Forex trading meaning

There are various financial instruments available for speculating on their prices. However, Forex remains the most accessible as there is a large pool of brokers to choose from and the barriers for entry are minimal. Forex trading carries risks associated with trading and in this guide we’ll do our best to help you minimize those risks by helping you fully understand what Forex trading actually is.

Forex trading can become a great opportunity for some investors to create an additional source of income or even the only source of income. However, many people lose a lot of money trading instead of raking in profits. Follow our forex trading guide in order to find out how to trade forex, what Forex is and what to expect from the process.

Forex pair meaning

Forex pair consists of two parts: the first part is referred to as a base currency and the second one is called quote currency. In a pair one currency is always valued in relation to the other currency. And therefore prices on FX pairs have a more cyclical nature than stock prices. Learning about the currency pairs that you are going to trade is forex trading 101. Each pair is unique and offers different opportunities.

Types of Forex pairs

There are Major, Minor, and Exotic pairs available for trading on the markets. Major currencies are coming from strong global economies and are more stable. As a result, most investors are trading major ones and the liquidity is the highest. Major currencies are: EUR, USD, GBP, JPY, CHF, CAD, AUD, NZD. When the major currencies are paired with USD, we have a Major currency pair such as:

• EUR/USD – Euro vs US Dollar
• NZD/USD – New Zealand Dollar vs US Dollar
• USD/CHF – US Dollar vs Swiss Franc
• USD/CAD – US Dollar vs Canadian Dollar
• USD/JPY – US Dollar vs Japanese Yen
• AUD/USD – Australian Dollar vs US Dollar
• GBP/USD – British Pound vs US Dollar

It is recommended for novice traders to trade Major ones as the spreads are minimal and the information needed for conducting fundamental analysis is widely available.

Minor pairs are less liquid than the Major ones but more liquid than the Exotic pairs. Minor pairs consist of Major currencies, except the USD is missing as a pairing currency.

Exotic pairs are currencies of developing countries and therefore are more risky, volatile and least liquid. For these reasons, most traders avoid trading Exotic ones.

Benefits of trading forex pairs

There are many benefits of trading Forex compared to stocks and other types of instruments. And we’ll discuss everything about Forex trading below.

Low trading fees

Forex offers the lowest trading fees. Usually, there’s no fee for demo accounts. Most brokers offer free and instant deposit options and the spreads and commissions are low. When trading stocks for instance, often brokers charge their clients with platform fees.

Leverage

Forex brokers offer high leverage that enables them to trade large positions with only a small upfront capital. Traders get a higher purchasing by using borrowed funds from their broker. Leverage trading or high leverage is not possible for physical Stock market investors or investors that are collecting crypto currencies. However, leverage can be a double edged sword and traders can increase their losses just as easily as their profits. 100:1 leverage simply means that every 1,000 USD you deposit into your account will have up to 100,000 purchasing power.

High liquidity

As we have already mentioned, the Forex market is lightly liquid. But what does that mean exactly? When you purchase something and intend to sell it, you want a lot of offers to choose the best ones. When markets are highly liquid, the difference between asset ask and bid prices are minimal. The difference is called spread in Forex. To pay the least on spreads, it is recommended to trade during active trading sessions. It is true that the markets are open 24/5. However, London, New York, and Tokyo sessions are the most active. And the most liquid time to trade is when London and New York trading sessions overlap. Understanding forex trading includes learning about different trading sessions and their liquidity.

Trading is available 24/5

One more reason to learn Forex trading is that the markets are open 24/5. Which enables you to trade even if you have a job and do not have much time to sit in front of your desktop all day. Traders that have busy personal lives and little time for trading prefer swing and position trading.

Compounding

Trading enables you to increase your income by compounding. When you are working a regular job and selling your time for money, you can only earn a limited amount as there is a limited amount of time in our lives. Trading financial instruments help investors reinvest their profits and make their money work for themselves. In such occasions earning potential income is no longer bound to time. For instance, let’s say you make 100% profit every year on your deposit. Your starting capital is 10,000 USD.

• Year 1: 10,000 USD – 20,000 USD
• Year 2: 20,000 USD – 40,000 USD

After 2 years you have increased your initial investment by 300%. It is very difficult to double your money in trading, however, this example shows the power of compounding over time.

Easily accessible

Forex trading is much more easily accessible than trading any other financial instrument. As we mentioned, leverage enables you to start speculating currency markets using much smaller trading capital. What’s more, barriers are very few. Account opening usually takes less than a day. Brokers are offering user friendly web pages and active customer support.

Drawbacks of trading forex pairs

In addition to benefits, there are some disadvantages of trading Forex pairs that need to be discussed.

Limited number of currency pairs to choose from

Currency pairs are limited in number, whereas stocks and other various asset types are in thousands.

Leverage

We’ve mentioned leverage as positive previously. However, it can be counted as a negative as well. Usually, high leverage and large trading positions are the main reason why traders blow up their accounts.

Trading profitably is hard

Trading currency pairs consistently profitably is not an easy feat. There are multiple trading styles and multiple assets to trade. Each trader needs to find the strategies that best suit their personality. What’s more, it takes a lot of work to keep updating the trading systems to cope with the changing market conditions.

Forex trading for beginners

Forex trading for beginners is especially challenging as there’s a vast amount of information to digest. Novice traders usually do not have working trading strategies that best suit their personality when starting out. As a result, often beginner traders blow up their accounts. There are a couple of steps beginners go through to become professionals:

Learn how to use a trading platform

The first step is to learn how trading platforms work. You can find a lot of tutorial videos on the internet. Demo accounts are free of charge and they can help you to practice your trading skills using virtual money.

Before risking real money, it’s important to make sure that you will not be making any technical mistakes related to platforms. Mastering the platforms and technical indicators are absolutely achievable.

Learn how to conduct technical and fundamental analysis

Forex trading for beginners is challenging. To learn how to trade forex profitably, they need to learn how to make predictions.

As novice traders become efficient in using trading platforms, the next step for them is to learn how to predict prices. There are traders that base their prediction on technical analysis, in other words, they study charts, patterns and indicators. And there are traders that analyze market news and fundamental factors such as trade deficits, unemployment, interest rates, etc. You can also find traders that do both. It’s best to learn about both methods and decide for yourself what makes the most sense. Each trader is different and each trading style that they choose needs to be in line with their personality. For instance, traders that hate to sit in front of their screens all day, will make bad intraday traders. However, they have a chance at becoming swing and position traders.

Learn about a trading edge and develop a trading system

To understand how forex trading works, understanding probabilities and trading edge is the most important. Trading edge is a mathematical advantage that makes it certain that the more traders trade using an edge, the more money they can make. For example, let’s say a trading setup offers a 50% positive outcome rate and the risk to reward ratio is 1:2. The next trade might not be in profit, but the more a trader trades using that system, the more money can be made.

Have proper attitude towards trading before depositing funds

Developing a proper attitude is highly important as our attitude becomes our actions and our actions can make us richer or poorer. Trading is not a gamble or a job. Trading Forex pairs is like running your own business. Traders should be ready for drawdown periods and have saved up funds for emergencies.

Risk the money you can afford to lose

Traders should always risk the money they can afford to lose on the markets. Trading is risky. In addition, when you are not dependent on revenues from trading, you can be more selective and focus on trading better as there’s no financial pressure.

Analyze your progress

Markets are constantly changing. Analyzing the progress and learning from your own mistakes is essential for making constant gains. A trading diary and monthly or weekly summaries can greatly help you improve your trading systems.

The main takeaways

To sum everything up, Forex is also known as FX or Foreign exchange. Learning how to trade forex profitably is challenging, however, FX trading has a lot of benefits. Small upfront investment is required compared to other asset classes and there are less barriers. Fees are affordable. The market is open 24/5 and is highly liquid during major trading sessions: London, New York and Tokyo. However, trading constantly profitably is difficult and requires hard work and dedication. Beginner traders should master the use of trading platforms first before depositing actual funds. In addition, traders should only risk the amount of money they can afford to lose to remove the pressure and focus on performance instead. Analyzing other people’s mistakes and learning from your own mistakes can greatly improve any trader’s results in the long run.

FAQs on Forex trading meaning

Is it good to trade in forex?

Forex is the most liquid market in the world of finance. Forex trading is great for people who are looking for low trading fees, high liquidity, 24/5 open market and lot’s of trading opportunities. What’s more, information is widely available to advance as a trader or conduct market analysis on the internet for beginner and professional traders.

What is a forex trading example?

Forex trading is conducted via brokerage companies using trading platforms. For example, let’s say you have already opened an account and made an initial deposit. And after thoroughly analyzing the market, you are predicting that the EUR/USD pair will go up by 50 pips. Forex trading example would be opening a market order at 1.02 and placing a take profit order 50 pips apart.

How do I start trading forex?

There are a couple of steps you need to take to be able to start trading forex pairs. First and foremost is learning how to trade. Trading requires upfront capital and inexperienced traders have a high risk of blowing up their accounts. Once you learn trading basics, you can choose a broker, download their trading platform and start placing orders.

Is forex a gamble?

Professional Forex trading is far from gambling. However, trading can become a gamble for certain individuals who cannot manage their emotions or don’t have a profitable trading system. Trading forex profitably requires hard work, a trading system with an edge and risk and emotional management to let that edge present itself.