Forex Trading

Forex Trading: Answers to the Most Common Questions | Forex FAQs

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The forex is a growing market that entices new traders every day. If you’ve just been introduced to forex trading, then you have a lot to discover and learn. This is very common for a huge market such as the forex which has different dynamics compared to other traditional investments. However, when you invest time in learning the craft of forex trading, you’ll pave your way for becoming a successful forex trader. But before risking your money, make sure you understood the basic principles of forex trading and how does the market work. It is also important to consider other factors like trading psychology and disciplined trading.

Forex Trading Frequently Asked Questions

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. Check our full guide to the Forex Market

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 of 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. 

What is a Currency Pair?

Forex trading is primarily the process of exchanging one currency for another. That is why 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 use the abbreviation of currency and country names. For example, the USD/JPY currency pair refers to the US Dollar against the Japanese Yen. 

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, and 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: Exotic pairs 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

What is Exchange Rate?

The exchange rate is the value of a currency relative to another currency. It is the price at which one currency is being exchanged for another. For instance, if the exchange rate of the EUR/USD pair is 1.1200, this means that one euro equals $1.20, or it takes $1.20 to buy one euro. 

The rise in exchange rate reflects that the base currency is appreciating against the quote currency. Similarly, the fall in exchange rate reflects that the base currency is depreciating against the quote currency. Read more about Currency Appreciation and Depreciation and what affects exchange rates.

What are the Most Traded Currency Pairs in Forex?

The top traded currency pairs are: 

  1. EUR/USD:  Euro vs. US dollar 
  2. USD/JPY: US dollar vs. Japanese yen
  3. GBP/USD: British pound vs. US dollar
  4. USD/CHF: US dollar vs. Swiss franc
  5. USD/CAD: US dollar vs. Canadian dollar
  6. AUD/USD: Australian dollar vs. US dollar
  7. NZD/USD: New Zealand dollar vs. US dollar 
  8. USD/CNY: US dollar vs. Chinese Yen 
  9. EUR/GBP: Euro vs. British pound

Check Most Popular Forex Currencies Nicknames

Forex Trading FAQs Most Traded Currency Pairs

What are the Types of Forex Analysis?

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 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 analyzing 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. 

On the other hand, fundamental analysis is evaluating the price of a currency and the factors that could influence its value in the future, including external influences, as well as financial statements and economic trends. Fundamental analysis is the process of analyzing the fundamental factors affecting financial markets in order to predict the future price.

Forex fundamental analysis tackles the overall state of the economy and examines various fundamental factors including interest rates, employment rate, GDP, international trade, and manufacturing, to evaluate their relative impact on the value of the national currency.

What are Forex Charts?

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 the 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.

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 the 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.

What is The Best Forex 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. 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. 

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. 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 educate yourself. Forex trading is based on the ability to understand trends and spot opportunities in the market. Therefore, the main step to learning 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

How to 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 a 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 accounts. 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, 5 ECN accounts, and 1 infinite leverage account per Active Member Area. 

What is the Pip? 

The pip is the standard measuring unit for the change of value in a currency pair. It is represented as the last decimal point in the price quote and is equivalent to one basis point. A pip stands for percentage in point or price interest point.  Pips are used to calculate the profit or loss of forex trade.

One pip is displayed as $0.0001, it is one-tenth of 1% and is equal to 1 basis point. For example, if the EUR/USD Pair moves from 1.1050 to 1.1055, then it did move 5 pips. 

Pipettes or fractional pips are smaller units used to precisely define fluctuations in forex rates. Every pipette is equal to a tenth of the pip. They are additional decimals, the 5th, and 3rd decimals, beyond the standard of 4 and 2 decimals. 

What is the Lot Size?

The lot is one of the main forex trading terms. A lot is the quantity of the traded currency pair.  It is basically the standardized unit of measuring the quantity of the trade. 

There are four common types of lots in Forex trading; Standard, Mini, Micro, and Nano. The standard lot size is 100,000 units of the currency pair, mini is 10,000 units, micro is 1,000 units and the nano is 100 units. Determining the proper lot size plays an important role in your forex risk management. Learn more about how to determine the proper lot size and calculate profits. 

What are Bid and Ask Prices?

Bid and ask indicate the price at which a currency pair or another asset can be sold or bought at the current time. The bid price is the price that the trader is willing to pay for the base currency in forex trading. While the ask price is the price that the trader is willing to receive from selling the base currency. The ask price is always a little higher than the bid price, the difference between both is known as the spread. 

The quote is the market price for buying/selling a currency pair. It is always consisting of two figures; the bid/ buying price and the ask/selling price. For instance, the quote for USD/GBP currency pair can be $0.7130/32. The first figure represents the bid price of $0.7130, while the second figure represents the ask price, and the difference between the two is the spread worth of 2 pips.

What is Spread?

The spread is the transaction cost for a trade. The trading fee that a trader pays affects the total cost of trading. It is defined as the difference between the bid and ask price of a currency pair. That is usually measured in pips, the smallest unit of price movement. The larger the gap, the higher the spread. It can be very small in a high liquidity market, but when the market is less liquid, spreads will be wider.

What are Bullish and Bearish Markets?

Markets move in three directions: up, down, or sideways. In forex terms, bull and bear are used to describe a market condition. A bullish market is when prices are rising or are expected to rise. On the other hand, the Bearish market describes falling prices or a descending price trend. 

The terminology is based on how the bulls and the bears attack their prey. Bears stomp their paws on the prey pushing it downwards, while bulls thrust their prey upward.

In a bull market, traders usually buy the base currency against the quote currency. Whilst in a bear market, traders look for selling the base currency to buy the quote currency.  Read more Bullish and Bearish Markets: What’s the Difference?

How to Make Profits?

The forex market provides a unique opportunity to profit from rising and falling prices. You can buy when prices are rising, or when you anticipate a higher price. On the downside, you can sell when prices are falling, or when you anticipate a lower price. And still making profits in both situations. This feature exclusively defines the FX market.

What Are the Top Benefits of Forex Trading?

One of the top benefits of Forex trading is mainly the high liquidity and the highest trading volumes.  According to estimates, the Forex markets had a daily turnover of $6.6 trillion. Since the forex is a decentralized market that is accessible around the clock for 5 days, it offers traders to enter and exit positions anytime all day long.

Forex Trading FAQs - benefits of Forex trading

What is Leverage?

Leverage is an investment tool for using borrowed capital to maximize an investment’s potential return. It is defined as the ratio of the amount of capital to the required margin. It also gives you the ability to increase your trading capital with a relatively small deposit, the margin.

Trading using leverage is referred to as margin trading; as the amount needed to open and maintain a leveraged trade is called the margin. Forex leverage is applicable to different financial products such as CFDs, stocks, cryptocurrencies, and forex.

How Leverage Works in the Forex Market?

The leverage technique is very common in forex trading. Investors can trade larger positions by borrowing money from the broker. Leveraging helps maximize the returns from changes in a currency’s exchange rate.

By using a leverage of 1:100 for instance, every $1 you invest is worth $100, and with your $1000 margin, you can open $100,000 lots. For example, if the EUR/USD rate moves up 100 pips from 1.1100 to 1.1200 and you had invested $1000, you would have made $10 on that trade. But, your $10 profit will be magnified to $1000 instead.

Forex Trading FAQs - Tips to master leveraged trading

Because profits and losses are calculated on the total size of the position, so losses may be exceeding the initial deposit. That’s why leveraged forex trading is a double-edged sword. So, it is important that forex traders know how to manage leverage usage and adopt a strict risk management plan to mitigate potential losses.

How to Choose the Proper Leverage Level

Choosing the right leverage level depends on considering both profits and losses. If you’re a beginner, try sticking to the following:

  • Pick low leverage levels.
  • Use stop loss orders and trailing stops to reduce potential losses and protect your capital.
  • Limit your risk exposure to 1% to 2% of total trading capital for each open position.

Remember to choose the level of forex leverage that makes you most comfortable. If you’re in the risk aversion team, or you’re still learning how to trade forex, low leverage levels like 5:1 or 10:1 might be more appropriate for you for now. But if you’re an experienced trader with a higher risk appetite and a clear trading plan, you can go for high leverage levels.

Is Forex Trading Legit?

Yes, forex trading is a legitimate investment in most countries. However, some countries restrict or ban forex and it is considered illegal.

Is Forex Trading Gambling?

Absolutely no. Unlike gambling, forex trading requires a trading plan and a strategy. Based on analyzing the value of currencies technically and fundamentally, you open a position.

What are the Forex Market Trading Hours?

The forex market operates 24/5 from Monday 00:00 GMT to Saturday 00:00 GMT.

What is AI Trading? 

AI trading is implementing Artificial Intelligence (AI) to analyze, predict and automatically execute trades on one or more currency pairs using pre-set rules for entering and exiting. Using automated trading systems (ATS) is more efficient in detecting the ideal entry and exit points based on price movements with less human intervention and taking emotion out of the equation. Based on predefined price algorithms, artificial intelligence bots search the market for the best trading opportunities, making AI trading more efficient, safe, and a simple way to trade in the forex market. 

What is Copy Trading? 

Copy trading is the process of copying a professional trader’s positions by another trader’s account. It can be performed either automatically or manually. Copy trading technique aims to follow other investors who have a track record you would like to emulate. It allows the follower trader to monitor and learn from the strategies of top successful traders. 

Read more: AI Trading Vs. Copy Trading: Which is Better for Successful Forex Trading?

Copy trading best suits traders who don’t have time to keep up with the market or still lack the experience to trade on their own. It is preferably used in short-term trading like day trading​ and swing trading. 

What is CFD Trading?

CFD stands for contract for difference, a popular financial instrument. A contract for difference is a contract between an investor and investment intermediate to exchange the price differences of an asset. CFD trading is an essential element in every investor’s portfolio. However, some traders find it difficult to fully understand the real benefits of CFD trading.

The value of a CFD contract does not reflect the value of the asset, only the price change between the trade entry and exit points. When trading CFDs, you agree to exchange the difference in the asset’s price between the opening and closing prices of the contract. Both the trader and broker are engaged in the contract according to market conditions, the trader as the “buyer” and the broker as the “seller”.

What is the Right Amount to Start Forex Trading?

The minimum amount of money you need to start with should be consistent with your goals. Other factors to consider are your trading style, your broker’s minimum deposit requirements, level of experience, and risk exposure. In any case, you should never risk what you cannot afford to lose.

Disadvantages of Starting with a Small Capital

  1. Small investment capital means small lot sizes, fewer opportunities, and limited profitability. A trader can get frustrated by small gains and probably give up trading.
  2. Trading costs can significantly affect your trading balance. Larger accounts usually enjoy lower spreads than the smaller ones.
  3. A small capital will get you stuck with day trading as you cannot afford to follow another trading strategy. You will have to monitor your trades carefully and make sure to close them by the end of the day as the swap rates may blow up your account.

For a clearer point of view check What is the Right Amount Required to Start Forex Trading?

Can I Start Forex Trading with only $100?

It is possible to start forex trading by investment capital as low as $100. However, such a low amount will limit your trading options and profit potential. Let’s assume you managed to achieve a 5% return on a trade, which is a great profit percentage. However, in this case, the profit will be only $5. But if you’re trading with a $2000 capital, the return on this single trade would be $100.

Trading on a budget can be helpful only if you are a beginner trader and want to step into trading without risking too much capital. Continue on How to Trade Forex with $100

How to Grow a Small Forex Account?

Through the right risk management rules and good investment decisions, a small account can be turned into a bigger one. Check out the top tips on How to Grow your Small Forex Account

Can FX Trading Cause Money Loss?

Losing and winning are two inevitable processes every trader will have to experience. The trick is to minimize your trading losses by following a strict risk management plan.

Check also 7 Tips to Handle Trading Losses

Is Forex Trading Profitable?

Yes, it can be profitable if you follow a clear trading strategy, developed a Successful Trading Mindset, and adopt a sound trading plan with clear objectives.

Who Can Trade Forex?

Forex trading is available to everyone thanks to the outstanding market accessibility, the advanced trading platforms, and the plentiful learning resources. Unlike other types of investments, forex trading can be suitable for everyone. Compared to other markets such as the stock market, any person can open a forex demo account, download the MetaTrader application for free, and start some basic trading. Moreover, major forex brokers provide welcome bonuses and no-deposit bonuses for beginners to start trading with a real account.

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