What is Forex? Learn about the forex market for beginners
What is Forex?
Forex stands for Foreign Exchange, known by many names as FX, spot FX, foreign exchange market. In short, Forex – Forex is a global decentralized financial market for the exchange, buying, and selling of world currencies. A forex investor can trade currencies and earn profits. Profit from the difference in exchange rates between the currencies of two countries
If it is currency trading, why not go to the bank to change it quickly?
Because it will cost you money to convert.
Since you can’t profit, it even loses money in fees.
Long wait time to get the transaction -> lost opportunity cost
And Forex doesn’t just stop buying and selling currencies, but now Forex also allows trading of oil, gas, cryptocurrencies, etc. With things like oil and gas, of course, you can stay supplied. Outside, tell the seller, “Get me 1 liter of oil” or “Get me one gas can,” right?
Forex trading is the market that best fits the theory of perfect competition. When customers trade on the foreign exchange market, there will not be any producer or consumer who has the right or ability to control the market, affecting the price.
Today’s Forex market began in 1970, after three decades of government restrictions on foreign exchange transactions. Many factors caused this advance, but the US officially withdrew from the Bretton Woods monetary system, allowing the exchange rate to float.
Essential terms in Forex investing
Pip: Pip is the smallest unit of price movement of the currency pair, equivalent to 0.0001 of the quoted price. When the bid price (buy price) of the EUR/USD currency pair moves from 1.1779 to 1.17780, the value of the currency pair changes by one pip. (For more information: What is a Pip ?)
Spread: Spread is the difference between the bid and asks prices of a currency pair. Popular currency pairs often have low spreads – even less than one pip, and less commonly traded currency pairs have higher spreads. One note for traders when trading Forex to make a profit, the value of the trading currency pair must exceed the spread. (Refer to What is Spread ?)
Margin (Margin): The amount deposited into the account trader exchanges his broker. However, because Forex Traders with Retail accounts often need more margin to execute large volumes of trades and improve profits, many Forex and CFD brokers allow traders to use leverage ratios. (Refer to Margin in forex trading )
Leverage: Leverage is the capital provided by the Forex floor so that traders can make a larger volume of trades with the money they have. If you use 1:10 leverage and have $1,000 in your account, you can invest up to $10,000 in Forex. If the above trade is successful, the leverage will multiply the profit by ten times. (Refer to How to use financial leverage most effectively )
However, if it fails, the loss is multiplied by ten times. Therefore, traders must be cautious when using leverage ratios. Suppose the account balance falls below $0. In that case, the trader can activate the hostile balance protection policy offered by the exchange (in the case of trading with an ESMA-licensed and regulated stock exchange). The order will be automatically closed at that time, and the account balance cannot go below $0. Thanks to that, traders will not owe money to the stock exchange.
What are currency pairs in forex trading?
Today, many currencies are globally and currency pairs on the forex market. Some of the most popular Forex currency pairs:
US Dollar ( USD )
Euro ( EUR )
British Pound Sterling ( GBP )
Japanese Yen ( JPY )
Swiss Franc ( CHF )
When pairing currencies with the USD, we have the central currency pair ‘Forex majors’ – the Forex currency pairs with the most significant trading volume are:
EUR/USD
GBP/USD
USD/JPY
USD/CHF
When pairing two common currencies that do not contain USD, we have ‘Cross pairs’ cross currency pairs, like:
EUR/GBP
GBP/JPY
CHF/GBP
In addition, we have three other currencies that are often traded when playing Forex:
New Zealand Dollar(NZD)
Canadian Dollar(CAD)
Australian Dollar(AUD)
The ‘Forex minor’ minor currency pairs contain the above currencies against the USD:
NZD / USD
CAD / USD
AUD / USD
The remaining pairs, known as ‘exotic pairs,’ account for 10% of Forex trading.
Exotic pairs contain currencies not mentioned above, such as the Hong Kong Dollar (HKD), Norwegian Krone (NOK), South African Rand (ZAR), and Thai Baht (THB). Exotic pairs combine a primary currency and a minor, uncommon currency.
When starting, traders only focus on major currency pairs because of the daily volatility and low spreads.
However, traders should know that they also have many other trading opportunities, from exotic currency pairs to trading CFDs on stocks, commodities, energy futures, and indices.
You even have indicators that track other indicators and are fully tradable with them.
Traders can seek investment opportunities from many different markets. Make sure to limit yourself to a single trading instrument or market.
Limiting the market can lead to overtrading, which increases the risk of putting all your capital in one basket. So, you can diversify your portfolio to maximize profits.
Currencies on the market are traded in pairs – for example, the Euro and the USD. When making a trade, the trader can see two prices: BUY(Bid) and SELL(Ask).
Want to buy into Euros with USD? Open a EUR/USD trade and press the “Buy” button.
Want to buy USD with EURO? Do the same and select “Sell.”
Remember that your order always applies to the first currency in that pair.
If you are buying a currency or making a long trade in the market, you are always hoping that the currency pair’s value will increase to sell it at a higher price and profit from it. Exchange rate difference
If you are selling a currency or making a short trade in the market, the opposite – the trader expects the currency pair’s value to fall so that he can repurchase it at a lower price and profit from exchange rate differences.
Liquidity from the Forex market
If it is said that traders – investors, when playing electronic coins, can be manipulated by sharks, messing with the crypto market, then the forex trading market never has that happened. The reason is that Forex is a global trading market through the inter-central banking system of countries, so liquidity and transparency are almost inevitable.
Individuals cannot participate independently but must go through a broker called Brokers – Forex floors. You must find the most reputable forex broker globally or have a representative office in Vietnam to open an account to make transactions.
A currency’s liquidity is how much it can be bought and sold. The most liquid currency pair will be the currency pair with the most significant supply and demand in the Forex market at trading. So how are the supply and demand created? Banks, businesses, importers and exporters, and traders create it.
The major currency pairs are usually the most liquid
EUR/USD moves about 90-120 pips on average daily.AUD/NZD moves around 50-60 pips a day USD/HKD only moves about 32 pips a day (money values are usually recorded with five decimal places). comma after comma)
1 Pip = 0.0001. So if USD/HKD moves from 7.75686 to 7.75696, it means it has moved one pip). The major currency pairs have the most liquidity, giving traders the most short-term Forex trading opportunities.
What is CFD – Spot Forex in forex trading?
While learning about Forex investing, traders must have encountered the phrase ‘Forex CFD.’ Currently, in Vietnam, there are two ways to invest in Forex: CFD (Contract for Difference) or Spot Forex (margin).
Spot Forex is concerned with the buying and selling of actual money. Assume a trader directly converts USD to EUR. Then, when the value of the EUR currency increases, the trader converts the Euro to USD and makes a profit from the exchange rate difference, which means that the trader will collect more money than the previous amount.
CFDs are ‘Contracts for Difference’ used to reflect price movements of financial instruments. Instead of directly buying and selling large amounts of currencies in forex trading, traders can profit from price action without owning the asset.
In addition to Forex, CFDs are available on stocks, indices, bonds, commodities, and cryptocurrencies. In any case, traders can trade price action with these financial instruments without buying them directly.
Leverage in the Forex market
In addition to having access to many financial markets, the Forex CFD market also offers leverage that allows traders to trade more significant amounts than they own. As a result, increased trading profits can be achieved.
Trade Forex CFDs (leverage 1:20)Traditional Trading Deposit USD 500USD $10,000 Trade EUR/USD with an opening price of 1.16766, a closing price of 1.16966 and a spread of 0.00200Trader gain $200, equivalent 40% Traders earn $200, or 40% Trade EUR/USD with the opening price of 1.16766, the closing price of 1.16532 and spread 0.00234Trader losing $234, equivalent to 46.8%Trader lost $234, equivalent to 2.34%Advantages of the forex market compared to other markets
Its huge trading volume represents the world’s largest asset classes resulting in very high liquidity in trading;
Continuous operation 24/24, except two weekends. Trading hours from 20:15 GMT on Sunday until 22:00 GMT on Friday;
Using a capital leverage system to increase profit margins, you only need to spend 100$. With many brokers (brokers) using 1:1000 leverage, the amount you can trade up to 100 x 1000 = 100000 USD.
Profits are enormous if you know how to invest and manage your emotions when investing.
Extremely high liquidity can execute orders immediately. For example, with a stock, you post an order to sell, then you have to wait to see if someone matches the buy order at that price, then the broker will execute the order. As for Forex, as long as you place a buy or sell order, the order will be matched almost immediately.
You can define “take profit” and “stop-loss” points on your account. When you are in profit, you close the order to take that profit, or when you are losing, you stop the order at that time to avoid losing more.
Learn and trade for free with a DEMO account. The advantage of this account is that when you sign up, the DEMO account will give you virtual trading money, and you use that money to trade on the forex market.
The amount earned or lost will still show on the account, only you cannot withdraw it from the account because it is only a DEMO account.
You can trade anywhere if you have a smartphone or laptop with wifi connection.
Make money 24/24 because even Saturday and Sunday, the market is still open (free market), and you can still trade.
However, please consider when to trade because significant banks will not work on these two days. The market will be floating, so there will be many problems with manipulation and price manipulation.
How to earn income from Forex – the Forex market
To profit in this market, you need to understand the simple concept: You buy a currency pair at a low price and sell it at a high price, then you will profit from the difference—that rate. The broker will, of course, take a commission from each of those trades, called the spread.
Assuming you have $100 in your trading account, you want to enter a EUR/USD trade. With an exchange rate of 1.25, that is 1EUR = 1.25 USD. Simply put, the exchange rate is like the price tag of a product in the supermarket, and the difference between the price tag in the supermarket and the Forex is that in this market, the price tag is continuously updated and changed hourly.
Today, you believe EUR will appreciate against USD, and you use 100 USD to buy 100/1.25= 80EUR. In the ideal condition, your prediction is correct. Then you will get the following profit:
The exchange rate EUR / USD will rise, i.e. 1.25 1.35 (up 0.1). In this case, you will have a profit, and you will take profit at the moment when the exchange rate changes. At this point, 80EUR = 108USD -> you get 8$ profit.
You see that more than 8 USD is needed for your efforts, then as Danhgiasan.com mentioned in the advantages of the forex market, you have one more mechanism as leverage. There are many brokers for 1:1000 leverage; in this case, you take 8$ x 1000 = 8000 USD. If you correctly predict the market trend, this is the number you will get. The profit figure is immense.
However, with more significant profits, the risk in the market also increases, so you need to improve your knowledge of risk management because it is a part of this forex market.
How to know the currency rate, which currency pair to buy, and when is the right time to sell or buy it?
You need to know that the exchange rate of a currency pair depends on many factors such as supply and demand factors, the country’s economic situation (GDP, inflation, labor market situation, etc.) ). If you understand these factors, you will get 90% of the winnings in trading in the forex market.
Two types of analysis that I like to make money suggest to you
Fundamental analysis
You should follow the economic situation and market news, especially the Nonfarm newsletter, because this news dramatically influences the forex market. Follow news from official channels abroad, follow news updates. All will help you a lot in trading.
Technical analysis
Use chart charts to predict the trend of currency pairs. Similar to how to analyze charts in stocks, cryptocurrencies,