Title: Understanding Forex Trading: A Beginner’s Guide
Adapted and expanded from a video by Rayner Teo (“Forex Trading for Beginners | How to Trade Forex”), available at: https://www.youtube.com/watch?v=KMsuRm9CS9w
Credit to original creator: Rayner Teo
Forex, or foreign exchange, is one of the most liquid and actively traded markets in the world. With the ability to trade 24 hours a day, five days a week, and vast opportunities for traders to profit from both rising and falling markets, forex trading has attracted individuals ranging from professionals on Wall Street to first-time retail investors. This guide breaks down the core principles of forex trading, adapted and expanded based on the teachings of Rayner Teo, a renowned trading educator.
What is Forex Trading?
At its most basic, forex trading involves the exchange of one currency for another. These transactions occur in the forex market, which is decentralized and operates over-the-counter (OTC). Traders participate in this market by speculating on the direction of one currency against another and seek to profit from price fluctuations.
The term “forex” itself is a contraction of “foreign exchange,” and currencies are traded in pairs such as EUR/USD, GBP/JPY, or USD/CAD. Each pair represents the value of one currency relative to another. When a trader believes the euro will strengthen against the US dollar, they would go long on EUR/USD. Conversely, if they believe the euro will weaken, they would go short.
Major Characteristics of the Forex Market:
– Largest financial market in the world, with daily trading volume exceeding $6 trillion
– Operates 24 hours a day during weekdays
– High liquidity with low transaction costs
– Leverage is available, amplifying both potential profits and losses
– Currency values influenced by geopolitical events, economic data, central bank policies, and market sentiment
Participants in the Forex Market
Several different participants are active in the forex market, each contributing to its scale and volatility. The main types of participants include:
– Central Banks: Influence currencies through monetary policy decisions, interest rates, and intervention to stabilize national economies.
– Commercial Banks: Provide liquidity and execute large-scale trades on behalf of clients such as multinational corporations and hedge funds.
– Corporations: Engage in forex trading as part of international business operations like importing and exporting goods.
– Retail Traders: Individual investors who speculate on currency pairs through online trading platforms or brokers.
– Hedge Funds and Institutional Investors: Engage in substantial forex trading using strategies ranging from arbitrage to carry trades.
How to Read a Currency Pair
Understanding how currency pairs work is fundamental to learning to trade forex. Every currency pair involves a base currency and a quote currency.
For example: EUR/USD = 1.1050
This means 1 Euro (base currency) is equal to 1.1050 US dollars (quote currency).
– If the pair rises in value, the base currency is gaining strength compared to the quote currency.
– If the pair declines, the base currency is weakening.
Common Currency Pairs
Currency pairs are typically divided into three categories:
1. Major Pairs:
– Most traded and most liquid.
– Examples: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD
2. Minor Pairs (Crosses):
– Do not involve the US dollar.
– Examples: EUR/GBP, EUR/AUD, GBP/JPY
3. Exotic Pairs:
– A major currency paired with a developing or emerging market currency.
– Examples: USD/TRY, EUR/SEK, USD/ZAR
Types of Forex Markets
There are three major types of forex markets:
– Spot Market: Immediate exchange of currencies at current market prices.
– Forward Market: A customized contract between two parties for future exchange at a predetermined rate.
– Futures Market: A standardized legal contract to exchange currencies at a set price
Read more on EUR/USD trading.