Forex is a common word, however, not many folks, especially those venturing into financial trading, understand what it means. Well, the word is a combination of two words, foreign and exchange. The term simply refers to the act of buying and selling currencies in exchange for other currencies. Forex is the world’s most traded market since it is not only people but big companies and countries that participate in it. You can participate in this market without the slightest idea. Take it this way, if you travel to the US and convert your British Pounds into US Dollars you will be participating in the Forex Exchange trade. Be ready to learn more key forex concepts as you read through.
Among the key forex concepts is that demand for a particular currency can push it on an upward or downward trajectory, value-wise, compared to other currencies. The currencies are traded in pairs where trading positions are placed based on the projection of the price changes. The price changes are calculated in Pips that traders use in establishing trading positions. In this post, we will be talking about “Key forex concepts, the beginners’ guide” to kick-start your forex trade.
The forex market offers liquidity to traders daily. Central banks all over the world are also involved in the buying and selling of foreign currencies to liquidate their native currencies.
What is the Basic Concept of Forex Trading?
Before entering into forex trading, you must understand the key forex concepts of what it entails. The first key forex concept is to understand the currency pairs and their significance. In this huge Forex market, the currencies are always traded in pairs. For example, exchanging USD for GBP implies two currencies are involved in the transaction. The transaction will show the value of the two currencies concerning each other. In our case, GBP/USD price, allows us to know the amount of USD needed to buy or exchange one GBP.
Furthermore, currencies are expressed in symbols. As per the above scenario, the British Pound is represented by GBP, whereas the US Dollar is symbolised by USD. Thus, the pair is quoted as GBP/USD. The most traded currencies include Euro (EUR), Australian Dollar (AUD), Japanese Yen (JPY), Canadian Dollar (CAD), Swiss Franc (CHF), and New Zealand Dollar (NZD). This is another key forex concept.
As we continue learning key forex concepts let us look at the value for each pair. Each pair has a value or price that is linked to it in the market. The value refers to the amount of the second currency it takes to purchase one unit of the first currency. Let us have the following example, in the case of EUR/USD pair, which has a price of 1.3724, meaning that to buy one EUR, you need 1.3724 USD. You can also know the amount of Euros in one US Dollar, by dividing 1/1.3724 so the currency pair price, will come to roughly 0.5800 Euros. However, it is important to note that the currency pair prices keep on fluctuating each passing moment.
Market pricing is among the key forex concepts that we will be looking at. You should know how to calculate your trading profit. To do this, you must familiarise yourself with the term Pip. Pip just stands for “Point in Percentage”- it is used to show the fourth decimal point on a currency pair or a second decimal point when the Japanese Yen is in any Pair. Most currency pairs move between 50 to 100 pips per day. For example, if EUR/USD price moves from 1.3700 to 1.3750 it indicates that it has moved 50 pips. Therefore, you will make a profit of 50 Pips if you buy the pair at 1.3700 and sell it at 1.3750. However, the price will be dependent on the amount of currency you purchase. In our case, if you buy 10,000 units, otherwise known as Mini lots each pip will be worth $1. Therefore, your 50 Pips will be $50. The Units are broken into a Standard lot that comprises 100,000 USD units, a Micro lot (1,000 USD Units), and the one we have explained above the Mini lot (10,000 USD Units). The amount of profit you make depends on which trading Lot you use.
Going by the example above, it will only be applicable wherein any pair that the US dollar appears second. Where it appears the first, the price will be different. To calculate the pip value in this scenario, you use the pip value mentioned above then divide by the current exchange price of the (USD/Other currency). However, where the Japanese Yen is listed as the second currency, you multiply the outcome by 100.
An upward movement on EUR/USD indicates that the first currency i.e. EUR moves strongly compared to the USD. On a downward movement, it means the EUR value is declining compared to the dollar.
However, if you still feel that you need more exposure to trading forex you can use a paper trading account that involves fake trades. The account carries no real financial risks. When it comes to forex brokerage firms, you can also get the Demo account that operates as a live account but with no financial input needed. There are also simulators online that you can use to continue sharpening your forex trading skills and learning key forex concepts.
Other key forex concepts, involves understanding terms used like scalping, spread, and the market operation timelines.
Scalping: refers to the very short trading timeline. It can be used in diverse markets. It takes a few minutes to seconds and the participants, that are also known as the Scalpers, exit immediately once the transaction becomes profitable.
The Spread: The difference that arises between the buying (Bid) and the selling (Ask) price is the spread. The brokers keep a portion of the spread as a way of earning from the trades executed. The spreads size depends on the liquidity or stability a currency pair has.
The opening and closing of the forex market: The forex market operates 24 hours each day globally. It operates from Sundays (EST) 5 P.M. to Fridays (EST) 5 P.M.
What are the 3 Types of Analyses in Forex?
Having, gone through several key forex concepts, it is now the moment to dig deeper and start applying what we have learned into practice. As the scholars say, learning and education are a lifelong journey. We will keep on juicing up your forex trading journey with more knowledge tips until you can execute trades on your own and make profit. Let us walk together. Key forex concepts are all over the internet so keep on reading more materials.
It is important to understand that to buy or sell a certain currency pair, you must make a decision based on some requirements, which are some other key forex concepts. This is where analysis comes in. The types of analyses in forex are tools you use to achieve your forex trading goals. These are fundamental, technical, or sentimental.
Fundamental analysis revolves around the forex currency’s interest rate. Interest rates always have serious effects on the forex market. Other factors in this cluster are economic growth, manufacturing, GDP, and inflation. However, a country’s interest rate is affected by almost all the above factors. The fundamental releases or news is responsible for the way interest rates behave. When a trader is in a risk- seeking form (higher Interest Rate currencies- high yields), the investment offers a high-interest rate that could push for more investment. If a trader is in a risk-averse mode, the money goes to the “safer” cushion currencies. Fundamental analysis offers some key forex concepts that a beginner can use.
Technical analysis deals with price history patterns to gauge a higher probability moment and position to enter or exit the trade. It has some key forex concepts that you can confidently apply. It is one of the best forex analyses. It involves the movement of trading charts on price action to give a picture of the unseen levels of demand and supply. The price chart review also gives the strongest trending currencies. To know more about technical analysis, you can also use indicators. For beginners, indicators are the best option because their signals are easily readable and they simplify forex trading. You can also combine fundamental and technical analysis for better results.
The Sentiment Analysis
Sentiment is another form of forex analysis that is rich in key forex concepts. Here, an overwhelming one-positioned direction indicates that the majority of traders are hedging on that position. For example, if several traders think that a certain currency is going upwards, there is a possibility that after voting the majority will buy the specific pair. The large pool of investors who buy the currency pair automatically becomes the next source of sellers. However, it is important to analyse the retail segment or fraction with the institutional segment. You can also review the commitment of traders (CoT) news to know more about how the institutional segment is behaving and how to implement it.
What are the 7 Forex Majors?
Forex majors carry some key forex concepts that we will be looking into today. The forex market is completely different from the stock market that offers many assets to trade because you need to keep an eye on the major economies to place a successful trade. These economies make the best currency pairs. In other words, the major forex pairs include the USD, which comes from the largest global economy. They include the US, United Kingdom, Eurozone, Canada, Australia, Japan, Switzerland, and New Zealand. The reason behind this is that the above-mentioned economies have some of the most advanced Financial Markets globally. Their economic data are released in the forex market daily and this can enable a trader to make informed decisions when it comes to forex trading. The currency pairs from the above countries make the list of the most traded pairs on the globe. They are split into secondary and base currencies.
The base currency is listed first with the secondary one coming second. The secondary one is known as the quote currency. Therefore, the price shown on any pair shows the amount of quote currency that is required to equate a single unit of the first listed (base) currency. Now, let us jump to the 7-forex majors.
- Euro and the US Dollar- EUR/USD
- British Pound Sterling & US Dollar- GBP/USD
- US Dollar versus Japanese Yen- USD/JPY
- US Dollar & Swiss Franc- USD/CHF
- US Dollar versus Canadian Dollar- USD/CAD
- Australian Dollar & US Dollar- AUD/USD
- New Zealand Dollar versus US Dollar- NZD/USD
It is very crucial to note that these 7-forex majors account for 75% of forex trading. They offer stability and liquidity in the forex market. Owing to their pull, they attract a huge chunk of the forex trades thereby offering the tightest spreads.
Let us examine some key forex concepts such as the movement of currency pairs. Exchange rate is one of the drivers of the currency pairs. The rates fluctuate from time to time depending on the strongest currency at any given time. The rates come from international banks where they are updated within a split of a second. Other key forex concepts are the commodities; they can have an impact on the behavior of currency pairs. Some currencies come from countries that possess huge amounts of natural resources or commodities. These countries’ exchanges are linked to commodity exports. Remember, natural resources play a big role in the strength of these countries’ economies. Some of the countries include Nigeria, Saudi Arabia, and Russia. We are not yet done with the key forex concepts continue reading.
Here are some benefits of trading the 7-forex majors,
- They offer a liquid forex market that runs 24 hours each business day.
- They offer tight spreads that translate to reduced operational costs. Therefore, you are assured of an increased profit margin.
- The majors also play a big role in regulating individual countries’ economic growth. The central banks will increase interest rates as the economy grows but reduce them when the economy starts struggling.
- The hard currencies do not fluctuate or depreciate abruptly; therefore, they offer stability in the forex market.
After this guide, “key forex concepts for beginners, we do hope that you can confidently navigate through and execute your first forex trade. The post helps you move from beginner to intermediate forex trader. However, it is important to employ forex trading strategies that you are comfortable using to avoid disappointments. The key forex concepts also usher you to the next level of forex trading, otherwise known as advanced forex trading. As previously intimated, keep on investing in learning to remain successful. Let us meet in our next forex post.
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