Forex trading is a prominent investment destination as it fits all traders with different experience levels. However, trading in the forex market is still controversial to many due to the promising yet risky nature of the market. Some people actually think forex trading is a shortcut for being rich, but this is not how it really works.
To be a successful long-term trader you will need proper market education, practice, application, and persistence. This is why it’s always important to know the key facts about the forex market and how it works before you step into the world of forex trading.
What is the Forex Market?
The foreign exchange market, or forex market, is the most traded financial market in the world. The forex market is a global marketplace where financial institutions, banks, and investors can speculate on currencies. It is considered to be the largest and most liquid financial market in the world, with an average daily trading volume of $6.6 trillion. The forex is a decentralized market as all trading is done online, known as over-the-counter (OTC) trading.
What is Forex Trading?
Foreign exchange is the process of exchanging one currency with another. This is a common financial process that can be performed for commercial or trading purposes.
Forex trading is the speculation on currency prices for potential profits. Since forex trading is primarily exchanging one currency for another, currencies in the forex market are traded in pairs. The currency pair is a quotation for one currency against the other; known as quote currency and base currency. Currency pairs are affected by different fundamental and technical factors that affect the exchange rate. These factors include economic policies, political stability, trade flows, and of course the changes in supply and demand.
Currency pairs use the abbreviation of currency and country names. For example, the USD/JPY currency pair refers to the US Dollar against the Japanese Yen.
Understanding Currency Pairs
Understanding the pricing and quotation for currency pairs is very essential in forex trading. Currencies are defined as the base currency and secondary quote currency. The base currency is the first currency in a currency pair. Also known as the transaction currency. The quote currency is the currency being used to pay for the transaction, and it is also known as the counter currency or secondary currency.
Buying and selling currency pairs in the forex market always involves two currencies: the currency you’re paying with (the one you’re selling) and the currency you’re buying. This explains why currencies are traded in pairs.
If you’re selling the pair, then you’re selling the base currency, and the currency you’re buying is the quote currency. While in buying, you’re selling the quoted currency to buy the base currency.
When trading a forex pair, the prices are shown (the exchange rate) reflect how much it costs to buy/sell one unit of the base currency by selling/buying the quoted currency.
For example, in the EUR/USD pair the US Dollar is the quote currency, while the first currency (Euro) is referred to as the base currency. If the price of the pair is 1.1200, this means that then you need $1.12 to buy 1 Euro.
What are the Most Traded Currency Pairs?
Currency pairs in the forex market are divided into three main categories:
- Major Pairs: The major pairs are the most traded major currencies against the US Dollar. These pairs enjoy high levels of liquidity due to the elevated trading volumes. Examples of major currency pairs are EUR/USD, USD/JPY, GBP/USD, USD/CAD.
- Cross Pairs (Minor): A cross currency pair is the currency pair that does not involve the US dollar. Despite enjoying sufficiently liquid markets, they are less liquid than the major pairs. The cross currency pairs with higher trading volumes are the ones that include a major currency. Some examples of cross currency pairs are; EUR/GBP, GBP/JPY, and EUR/CHF.
- Exotic Pairs: The pairs that include currencies of emerging markets. They are not as liquid as majors or crosses, so they are characterized by higher price swings. USD/TRY and USD/MXN are among the exotic currency pairs.
The eight most traded currencies in the forex market are the US dollar (USD), the euro (EUR), the British pound (GBP), the Japanese yen (JPY), the Canadian dollar (CAD), the Australian dollar (AUD), the Swiss franc (CHF), and the Chinese Yuan (CNY), according to the BIS survey in 2019.
And the top traded currency pairs are:
- EUR/USD: Euro vs. US dollar
- USD/JPY: US dollar vs. Japanese yen
- GBP/USD: British pound vs. US dollar
- USD/CHF: US dollar vs. Swiss franc
- USD/CAD: US dollar vs. Canadian dollar
- AUD/USD: Australian dollar vs. US dollar
- NZD/USD: New Zealand dollar vs. US dollar
- USD/CNY: US dollar vs. Chinese Yen
- EUR/GBP: Euro vs. British pound
How to Trade Forex?
Forex trading is based essentially on the idea of anticipating the future price of the currencies. To predict future market directions, traders use two main types of analysis to predict market movements. These are technical analysis and fundamental analysis. As a forex trader, you can rely on one or both of them to predict the market.
Technical analysis is based on the study of historical price action in order to identify price patterns and predict the future movements in the forex market through the use of technical indicators and historic price patterns. The main tool for technical analysis is the price chart through which traders interpret price patterns. That is why it is widely seen by novice traders as an easier approach to analyze the market. Check our Beginner’s Guide to Forex Technical Analysis.
Learning the basics of forex technical analysis and tools can be sufficient to start trading. Once you understand the main concepts of technical analysis, you can apply them to any market, which makes it a flexible analytical tool.
There are three popular types of price charts which are:
- Line Chart: the most basic of trading charts, and the easiest for beginner traders. The chart represents only the closing prices over a period of time. In trading, the closing price is often considered the most important element in price analysis.
- Bar Chart: It is made up of a sequence of vertical lines where each line is a representation of trading activity, and includes more key information of prices. Each bar includes the high and low of the trading period, as well as the open and closing price that is represented by a side horizontal shorter line.
- Candlestick Chart: the most popular in forex charts. Candlestick charts are easy to use and also very informative when it comes to highs, lows, opening, and closing prices.
Check more about Forex Charts and how to read them.
Fundamental analysis, on the other hand, is evaluating the price of a currency and assessing the factors that could influence its value in the future, including external influences, as well as financial statements and economic trends.
While fundamental analysis analyzes the fundamental and economic factors, technical analysis tends to identify price trends, which conveniently can be caused by the underlying fundamentals.
How to Choose a Reliable Forex Broker?
The Forex broker is an intermediary entity between retail traders and the forex market or the interbank system, in which major banks trade with each other. The broker provides financial services to facilitate the process of buying and selling foreign currencies for retail traders. Clients of a forex broker may also include large financial institutions that trade on behalf of retail customers and investment banks.
Take your time searching for a reliable forex broker so your money and trades will be handled appropriately. The main features of a reliable broker include efficient customer support, real-time market execution, suitable trading conditions, a wide selection of account types that suits different traders depending on their financial capabilities, providing advanced software for successful trading, secure and fast money depositing and withdrawal, competitive spreads and finally but not least is offering multiple trading options with various currency pairs.
Checking the broker’s regulatory compliance is very crucial. You have to choose a regulated forex broker, which keeps you safe from scams and frauds.
AximTrade Regulation guarantees accountability and transparency that protects the interests of our traders. AximTrade is regulated by the Financial Conduct Authority Scheme (BVIFSC) which ensures broker’s compliance with the highest international standards and best conduct of business practices. This means you won’t have to worry about your funds or the privacy and confidentiality of your transactions. Check the full Aximtrade Review for more insights about the broker’s accountability and reliable services.
The Trading Platform
The trading platform is where you execute trading, it’s your trading portal. Nowadays, advanced trading platforms have transformed the overall trading process, making it easier and more accessible.
AximTrade, recognized as the best broker, offers its award-winning Metatrader 4 (MT4) trading platform for an outstanding trading experience. MetaTrader 4 has a very user-friendly interface, which enables new and experienced traders to trade with ease and comfort. Traders of all levels find this Forex platform easy to use. You can download the MT4 platform for your home computer, tablet, and phone.
The MetaTrader 4 platform offers real-time access to market prices and liquidity. Traders are able to view all details including spread, contract size, margin currency, and margin percentage. MT4 provides extensive tools for price analysis with a set of in-built technical indicators and charting tools. Know how to Download AximTrade MetaTrader 4.
How to Learn Forex Trading?
There are many ways to learn forex trading, they can either be free or paid. Before investing your money, it’ll be better to invest in knowledge and educating yourself. Forex trading is based on the ability to understand trends and spotting opportunities in the market. Therefore, the main step to learn forex trading is to believe in self-education and to be patient with your progress. Staying up to date with the key forex terms and what they really mean is very helpful.
By educating yourself, you can better manage your risk, trade profitably, and set yourself up for success in your new investment. While forex trading is easy to learn, you’ll still have to practice and embrace your mistakes. Check our detailed guide for beginners on how to learn forex trading.
Open a Forex Account
A forex account is used to trade foreign currencies. Typically, you open a forex account, deposit money and then buy and sell currency pairs. Opening a forex trading account is a quite simple process these days given the growth of online forex trading. It requires some paperwork and few security steps, such as identity verification, and all can be done online. But first, you’ll have to choose your forex broker, select an account type, register then activates your account.
AximTrade offers a variety of options when it comes to forex accounts. Traders can choose the best account type based on their trading strategy, experience, and capital designed for investment. Choices include Standard, Cent, or ECN trading account. All AximTrade accounts offer negative balance protection with a low spread from zero to 1 pip on all majors. Traders can also enjoy a competitive forex bonus on all account types with a minimum deposit starting from $1. Any trader can hold up to 14 active trading accounts. You are allowed up to 7 Standard Accounts, 2 Cent accounts, and 5 ECN accounts per Active Member Area.
Features of Trading Accounts from AximTrade:
- Variety of account types including Standard, Cent, ECN, and Islamic
- Excellent customer service reachable through email, live chat, and more
- Tight spreads and low minimum balances reduce financial commitment
- Fast order execution with execution speed at 0.004s
- Minimum deposit of $1 and no commission
- Instant deposit and withdrawal, wide variety of payment methods
The key to establishing your investment journey in the markets of foreign currency exchange is to choose the forex broker wisely and define the trading conditions that match your investment portfolio. Make sure to choose a reliable broker which is trustworthy, offers tools, forex leverage, and account requirements that match your trading style. AximTrade is the Title Partner of Porsche and Carrera Cup Asia and the winner of the best trading platform in Asia from the Global Forex Awards in 2021. Discover more and about forex investing and trading opportunities of over 49 financial instruments at the official website.