When someone utters forex, one thing that passes our mind is liquidity and huge volumes with transactions passing over USD 6.6 trillion. That is the beauty of the instrument that it is open for all because trades require an exchange of money or currency against services or products. The fluctuation in the market reminds us of thunderstorms in the sky. Currency pairs blink faster than your eyes could blink, and profit-losses get booked in those fractions of seconds. However, it is not everyone’s cup of tea as the volatility tends to put you in a perilous space. So, before you kick start foreign exchange trading, knowing about in-depth information, technicalities and definitions can help you get command over forex trading.
Essential Terminologies of Forex Trading
The currency unit rates get quoted as currency pairs in the forex market. They denote which currencies are getting exchanged against the other. Primarily, there are two types in the forex market; base currency and base currency.
It is the first currency lying on the left side of a forex pair. Some traders also refer to it as accounting currency or domestic currency. For example, in the currency pair EUR/USD, EUR is the base currency. It is also known as the transaction currency.
The currency appears first in the currency pair quotation. A company or firm may utilise base currency for accounting purposes. It can indicate all losses and profits incurred by an individual or a firm.
The base currency is the representation of the number of quote currency one needs to draw the base currency’s one unit.
The currency lying on the right of the base currency is the quote currency. Precisely, a quote currency represents the foreign currency in a pair. Traders and market experts also call it counter currency or secondary currency.
The primary use of quote currency is to determine the valuation of the base currency in a pair. Anyone looking to trade in the forex market should know the pricing structure and quotation.
For example, in the currency pair USD/GBP, GBP is the quote currency. Irrespective of the pair is indirect or direct, quote currency falls when the currency pair rate hikes.
Cross currency pair:-
These are the currency pairs which do not include the US dollar in them when traded in the forex market. Here you do not have to exchange the currencies and can directly trade. One does not need to convert it into American dollars before trading.
The common cross currency pair includes the Japanese yen and the European euro.
It is the smallest unit of change in price, which an exchange rate can afford to make is a pip. Notably, major currency pairs get priced to four-point decimals. It is the tiniest change in the last decimal point. However, the Japanese yen comes with an exception. Its second decimal point is considered the last.
It is the combination of two different currencies, where one is sold against the other. Currency pair is the combination of one base currency and other quote currency. The valuation of a currency gets determined by comparing it with another one. It showcases the number of quote currencies required to buy a unit of the base currency.
Leveraging has an old relation with forex currency. It is precisely a borrowed sum of money from the account for trading assets of the value of various sizes. A trader can open a position at a larger contract size using it.
Leveraging helps in drawing bigger profits by investing a little. Based on your comfort, you can use any preferred forex pair of your choice and make gains through the advice of an expert.
To know it better, let us take an illustration:-
Let’s take up EUR/USD as a case study for understanding how does it work. So, let us assume different prices and sizes for currency pairs. Suppose a contract size 2,00,000 per lot would require $ 4,00,000 without leverage.
4,00,000/400= $ 1000
Hence, using the leverage of 1:000, a user can open a position by spending a mere $1000. That means, the trader has the authority to control
$ 4,00,000 for $ 1000
Ask and bid price:-
Bidding and asking price are for selling and buying assets of forex at a given rate or price. It is the most formulate way of trading in the forex financial market.
At an asking price, the buyer shows interest to buy a currency or pair at a proposed rate.; whereas a bid price would mean that a seller is willing to sell the pair or currency at a specific price.
The distinction between the bidding and asking prices is called a spread.
In forex, it is the fund that a trader or investor needs to put in before trading in the market or to open the initial position. Also, it assists in opening a bigger positioning size at times. While trading with margin, you have to put the fraction of percentage of the full value. It assists in opening a trade. It is precisely a security deposit instead of a transaction cost.
Trading currencies on margins help in gaining exposure to the market. Margin opens the doors for leverage trading. However, one needs to be very cautious as it is vulnerable to both profits and losses.
Going long and short:-
During the time when a trader tries or intends to go short, the first currency or base currency gets sold, on the other hand, the quote or the secondary currency is bought.
While going long, an investor has to buy the first part of the base currency and sell the second one. It directly means that you are expecting to make gains as the price of the currency would surge.
Going short essential means selling off the currencies from the currency pair.
It is the size or trade which a trader is willing to open in the forex market while trading in it.
In standard forex trading, one lot is equivalent to 100,000 units of the first currency or base currency on a currency pair.
If we talk about the currency pair EUR/USD, the trade size would $100,000 if we open a trade in the USD.
EUR is the base currency here. The standard value of a pip is $ 10.
Bullish and Bearish market:-
The terms bearish and bullish markets are associated with the publics’ sentiments. It is the traders and investors who channelise the market in a respective direction. If they hear negative news that the forex currencies may incur losses, then the collective actions of people driven by a piece of information can trigger a bearish market.
It would mean the forex market would plummet from the heights, and no one can predict when the sentiment of investors would turn optimistic. However, going by the historic performances, it does not last long. However, the correction in the foreign exchange market also brings the opportunity for investors to earn money.
They can achieve or buy some of the major currencies at a timid price and later on sell them at a higher rate by holding them for a brief period. Also, many people find the time to hedge and seek it as an advantageous stage for profit-making.
Likewise, the bullish market is the phase where the currencies outrun several records and do not see any barrier to touch the heights. Anyone who invests during that period earns good gains. Also, there is no risk of losing out as the forex market is on the upward swing. Even the less expensive currencies see a surge and fortune.
Basically, when a bull gets angry, it tosses things up with horns, while when a bear gets provoked, it tears things down. Hence, these terms are prevalent in the market for several financial instruments, including the forex market.
Know About the Best Forex Trading Strategies:-
Strategies are important while trading in forex because the volumes here are higher than any other financial instruments or markets. The volatility if dealt with no planning, is a recipe for disaster in the foreign exchange market. Also, the bigger the market size, the better execution of strategies is needed to see through a tough time.
Through a strategy, you can define when to buy or sell a forex pair. You can create several plannings through technical and fundamental analysis. An astute and intelligent trader would closely analyse the trades and then execute them for fetching benefits applying risk management techniques simultaneously, mitigating perils like losses.
Application of Forex Strategies:-
Before applying any strategy into place, always find common ground the risk-reward ratio. You have to be calculative while taking any risk. For formulating strategies, a trader should put forth multiple elements and factors. Depending on your choices, different plannings and tools may work for you, which may not apply to others in the same capacity.
While selecting a suitable strategy, you should know that the criteria need and consideration of every trader is different from the other.
For comparing sundry strategies, you can use the following criteria. It will help you vet them and find the suitability.
- Typical distance for targeting
- Time and resource required
- Number of trading opportunities coming your way
We are listing down some apt strategies that might find a ground of suitability for traders.
It is the process where a trader is a content in drawing small profits instead of a bigger one. However, it requires consistent efforts to culminate into larger profits over time. For trying it, one has to open and close positions several times a day. Here, more frequency would ensure better gains. One can seek help from an algorithm, which can automate the trading by using predetermined guidelines of exiting and entering positions. If you wish, you can do it manually as well.
The most liquid pairs like EUR/USD are preferred by traders mostly for tighter spreads. Also, it goes well with short-term trading.
The length of the trade here is around 30mins to 1 minute. Scalping means minimum returns with short-term trades. It operates on small time frame charts.
Exit and entry points
The forex market runs at a pace of knots. So, deciding on the entry and exit points usually take some time, because going haphazard in the market has its risks.
Identification of trends is the number one remedy of entering and exiting the forex market. Several scalpers use distinguishing indicators like moving average for verifying the direction of the trend. When you put into use the following levels of trends on a longer time frame, you can see a larger picture.
The levels here create different bands like resistance and support. After learning the art of scalping within the level, you can attempt it on smaller time frames. RSI is one oscillator that can come handy while you try it.
For avoiding the large movements, stops get placed at only a few pips distance. You can even use a MACD indicator for exiting and entering the position.
Day Trading Strategy:-
Here, all forex positions get closed at the end of the day. A trader has to trade within the stipulated limit. It means all positions should come to a stop when the day ends. You can make several trades or can feel satisfied with a single trade.
Here, the length of trades can be quite short, as small as a minute or minutes. However, it cannot go beyond a day’s time. Also, there can be hour-long trades.
Entry and exit points
There are short intervals, and currency pairs are too quick to change their positions.
Range trading strategy:-
You have to identify resistance and support points because, after the identification only, one can place their bids. The strategy works well without indulging into the risk of volatility. Also, there is no dependence on discernible trends.
The technical analysis comes as a crucial tool which is helpful while laying the foundation of the range trading strategy.
You do not have to give a thought about the trade’s length here. Range bound strategies come with a boon to work irrespective of time frames. However, you should be wary, as breakouts may occur while applying it. So, manage your risks.
Entry and exit points
In timing tools, oscillators are the most conducive tools. The few tools include stochastics, Commodity Channel Index (CCI), and Relative Strength Index (RSI). For validating the range-bound signals further, you can use price action.
It primarily depends on fundamental factors and runs for a longer time. You can also use technical tools likes Elliot wave theory for stoking more benefits and gains in the forex market while applying the strategy.
Tiny or smaller market fluctuations are cast aside in the strategy because they do not have any impact on a larger picture of forex trading.
Position trade generally means taking delivery of forex assets. So, it does not get affected by the fact that the market is going down or up. The idea caters to a long-term process. There is a set threshold that should meet the thought of a trader.
Entry and exit points
Valuable information on the market is the crucial key points that determine whether to hold or let it go. The long term outlook of a position trade provides ample time to think and then execute the planning in forex markets.
Speculation in the Forex Market:-
The forex market is all about predicting the market’s trend and movement. If you can guess it right, then you get money in your hands as profits. The demand and supply of forex markets depend on factors like geopolitical situation, economic strength, tourism, interest rates, international affairs, policy-making and trades, interest rates and many more.
Speculation that one currency is going to surge would subsequently mean that the other will plunge as currencies get traded in pairs.
For example, if there is a GBP/EUR currency pair and the price of the base currency rises, that would mean the quote currency’s rate slipped and vice versa.
Forex Trading in Futures:-
It is a standardised and appropriate way of trading foreign currencies at a pre-decided time, contract size and date.
You can trade such contracts at different exchanges or broker places. A trader also gets a guarantee on credit losses by intermediaries. Furthermore, such contracts are non-customisable and get traded publicly.
Best Brokers Available For Trading:-
You should be keeping up eyes for brokers that seem authentic by reading reviews and asking experts around you because a broker is an escalation point which can elevate your profits within limited expenses.
Forex trading or understanding the foreign exchange currency trade is not a one-day thing. Also, mere reading won’t help you either. There are an array of ways to trade currencies of different nations. Furthermore, you have to be patient and consider various elements that go around globally and affect changes in the currency market.