverage?
The ability to use leverage is one of the most attractive features when it comes to trading in the foreign exchange market. It means that a trader can control a large amount of trading money even if their starting investment isn’t substantial. The amount of leverage which can be used varies, depending on the brokerage firm a trader chooses to trade with. In order to clarify what leverage really is, let’s use a 50:1 leverage as an example. The number indicates that for every $1 a trader has on their account, they get $50 to trade in the foreign exchange market. This advantage can be very useful for those who are just starting out and they do not want to immediately invest a majority of their money. Of course, a trader has to be very careful when using leverage because the risk is higher and they can lose their money fast.
Question 8: What is scalping?
If you have been doing your research of the world of the foreign exchange market, you have probably come across the term ‘scalping’. ‘Scalping’ usually refers to a practice of using the small changes in a currency pair to your advantage. Those small changes happen in a short period of time. Traders who decide to use this approach are using very high leverages and their goal is to earn at least 10 pips within just a couple of minutes.
Every professional trader will tell you that scalping is not the best way to trade in the foreign exchange market and they are completely right. It is risky and you are more likely to lose your funds very quickly if you are not completely focused on the task.