Last Updated on: 18th July 2021, 10:52 pm
Moving across to online Forex trading or Currency trading is a natural progression for millions of traders around the world who are looking to start trading FX on MT4 or MT5. Our introduction to Forex trading for beginners is a great way to lay a solid foundation, especially if you are new to the currency markets.
The Forex market is a worldwide market of currencies (called instruments). The market measures the value of a currency in terms of another currency’s value (e.g.. $1 = £0.66).
Nowadays our world is a single, large global market. Different currencies change hands anytime, anyplace – for trading purposes, investments, loans, and partnerships. The globe is an enormous market where the forces of supply and demand are constantly changing due to the range of events taking place every day.
Did you know that almost everyone has taken part in Forex activities? Changing currency when flying to a foreign country for a holiday or business trip, giving a quote to a client, or even chatting with friends or colleagues about the dollar, euro, or other currencies, are all ordinary activities that participate in the Forex market.
The Forex market is the most traded in the world, larger than any other market. Daily trading volume amounts to approximately 5 trillion dollars!! For comparison, the biggest stock market, the NYSE (New York Stock Exchange), has a daily turnover of around 50 billion dollars (which is 100 times less than Forex). Amazing, right? There is no other market equal to the Forex market.
What is Forex? Let’s go back to the holiday example. Say you’re on a short vacation trip from your home in London, Britain to Mombasa, Kenya. By landing at the airport and changing your Pounds into Kenya Shilling you participate in a Forex transaction. A few days later, after flying back from Mombasa to London, you change the Kenya Shillings you have left back into Pounds at a slightly different price. In the second act, you executed an opposite transaction to the first, closing a circle of buying and selling of one currency for another.
I am going to cover the following topics below:-
Table of Contents
History of the Forex Trading Market
Until the 1970s, the Forex market did not act like an enhanced, modern market, reacting to changes in supply and demand. Since then, all of this has changed. The market became global and rates fluctuated, moving in response to market forces. Over the years the Forex market got bigger and bigger until it reached its current size.
In the past, the only real forces in the market were big commercial ones such as banks and big firms trading according to their business needs (for example, a company would hold Japanese yen if they had business activity in Japan). Things are different today – Forex is now extremely popular with private traders, large and small. Since the late 1990s, the rules of the game have changed, thanks to the Internet revolution. Banks, forex brokers, and financial companies now offer comfortable, simple, online forex trading platforms, which let ordinary people (medium and small players) trade the Forex market for themselves.
What do we trade?
First, it is important to get used to the fact that in Forex we trade currencies, not physical goods. Currencies are goods like any other, but when you trade forex online you don’t get to see or touch the money until you withdraw the profit from your account. The idea behind buying currency is very simple. If you believe that a currency’s value will rise, you buy it with another currency and hold it until you no longer believe it will rise further. If you think a currency’s value will fall, you sell it. Whether you buy or sell you are actually exchanging currencies – buying one currency and selling another (e.g.. buying the dollar and selling the euro).
When you buy a forex pair you always buy the first currency alongside the second one. This means that you are selling the second currency. For instance, if you buy USD/JPY you are buying the dollar and selling the Yen. It is the same when you sell a forex pair; you always sell the first currency and buy the second.
Currency instruments are always traded in pairs. Imagine a currency pair as a couple of boxers in the ring, caught up in an endless struggle over who is stronger. During the match, each has its stronger and weaker moments, its ups and downs. Sometimes they rest and sometimes they attack.
Symbols – Each instrument is indicated by 3 letters (the first 2 are the country and represent the base country for that currency, the third is the name of the currency). For example, USD = U.S. Dollar.
There are 3 main pair categories:
Majors – The 8 most traded pairs in the world, for example, GBP/USD (British pounds/US dollar), USD/JPY (US dollar/Japanese yen), EUR/USD (euro/US dollar). In the next lesson, we will look at all 8 of the major currency pairs.
Cross Currency Pairs (or Crosses) – All pairs that do not include the US dollar. For example, EUR Crosses are all pairs that include the euro, except for EUR/USD (which is a Major).
Exotic Currency Pairs – Pairs comprising of one major currency and one “weaker” currency (from a developing market). These pairs are usually traded in much lower volumes. Commissions on exotic pairs, asked by the brokerages, are relatively high. For example, GBP/THB (British pound/Thai Baht).
Forex Market Structure and Size
The Forex market does not have a “rooftop structure” (a single supervising body and trading limitations). It is the most popular and most traded market in the world, consisting of private groups, small and medium-sized traders, commercial and public companies, banks, and governments. Trading is electronic and online and takes place simultaneously around the globe, 24 hours a day.
The most traded currency is the US dollar. It accounts for a bit more than 85% of the total traded currencies around the world. This is followed by the Euro with almost 40% and the Yen with 18%. We are at more than 140%. Confused? Remember that the total percentage of Forex is 200%. Why? The market is composed of pairs with 2 currencies in each trade. The US has the largest and most stable economy in the world, which is why the US Dollar constitutes 62% of the total currencies reserves worldwide.
Other instruments we should note as we progress are those of the developing markets, such as Brazil, Turkey, and Eastern European republics.
Take a look at the distribution of currencies in the Forex market (total = 200%!)
Trades take place in real-time, around the clock. The market is highly dynamic and very volatile, with outstanding profit possibilities and nonstop information available at all times of the day. Anyone can easily trade: it doesn’t matter whether you are a “heavy trader” or a “small trader” trading from your own home.
Advantages of Forex Trading
There are many advantages to trading currencies:
- The market is open for business 24 hours a day, five days a week, anywhere in the world. It starts Monday morning in Australia in the east and ends Friday afternoon NY time in the west.
- There are no commissions for opening and closing accounts. There are no taxes either. You are your own master, trading positions and executing actions by yourself; without needing anyone to do the work for you.
- Its enormous size brings endless opportunities, with millions of winners every day.
- You can start trading with almost any amount, even just 25 dollars!
- The market is so comprehensive: there is no force in the world powerful enough to control and manipulate it. Unlike other markets where the banks and financial firms can control the prices that their clients pay, the Forex market is absolutely clean of price manipulation.
- Huge liquidity: you can always buy or sell any currency you want.
- The use of leverage gives you the ability to make profits with small amounts and in low volume trading. We will delve into this subject later.
Currencies vs. Stocks:
Let’s take a look at the advantages of the Forex market, compared to stock markets:
- Note the enormous difference between Forex and stock market volumes. While the media prefers to cover stock markets such as NASDAQ and NYSE, these markets are tiny compared to the Forex market (which is 10 times larger than all the stock markets in the world put together).
- Think for a moment about stocks and goods: let’s assume you decide to trade stocks. The variety of stocks is so ridiculously large – on the NASDAQ alone there are almost 4,000 companies registered; on the LSE (London Stock Exchange) there are another 2,000 companies! How do you figure out which stock to choose? You can get a headache even thinking about it! Forex is much simpler – there’s just a handful of main currency pairs to choose from.
- While stock markets close down every afternoon, the Forex market is open 24/5. There are many advantages to this, such as immediate order execution. The Forex market is also much more reactive to dramatic events than stock markets because continuous trading hours allow traders to respond instantly. There is no room for surprises or massive reactions following dramatic events taking place outside trading hours (as can be the case with stocks). Reactions are always in real-time, live.
- No force can manipulate the market. Brokers and financial companies cannot control the market by raising and reducing the commissions we have to pay in order to activate our positions. Bottom line – traders do not pay fees.
- As opposed to stocks, in Forex you can earn money in falling markets. In fact, it is very simple – whenever the value of one currency in a pair goes down, the value of the second currency goes up! To be precise, it is possible to make profits out of impairments in the stock market by selling and buying “shorts”), but we relate to natural market conditions, without manipulations. Remember, there is a constant “struggle” between the 2 currencies making up the pair. Selling one instrument means buying the other.
Let’s summarize the major advantages the Forex market has over the Stock market:
|Hard to follow (complicated rules)||Easy to understand|
|Open during working hours||Open 24/5|
|Able to manipulate||Huge earnings potential|
|Transaction Fees||Free of charge|
Key Forex Trading Players Reviewed
We have already said that the Forex market is simple to understand. It really is no problem to get oriented. A large number of major players make up this market. It is a decentralized market, not controlled by any single source. Yet there is order. Here are the key players influencing the Forex market:
Central banks: Each operates for its own country, according to the needs of the respective economy and government. Central banks play a major role in the Forex market, determining national interest rates, levels of inflation, and more. Naturally, Central banks influence exchange rates. If the exchange rate is too high or too low, the central bank starts buying or selling very large quantities of currency in exchange for other currencies. Their influence on economies and currencies is critical. In times of crisis, for instance, the global crisis of 2008, the central bank lowers interest rates to help the economy get back on track. The impact it has on the supply and demand for the currency is tremendous.
More on this can be found on our Fundamental Forex Trading Strategies page.
Benchmark Interest Rates
Examples of interest rates in the major markets (accurate as of 3/2020):
Commercial banks: The biggest and most significant group in this category is commercial banks. These banks set the tone in the Forex market. The amounts of capital switching hands inside the banking system (called Interbank) are astronomical! They set the exchange rates for the market’s supply and demand. Examples include Citigroup, Barclays, JP Morgan, UBS, Deutsche Bank, and BofA.
Commercial companies: All large companies trade Forex and exchange currencies according to their evolving needs. Usually, their activity is based on their business environment. Let’s take Samsung: when starting a business partnership with new electronic suppliers from Germany, Samsung will consider holding more Euros in its inventory. Now, assume there are other corporations and large firms that tighten their collaboration with German suppliers (or other European suppliers) – the demand for the euro will rise, strengthening it. These companies buy options contracts to exchange their currency for Euros at the current exchange rate in the future. This affects current and future rates. Experienced traders who track these changes can make a fortune using this data!
Hedge funds: These trade currencies keep their clients’ investments profitable through skillful leveraging. We call it “letting your money work smart”. Their clients are companies with wide inventories of capital.
Retail Forex brokers: All the Forex trading companies that offer trading platforms to small/medium traders around the world. They are called brokerages. There are hundreds of regulated forex brokers, offering the possibility to trade with almost any amount of capital, anywhere on the globe (as long as you have an Internet connection), without having to use the services of the banks.
Retail Traders: Private investors, like you, can trade forex in an attempt to generate another source of income. Taking advantage of the fact that they can trade forex anytime, even during or after work, and from anywhere.
Opening a Free Forex Trading Practice Account
Most of our recommended trading platforms allow new traders to open a ‘Practice Account’ (also called ‘Demo Account’), free of charge. In your practice account, you can use virtual money to trade on live market rates. Practice accounts allow you to warm up and study the platform, before opening a real trading account and jumping in at the deep end. The only difference from a real account is that you cannot make or lose real money.
Remember: Demo trading holds zero trading risks!
We recommend opening a demo account with our recommended broker and use it to practice everything you learn throughout the course, before depositing your own money. Try to see it like learning to drive a car: it is nice to have a good instructor, but until you take the wheel and practice for yourself you won’t know how to drive…
We recommend the best, most popular broker in the world. This broker will allow you to open a practice account on their platform free of charge. I will guide you on how to do this if you need any help.
Once you feel ready, you will be able to open a proper account and start trading for real. There is nothing more fun and exciting than using your new knowledge to make money out of good investments! Forex offers the highest money-making potential in the world. You just need to learn how to put it into action, and that’s why we are here!
Important: Take a couple of minutes and open a practice account. It will be very helpful along the way. The effort you put in now will translate into potential profits later!
How to Open a Free Forex Practice Account
The account you are about to open will serve you for training purposes. Every method learned can be tested on the platform. This will help you understand the market’s secrets and rules.
After opening a demo account you can join our telegram channel here now where you will be receiving free forex signals that you will be using to train with forex trading.
In Chapter 2 – First Steps in Forex Trading I will elaborate more on “’Forex Basic Terminology”. There you will get a detailed explanation of forex terminologies, plus additional tips and recommendations. There’s no rush! We have a lot of ground to cover before you open a real account.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.