Here, we are walking you through the basics of Forex trading, its working, steps to place your first Forex trading. After going through this article, you will have warmed up for your first forex trading.
Forex Explained
What is Forex? Forex or Foreign Exchange, is the largest exchange in the world where the currencies of the country are traded. Like any other trading, the goal of currency exchange is to make a profit by selling and buying currencies. This five-hundred-year-old system of trading is the major reason behind the liquidity of money across the globe. The emergence of coins for each country, traveling across nations, and international trade have made currency a commodity with price variations according to market volatility.
According to Gitnux, a global commerce media, Forex has a daily trading volume of 6.6 $Trillion.
What is the Forex Market?
Currency trading occurs in an electronic over-the-counter market known as the Forex market. Unlike stock exchanges, the forex market is not a physical place where currencies are bought and sold. So, it lacks a centralized currency exchange, and all the procedures are carried out through a computer network.
What is a Forex Pair?
All activities of a Forex pair, including buying and selling, are done against each other through a pair of currencies, which we call a Forex pair. These currencies are traded at the foreign exchange market and will be the national currencies of the two countries.
Each currency pair consists of a base currency and a quote currency. The base currency is the first currency listed in the pair, while the quote currency is the second one. Major currency pairs are the Euro and US dollar, US Dollar and Japanese Yen (JPY), the Sterling Pound (GBP)and US Dollar, and US Dollar and Swiss Franc (CHF).
In the example of EUR and USD, the Euro is the base currency, and the US Dollar is the quote currency.
Usually, in a pair, the base currency is listed first, and the quote currency is the second one.
In a currency pair exchange, a trader is performing both selling and buying simultaneously. That is, he will be buying a currency and selling another currency. The value of a currency pair is the amount of quote currency required to buy a a unit of base currency.
For a better understanding, let us take the example mentioned earlier of the Euro and US Dollar,
1 Euro ( Base Currency )= 1.09 US Dollar (Quote Currency)
A typical currency pair listing will be displayed now as EUR/USD 1.0940.
Let us understand it in comparison with the Indian Rupee. Suppose the value of the Euro now is 1 Euro = ₨. 90.66
1 US dollar = ₨. 82.87
So, the value of the currency pair currently is 90.66/ 82.87 = 1.0940
Bid Price and Ask Price in Forex Trading
In Forex trading, bid price and ask price are key variables used to indicate the price at which a trader can buy or sell a currency pair. While displaying the bid price appears first, and the ask price appears second.
The bid price is the price at which the traders in the market are ready to buy the base currency, and the ask price is the price at which the market is willing to sell the base currency. The difference between the bid and ask prices is known as the spread, which represents the transaction cost of trading the currency pair. Spread is essentially the profit earned by the market maker or liquidity provider facilitating the trade.
For example, if the current quote for the EUR/ USD pair is:
•Bid Price: 1.1200
•Ask Price: 1.1205
This implies that if you want to sell the EUR/USD pair, you can do so at a price of 1.1200 (bid
price). On the other hand, if you want to buy the EUR/USD pair, you will need to pay 1.1205 (ask price). In this case, the spread would be .0005.
Significance of Spread in Forex Trading
You might have received an idea of what spread is from the above discussion. Now, let us discuss the role of spread in trading currency in the market.
Spread can be either fixed or variable based on the broker and the currency pair being traded.
Some brokers may provide a fixed spread irrespective of the market conditions. Other brokers offer variable spreads, which can widen or narrow depending on the market volatility.
Low spread is generally a desirable factor for traders since it reduces the cost of trading and
improves the profit potential. Traders should be alert to the spread while entering and exiting
positions to optimize their trading performance.
However, spread alone should not be the criterion for selecting a broker. One should also consider factors such as execution speed and the overall trading condition of the broker.
What is a pip in Forex?
In forex trading, a “pip” stands for “percentage in point” or “price interest point.” It is a unit of
measurement used to express the change in value between two currencies in a currency pair. Pips are used to quantify the change in the exchange rate of a currency pair and to indicate the spread or difference between the bid and ask price.
The value of a pip is varied according to the currency pair and the size of the position in forex trading. For most currency pairs, a pip is the fourth decimal place in the exchange rate.
For example, if the EURO/USD currency pair moved from 1.1200 to 1.1201, it has moved one pip.
Working of Forex Trading
You have read in detail about the basics of forex trading and the important terms used. Now, let us see how a foreign exchange takes place.
Participants in the Forex Market
Forex market as a decentralized market includes various participants with different purposes and strategy. The participants are:
- Central banks
- Commercial banks
- Institutional investors
- Corporations
- Hedge funds
- Retail traders
- Speculators.
The major motives of these participants behind forex trading are:
- International trade
- Investment
- Speculation
- Hedging against currency risk.
Liquidity in the Forex Market
In the forex market, liquidity is provided by market makers, liquidity providers, and other
participants. Market makers facilitate trading by providing bid and ask prices. They ensure that
there is continuous liquidity in the market. Liquidity providers include banks, financial institutions, and other entities that participate in currency trading.
Forex Trading Platforms
Forex trading is conducted through electronic trading platforms provided by brokers and financial institutions. These platforms allow traders to access the forex market, execute trades, analyze charts and indicators, and manage their trading accounts. Trading platforms may vary in features, functionality, and user interface. However, they generally provide access to real-time market data, order execution, and risk management tools.
Order Types in Forex Market
Traders can place various types of orders in the market, including market orders, limit orders, stop orders, and others. A market order is executed at the current market price. On the other hand, a limit order is executed at a specified price or better. A stop order is triggered when the market reaches a certain price level, which can be used to limit losses or capture profits.
How to Become a Forex Trader? Step-by-step process
Now you will be wondering how do you become a forex trader. Are you excited to start your trading journey with currencies? Why should you confine yourself to trading in rupees when the door to international currency jackpot is open before you? Let us see the steps to follow in your journey towards the foreign exchange market.
Get Free Trading Tips from SEBI Registered Experts
- Educate yourself about the basics of forex trading
- Choose a reliable broker
- Complete the necessary verification of documents
- Fund your trading account
- Develop a Trading Plan
- Practice with a demo account
- Start Trading
FAQs About Forex Trading
Name a few RBI-approved forex trading apps in India.
Zerodha, Upstox, 5paisa, Angel Broking, Motilal Oswal, ICICI Direct, and HDFC Securities
are major trading apps available in India.
What is the forex market timing in India?
Forex trading time in India is from 9.00 am to 5.00 pm, and cross-currency trading is available until 7.30 pm.
Forex trading vs Cryptocurrencies
While both cryptocurrencies and forex trading make use of supply and demand dynamics, forex
trading is more predictable with knowledge and analytics of the global economy. Forex trading is a traditional financial instrument. Whereas cryptocurrency is a deviation from the traditional financial instruments.
Can you make a profit from forex trading without investment?
Making huge profits from forex trading without investment is not possible. However, you can make some money without investment by the following methods:
Demo accounts, Promotional offers, contests and competitions, Social platforms, trading
competitions and partnership programs.
Is forex trading with bots profitable?
While trading with bots offers potential benefits such as increased efficiency, reduced
emotional biases, and the ability to execute trades 24/7, it also comes with risks. Traders should
approach automated trading with caution, thoroughly research and test their strategies, and be
prepared to adapt and evolve their approach over time. Additionally, it’s essential to have realistic expectations and understand that no trading strategy, including automated ones, can guarantee profits.
What is forex trading gold or XAU/USD pair?
This trading gold involves speculating on the price movements of gold relative to the US dollar.
