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All You Need to Know About Forex

TABLE OF CONTENTS

All You Need to Know About Forex

All You Need to Know About Forex

Vantage Updated Updated Mon, 2023 October 23 03:55

Forex trading, since its inception in the 1970s, has undergone substantial transformations. The surge in technology and the emergence of online trading platforms have particularly catalysed an exponential rise in its popularity over the decades.

Recent data accentuates this growth trajectory; the forex market grew from $715.09 billion in 2022 to a projected $763.17 billion in 2023, reflecting a compound annual growth rate (CAGR) of 6.41% [1]

Looking further into the future of forex trading, the momentum doesn’t seem to wane, as projections indicate the global foreign exchange market soaring to an impressive $972.12 billion by 2027 with a CAGR of 6.54% [2].

What is Forex (FX)?

A few different questions come to mind when it comes to Forex, such as why one should trade with forex, or  what chart patterns to use for forex technical analysis. In this section we will highlight key things about this market that all traders need to know.

 FX, short for foreign exchange, represents the global currency markets. There is an array of entities that participate within the FX markets, and they include central banks, financial institutions, hedge funds, and individual investors or traders. 

But what is forex trading? At its core, forex trading revolves around market participants engaging in the buying or selling of currencies with the primary objective of realising potential profits. These trading activities are often driven by opportunities derived from fluctuations in exchange rates. Traders seize trading opportunities on the movements of one currency’s value in relation to another, anticipating increases or decreases against the base currency.

The forex market is the world’s most liquid market, attracting a wide range of participants. Central banks, major financial institutions, and corporations play crucial roles in trading and stabilising currencies. Meanwhile, individual traders, both professionals and retail investors, contribute to the market’s depth and diversity.

Read our article covering all about forex trading.

Why Trade Forex?

There are a few advantages when it comes to forex trading:

1. Leverage

Traders can also employ leverage when trading forex with CFDs, enabling traders to control larger positions with a smaller amount of capital. However, while leverage can amplify profits, it can also result in magnified losses.

2. Volatility

While volatility might be perceived as a risk, it also provides opportunities. Forex markets experience regular price fluctuations, offering traders numerous chances to enter and exit trading positions to potentially capitalise on short-term price movements – be it shorting or going long on a position.

3. Hedging

Forex trading allows businesses and traders to hedge against unwanted fluctuations in currency values. By taking positions that counter adverse currency movements, traders and businesses can protect their investments or revenues from volatile shifts that occur due to exchange rate fluctuations.

4. Liquidity

The Forex market has high liquidity. Due to a vast number of participants and the sheer volume of trades, large transactions can be executed without significant price deviations. This ensures smoother trading experiences and more stable prices.

5. Trade any time of the day (continuous operation)

The Forex market operates 24 hours a day during weekdays, allowing participants to trade round the clock, at their convenience. It is also accessible to global market participants across different time zones. 

The Basics of Forex Trading

So how does forex trading work? 

Imagine the process you go through when exchanging money for a trip abroad. Just as you exchange your home currency for another country’s currency, in forex trading you buy one currency while selling another. 

The rate at which you make these exchanges can vary due to supply and demand factors. Forex traders engage in trading these currency pairs, aiming to make potential returns from any currency rate changes. You can learn more by watching the video below!

Forex Terms

Before diving deeper into forex trading, it is important to understand all the financial trading terms and technical jargons of forex. Here are some basic forex terms to help you get started with forex trading.

1. Currency Pair

In forex trading, a currency pair is the quotation of two different currencies where a main currency (called the base) and a secondary one (called the quote) is combined. The base currency comes first, and the quote currency follows. 

For example, popular pairs like EUR/USD tell us the value of one Euro in US Dollars. In the EUR/USD image above, EUR/USD = 1.0588 represents that one Euro dollar is equivalent to 1.0588 US dollars.

Other common pairs include GBP/USD (how many US Dollars one British Pound is worth), USD/JPY (value of the US Dollar in Japanese Yen), and USD/CHF (US Dollar value in Swiss Francs). Currency pairs are also split into major, minor and exotic pairs

2. Bid-Ask Spread

The bid-ask spread is a term used in the market to describe the difference between the highest price a buyer is willing to pay (known as the bid price) and the lowest price a seller is ready to accept (known as the ask price). The spread represents the gap between these two prices, showing the difference in what buyers are willing to pay and what sellers want to receive.

3. Pips

A “pip” stands for “point in percentage” and indicates the tiniest change in the price of a currency pair. Typically, it’s the change in the fourth decimal place. Pips help traders figure out if they’ve made or lost money on a trade; alternatively use our handy trading calculators to help you out.

For instance, if the EUR/USD currency pair goes up from 1.2000 to 1.2001, that’s a one-pip move. However, the Japanese yen is different. Currency pairs with the yen, like USD/JPY, usually show changes at just two decimal places. So, you might see USD/JPY as 147.73.

4. Leverage

Leverage in trading means using borrowed money to multiply the size of your trade, allowing traders to control big amounts with just a small portion of their own funds. 

However, using leverage is a double-edged sword. While this can lead to larger profits, it also brings the risk of bigger losses. For example, with a 10:1 leverage, a trader can control $10,000 worth of currency with just $1,000 of their own money.

5. Margins

Margin is a deposit traders make with their broker to start trading, ensuring they can cover potential losses. It acts as a safety net for both the trader and the broker. For instance, if a broker requires a 5% margin, a trader would need to deposit $50 to open a $1,000 position in the market.

6. Lots

A lot is a fixed quantity of a financial instrument used in trading. Its size varies based on the market and the specific asset. When traders buy or sell a lot, they are trading with that predetermined number of units of the asset. Different types of lots include:

  • Standard Lot: Represents 100,000 units of the base currency. 
  • Mini Lot: Represent 10,000 units of the base currency.
  • Micro Lot: Represents 1,000 units of the base currency.
  • Nano Lot: Represents 100 units of the base currency.

7. Swap/Overnight Rates

Swap, often referred to as the overnight rate (or fee), is the interest paid or earned for holding a currency position overnight. 

This rate is either added to or subtracted from a trader’s account based on the direction of their trade and the interest rate differential between the two currencies in the pair. For example, if a trader holds a long position in EUR/USD, they might receive or pay interest depending on the difference in interest rates between the Eurozone and the US.

8. Orders

Orders are placed by traders to their brokers on when they would like to enter or exit a position. These can be executed immediately or under specific conditions. Common forex market order types include:

  • Market Orders: Buying or selling the currency pair at the current market price. For instance, if the current market price for EUR/USD is 1.1000 and a trader places a market order to buy, the transaction will be executed at this price (or very close, depending on market conditions).
  • Limit Orders: Set a specific price at which they wish to buy or sell. For example, a trader might place a limit order to buy EUR/USD at 1.1000, meaning the order will only execute when or if the pair reaches that specified price.
  • Stop Orders: A trade is initiated once a certain pre-set price is reached. Suppose a trader wants to buy EUR/USD only if it starts to rise above a certain level, signalling an upward trend. They could place a stop order to buy at 1.1000, meaning the purchase will only be initiated if the price climbs to that level or higher.

Discover the different types of market orders with our comprehensive article.

Currency Pairs

As mentioned briefly in the section above, currency pairs are the quotation of two different currencies where a main currency (called the base) and a secondary one (called the quote) is combined. 

When engaging in forex trading, traders always deal with currency pairs. This unique trading instrument reflects the exchange rate between the two different currency pairs. Trading currencies via pairs therefore involves two sides automatically – a buyer and a seller. 

Here’s how you can read the EUR/USD currency pairs:

The first currency is known as the base currency which is the Euro (EUR) 

The second currency is known as the quote currency which is the US dollar (USD)

Types of Currency Pairs

Currency pairs in the forex market are grouped into categories based on the volume they trade daily. These categories help traders understand the liquidity, popularity, and potential volatility of the pairs. Generally, they are categorised into four main types:

  • Major Currency Pairs (majors): These pairs involve the world’s most traded currencies and boast the highest daily trading volumes. Their high liquidity often results in tighter spreads.
  • Minor Currency Pairs (minors): These pairs don’t include the U.S. Dollar but involve other major world currencies. They might not have the same level of trading volume as the majors but are still relatively liquid. 
  • Exotic Currency Pairs (exotics): Exotic pairs involve one major currency paired with a currency from a developing or emerging market, such as countries in Africa, Asia, or the Middle East. Exotic pairs are less liquid than both major and minor pairs, and they often have wider spreads.
  • Cross Currency Pairs: These pairs do not include the U.S. Dollar but are combinations of other major world currencies. An example of a cross currency pair is the EUR/JPY.

Understanding these categories and the characteristics of each can help traders make informed decisions based on their trading strategy and risk tolerance.

Major Currency Pairs and their nicknames:

  • EUR/USD – “Fiber”
  • USD/JPY – “Ninja” or “Gopher”
  • GBP/USD – “Cable”
  • AUD/USD – “Aussie”
  • NZD/USD – “Kiwi”
  • USD/CAD – “Loonie”
  • USD/CHF – “Swissie”

MInor Currency Pairs and their nicknames:

  • EUR/GBP – “Chunnel” 
  • EUR/CHF – “Euro-Swissie”
  • EUR/AUD – “Euro-Aussie”
  • EUR/NZD – “Euro-Kiwi”
  • EUR/CAD – “Euro-Loonie”
  • GBP/JPY – “Geppy” or “Dragon”
  • GBP/AUD – “Pound-Aussie” or “Sterling-Aussie”
  • GBP/CAD – “Pound-Loonie” or “Sterling-Loonie”
  • GBP/CHF – “Pound-Swissie” or “Sterling-Swissie”
  • AUD/JPY – “Aussie-Yen”
  • NZD/JPY – “Kiwi-Yen”
  • CAD/JPY – “Loonie-Yen”
  • AUD/CAD – “Aussie-Loonie”
  • AUD/NZD – “Aussie-Kiwi”
  • NZD/CAD – “Kiwi-Loonie”

Exotic Currency Pairs and their nicknames:

  • USD/TRY – U.S. Dollar/Turkish Lira – “Dollar-Turk”
  • USD/NOK – U.S. Dollar/Norwegian Krone – “Nocky”
  • USD/ZAR – U.S. Dollar/South African Rand – “Dollar-Rand”
  • USD/MXN – U.S. Dollar/Mexican Peso – “Dollar-Peso”
  • USD/RUB – U.S. Dollar/Russian Ruble – “Dollar-Ruble”
  • USD/PLN – U.S. Dollar/Polish Zloty – “Dollar-Zloty”
  • USD/BRL – U.S. Dollar/Brazilian Real – “Dollar-Real”

Cross Currency Pairs and their nicknames: 

  • EUR/GBP – “Chunnel”
  • EUR/JPY – “Euppy” or “Yuppy”
  • GBP/JPY – “Geppy” or “Gopher”
  • GBP/AUD – “Sterling Aussie”

Forex Market Analysis

Here are the common, go-to ways traders can use to analyse the forex markets. 

Fundamental Analysis

Fundamental analysis in forex refers to the examination of the economic and geopolitical factors of different currencies, with the purpose of price forecasting. Here are some of the key factors that can impact the price of currencies.  

Central Bank

The Central Bank Monetary Policy is the process of setting the interest rate and controlling the supply of money. It is often categorised by the below:

  • Hawkish Monetary Policy: Characterised by rising interest rates to combat inflation, it makes borrowing more expensive for businesses and consumers, leading to reduced spending and investment.
  • Dovish Monetary Policy: Associated with falling interest rates to boost a stagnating economy, it makes borrowing cheaper, encouraging businesses and consumers to spend and invest, stimulating economic growth.
  • Quantitative Easing (QE) Policy: QE sees the central bank purchasing long-term securities to boost the money supply and reduce the long-term interest rate.

Economic Data

Trading based on economic events is a major part of basic trading analysis. These events give clues about how an economy is doing. Here are the key events to watch:

  • Central bank decisions on interest rates
  • Information on price increases (inflation)
  • Job reports
  • GDP (the total value of goods and services produced)

Keep yourself up-to-date on the latest market news and analysis.

Inflation

In fundamental analysis, we look at various factors to figure out the health of an economy. One of these factors is inflation, which is simply how much prices increase over time. For example, if you spent $100 on groceries last year, and the same items cost you $105 this year, prices have gone up by 5%. That’s 5% inflation. 

This change in prices can affect how far your money goes. Today, it might buy less than it did yesterday. So, when studying an economy or deciding where to invest, understanding inflation is crucial. It can influence your money, businesses, and the overall financial picture.

Supply and Demand

Supply and demand principles also apply to currencies. Investors typically rely on both technical and fundamental analysis to predict which currency pair’s value will increase. By grasping the supply and demand dynamics, traders can better anticipate the current and future price shifts in the forex market.

Interest Rate

An interest rate is a key monetary tool that central banks use to control the overall markets. In the context of fundamental analysis, it is important for forex traders to understand the interest rate. This is because:

  • A higher interest rate might mean the country is trying to attract foreign capital, which can strengthen its currency.
  • A lower rate might be used to boost spending, possibly weakening the currency.

Thus, by analysing the interest rates fluctuations, forex traders can anticipate currency movements and make their trading decisions.

Technical Analysis

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analysing statistical trends gathered from trading activity, such as price movement and volume. 

Unlike fundamental analysis, which attempts to evaluate a security’s value based on business results such as sales and earnings, technical analysis focuses on the study of price and volume, using trading charts.

Support and Resistance

Support and resistance are fundamental concepts in technical analysis that refer to price levels on a chart where the price of a security tends to find support or resistance and reverse direction. 

  • A support level is a price level at which a stock or market tends to stop falling and may even rebound
  • A resistance level is where prices tend to stop rising and might start declining. 

These levels of support or resistance are derived from past price actions and are used by traders to predict future price movements.

Indicators

Indicators are essential tools in technical analysis that provide traders with quantitative data to aid in their trading decisions. They are mathematical calculations based on price, volume, or open interest information that aims to forecast currency price movements. It can help traders to identify potential buy or sell signals, overbought or oversold conditions, and overall market trends.

Common basic indicators include Moving Averages, Relative Strength Index (RSI), and Moving Average Convergence Divergence (MACD). 

Basic Indicators

  • Moving Averages (MA)

Moving Averages (MA) is an indicator of the average price of a market over a certain period. This can be used to help identify trends and traders can get a better idea on what their next trade move might be. Moving averages can be further classified into:

1. Simple Moving Average (SMA)

The Simple Moving Average (SMA) calculates the average price over a set period, giving equal importance to all prices.This method results in a smoother line that often lags behind recent price changes.

2. Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) focuses more on recent prices, making it react faster to price changes. The EMA can provide a clearer view of short-term price movements and trends.

  • RSI Indicator

 The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements through a range of 30 (oversold) and 70 (overbought). They form an indication as to whether the market is over or undervalued. 

  • Moving Average Convergence/Divergence (MACD)

The Moving Average Convergence/Divergence (MACD) is a tool that shows the difference between two moving averages, helping to spot changes in a stock’s momentum. It appears as two lines on a chart, with their movements indicating potential buy or sell signals, rather than showing if something is overbought or oversold.

  • Stochastic oscillator

The Stochastic oscillator is a tool that compares an asset’s current price to its price range over a certain period to gauge its momentum. A reading above 80 suggests the stock might be overbought, while a reading below 20 suggests it might be oversold.

  • Standard deviation

Standard deviation is a measure that tells how spread out or clustered data points are around the average. When it comes to trading, a high standard deviation means prices are changing a lot (high volatility), while a low value means prices are stable.

Advanced Indicators

  • RSI Divergence

RSI Divergence occurs when the price of an asset moves in the opposite direction of the RSI indicator, indicating potential market reversals. For example, if the price is making higher highs but the RSI is making lower highs, this may suggest a bearish divergence, hinting at a possible upcoming downtrend. 

Fibonacci Retracement is a technical tool that highlights support or resistance levels, using key percentages from the Fibonacci sequence developed by 13th-century mathematician Leonardo Fibonacci. 

Traders use these levels, primarily 23.6%, 38.2%, 50%, 61.8%, and occasionally 78.6%, to predict potential reversal points in price movements. This tool becomes especially powerful when combined with other technical indicators.

  • Bollinger Bands

Bollinger Bands are a charting tool developed by John Bollinger that show asset volatility and potential overbought or oversold conditions. They consist of three lines: a central simple moving average, with an upper and lower band set at a certain standard deviation from this average. These bands widen during increased volatility and narrow during decreased volatility, helping traders gauge price movements.

  • Ichimoku Cloud

The Ichimoku Cloud is a charting tool in technical analysis that displays potential future support and resistance levels, momentum, and the overall trend. Developed by Goichi Hosoda in the 1960s, it consists of five lines, with two forming a shaded “cloud” that indicates whether the trend is upward (above the cloud) or downward (below the cloud). This cloud, along with the other lines, helps traders predict where the price trends are heading.

  • Heikin Ashi

Heikin Ashi, meaning “average bar” in Japanese, is a charting method that smoothens traditional candlestick patterns to highlight trends more clearly. By using averaged price data instead of the usual open, high, low, and close prices, it filters out market noise, making it easier to spot and follow trends. 

Developed centuries ago by Munehisa Homma, Heikin Ashi’s unique averaging formula results in a more visually coherent chart, helping traders to identify sustained trends and potential price reversals.

Check out our latest webinars, happening daily, where we cover some of these popular technical indicators.

Charts and Graphs

Forex charts are graphical representations of currency exchange rates over time. These charts provide a visual display of how a particular currency pair has been performing, allowing traders to analyse historical price movements, identify trends, and make informed trading decisions. 

  • Line Charts 

Line charts connect the closing prices of instruments with a continuous line, offering a simple and clear representation. This clarity eliminates ‘market noise’, making trend trading more straightforward. They can be ideal for beginners, laying foundational chart reading skills before exploring more complex chart types and indicators.

  • Bar Charts 

The bar chart offers more detailed market insights as compared to the line chart by showcasing four key data points: open, close, high, and low prices for a given time frame. This granularity aids in deeper technical analysis. For instance, the highs and lows on the chart help traders identify the trading range of an instrument.

  • Candlestick Charts

Candlestick charts display open, close, high, and low data points, similar to bar charts, but with thicker, colour-coded bodies making them visually easier to identify trends, and a more popular choice among traders. The main section is the “candle body,” while the lines showing the high and low are “candle wicks”. Green typically represents bullish activity and red indicates bearish movement, with groups of candlesticks forming patterns that inform traders’ market decisions.

Here’s a guide to candlestick patterns and how to use it.

Time Frames

The time frames in the forex charts are represented on the horizontal axis. It shows the time frame you are looking at, usually in minutes, hours, days, or weeks.  

Chart Patterns

Forex chart patterns are visual representations of market movements that traders can use to predict future price directions. By understanding these patterns, traders can use it to help make the decision to enter or exit trading positions. Here are 2 patterns type to observe:

  • Continuation Patterns

Continuation patterns in forex charts are formations that hint at the current market trend persisting after a temporary pause or consolidation period. Essentially, when you spot a continuation pattern, it suggests that the prevailing trend (whether it’s an uptrend or a downtrend) is expected to proceed in the same direction once the pattern completes. 

Some of the most frequently observed continuation patterns include triangles, flags, and pennants. These formations signal that the market is taking a brief break before resuming its prior move.

  • Reversal Patterns

Reversal patterns in forex charts, on the other hand, signal a potential change in the market’s direction. When these patterns form, they imply that the current trend, whether it’s rising or falling, might soon reverse. Examples of these patterns are the head and shoulders, and double tops and bottoms. 

Recognising these can be crucial for traders as they suggest that the current momentum is weakening and a shift, from an uptrend to a downtrend or the reverse, might be on the horizon.

You can refer to these visual examples of popular patterns as we discuss them in the section below. 

Flags

Flags are short-term continuation patterns that resemble a flag on a pole, formed during a steep, rapid price move (the pole) followed by a consolidation period (the flag) that slopes against the prevailing trend. They indicate that after a short pause, the prior trend is likely to continue. For traders, spotting a flag could provide a timely opportunity to jump into the market just before the continuation of a strong move.

Triangles

Triangles are chart patterns formed by converging trendlines, with the price of an asset typically moving within these trendlines. Depending on their shape, triangles can be ascending, descending, or symmetrical. They signal an impending breakout, where the price can move in the direction of the prevailing trend or reverse. The breakout direction often gives traders a clue about potential future price movements.

Wedge

A wedge pattern in forex charts is formed when trendlines drawn above and below price converge. There are two main types: rising wedges and falling wedges. While they may appear similar to triangles, wedges typically have a more pronounced slope and indicate a reversal or continuation, depending on the trend’s direction before the formation. Recognising a wedge can help traders anticipate a potential breakout or breakdown in price.

Head and Shoulders

The head and shoulders pattern is a reliable reversal indicator. It consists of three peaks: a higher peak (head) between two lower peaks (shoulders). An inverse head and shoulders pattern, with the head at the bottom, indicates a bullish reversal. These patterns help traders identify potential trend reversals, making them crucial for strategic planning.

Double Top and Double Bottom

Double top and double bottom patterns signal trend reversals. The double top, resembling the letter ‘M’, occurs after an uptrend and suggests a bearish reversal. Conversely, the double bottom, resembling the letter ‘W’, forms after a downtrend, hinting at a bullish reversal. These patterns are strong indicators, helping traders foresee potential market shifts.

Triple Top and Triple Bottom

These patterns are an extension of the double top and double bottom formations but involve three peaks or troughs instead of two. A triple top, formed after a sustained uptrend, predicts a bearish reversal, while a triple bottom, after a downtrend, suggests a bullish turn. They offer traders a more confirmed reversal signal compared to their double counterparts.

Cup and Handle

The cup and handle is a bullish continuation pattern that resembles the shape of a tea cup. It begins with a rounded bottom, the “cup,” followed by a consolidation or a slight pullback, the “handle.” Once the pattern completes, it usually indicates a strong upward price breakout. For traders, this pattern is a sign that the current trend will continue following a brief pause.

Trading Strategies

Forex trading strategies refer to the plans and tactics that traders use to determine when to buy or sell currency pairs in the foreign exchange market. These strategies act like a roadmap, helping traders decide when to enter or exit trades based on a set of criteria or signals. A forex trading strategy helps traders employ a systematic approach to trading, reducing guesswork and enhancing consistency in decision-making.

Just as a traveller might choose a route to take based on speed, scenery, or other preferences, traders will select a strategy based on their goals, risk tolerance, and market analysis. Some strategies rely on technical analysis tools in the likes of chart patterns and technical indicators, while others might focus on fundamental analysis like news events and economic data. 

Swing Trading [3]

Swing trading is a strategy that focuses on capturing gains in a currency pair over a period of a few days to several weeks. Traders use technical analysis, such as support and resistance levels, to identify potential price swings. For instance, if a currency pair’s price hits a support level (a price it has historically not fallen below) and shows signs of bouncing back, a swing trader might buy, expecting the price to rise. This approach is favoured by those who can’t monitor the market every moment but want to capitalise on its momentum.

Day Trading [4]

Day trading involves opening and closing positions within a single trading day. The objective is to profit from short-term price movements without holding positions overnight, thus avoiding potential adverse events that might happen when the markets are closed. 

For example, a day trader might buy a currency pair in the morning upon reading news that resulted in a sudden surge and proceed to sell it a few hours later after realising profit. It requires quick decision-making, a deep understanding of the market, and is best for those who can dedicate their full attention to trading during market hours.

News Trading [5]

News trading is a strategy based on reacting to major news events that can significantly impact currency values. Factors like economic data releases, central bank decisions, or geopolitical events can lead to swift and substantial price shifts. For instance, if the European Central Bank unexpectedly announces a rate hike, the euro might strengthen. A news trader, anticipating this, would buy the euro before the announcement and sells after its value rises. 

Timeliness and understanding the implications of news are key for this strategy. Stay updated on the latest market news and analysis with Vantage.

Range Trading [6]

Range trading is a strategy employed when a currency pair is moving sideways, oscillating between two price levels, known as support and resistance. Traders buy at the support level (the price’s low point) and sell at the resistance level (its high point). For instance, if the EUR/USD has been bouncing between 1.1000 and 1.1050, a range trader might buy at 1.1000 and sell at 1.1050, repeatedly capitalising on the movements within this small price range. 

This strategy works best in markets without a clear trend.

Breakout Trading [7]

Breakout trading revolves around the idea that once a currency pair breaks through a previously defined support or resistance level, it often continues in that direction. Traders place trades in anticipation of this continued movement. For instance, if GBP/USD has been hovering below a resistance level of 1.3000 and suddenly breaks through that level of resistance, a breakout trader would buy, expecting the price to keep rising. Do bear in mind that setting stop-losses is crucial with this strategy to manage potential reversals.

Getting Started with Forex

You would require a forex trading account before you can trade the forex market. Open a live trading account in less than five minutes with Vantage to start trading Forex today.

Funding your live account with Vantage is convenient as we offer various funding methods to help you fund your account. The various methods you can fund your account with Vantage are listed below:

Image last updated: 17 October 2023

Visit our deposit page to learn more about all the deposit methods available.

Placing Your Forex Trade

When you’re ready to dive into the world of forex trading, it’s essential to understand a few key concepts before you start.

Charges

1) Swap fee 

This is a charge you’ll face when you keep a trade open overnight. Essentially, it represents the interest on the borrowed currency. Moreover, the broker you choose to trade with will have specific fees and spreads they charge. It’s crucial to research these before making a trade with that broker.

2) Margin 

This refers to the amount of money a trader must deposit with a broker to open a trade. It acts as a good faith deposit, ensuring you can cover potential losses.

3) Spreads

This charge represents the difference between the buying (ask) and selling (bid) prices of forex. It’s applied to your trades and can impact your overall returns.

Curious to start trading forex? Read our complete guide on how to trade forex to help you get started.

Forex Brokers

Choosing the right forex broker is another important step to start your forex trading journey. Here’s are three important things to keep in mind:

Regulations: A good broker adheres to regulations set by financial institutions. These regulations protect traders from fraud and ensure that the broker operates transparently. Before committing to a broker, check which regulatory bodies oversee their operations.

Cost: Choose a forex broker that offers low spreads (often expressed in pips), as spreads can eat into your returns. 

Currency pairs available: Are you looking to trade exotic pairs? Or are you looking to trade just majors and minors? Look for a broker that offers a variety of currency pairs for you to trade. This gives you greater trading options and flexibility.

Remember, taking the time to choose a trustworthy broker can save you from potential problems in the future. So, research thoroughly and trade wisely.

Tools

In the dynamic realm of forex trading, utilising the right tools can make all the difference in placing a successful trade . Here are some tools and features to look for:

1. Trading Platforms

This is the software that connects you to the forex market. A robust trading platform will offer a user-friendly interface, real-time quotes, charting tools, and sometimes even news and data feeds. For example, Vantage offers multiple platforms that allows you to trade with. From Metatrader 4 and 5 to ProTrader and TradingView, everyone can trade smarter with Vantage.

2. News and Data

Staying updated with global events and economic news can heavily influence the forex market. Reliable sources of news and data can keep traders informed about the latest happenings that can sway currency prices. Whether it’s political unrest, economic announcements, or global pandemics, being in-the-know is crucial. 

Be updated with our daily news and analysis, educational courses  catered for beginners to expert traders. 

3. Support

The best forex brokers offer excellent customer support. This can range from technical assistance with the trading platform, to guidance on executing complex trades. Ensure that your broker offers 24/7 support or support during the hours you plan to trade.

4. Market Analysis

For a trader, understanding the market is vital. Market analysis tools help in interpreting price movements and predicting future trends. This includes both fundamental analysis (based on economic news and data) and technical analysis (using charts, indicators, and patterns). A good broker or trading platform will often provide access to quality market analysis.

5. Accounts

Different account types cater to different traders. For instance, a beginner might opt for a mini or micro account with lower minimum deposit requirements, while a professional might select a standard or premium account that offers better spreads but requires a higher deposit. It’s essential to choose an account type that fits your trading style and capital.

6. Calculator

Forex calculators are invaluable tools for traders. They help in determining potential returns, losses, and risks associated with a trade. This can include pip calculators, margin calculators, and currency converters. Using a calculator helps you to understand the potential outcome of a trading decision.

Risk Management

In the volatile world of forex trading, risk management is the practice of identifying potential risks, quantifying them, and taking steps to mitigate potential losses. It’s important because, while forex trading offers opportunities for potential returns, it comes with equally substantial risks, particularly if you trade with leverage. 

Traders employ various strategies for effective risk management, including setting stop-loss orders to cap losses at a predetermined level, diversifying their portfolio by trading different currency pairs or markets, and never risking more than a set percentage of their trading capital on a single trade. By mastering the principles of risk management, traders can safeguard their capital and enhance their long-term profitability.

Slippage

Slippage refers to the discrepancy between a trader’s expected price of a trade and the actual executed price. This occurs because of huge swings in the market and the time taken for the order to be executed. In forex, due to rapid price fluctuations, traders might often experience slight differences from what they anticipated.

Greed

Greed is an emotional state that prompts traders to act irrationally, often chasing unrealistic profit targets or holding onto losing positions for too long. This emotion can cloud judgement and lead to decisions that are not based on sound trading strategies. It’s essential for traders to recognise and manage this emotion to maintain disciplined trading practices. Trading psychology also plays a pivotal role in how we approach the markets and make our decisions. 

To fully understand how to master your emotions and trade with clarity, read our comprehensive article, titled The Basics of Trading Psychology.

Diversification

Diversification is a strategy that entails spreading investments across different financial instruments or assets. The primary purpose is to reduce the risk associated with adverse price movements in one particular asset. By diversifying, traders aim to mitigate potential losses, ensuring that negative performance in one area might be offset by positive performance in another.

Risk-to-Reward Ratio

The Risk-to-Reward Ratio is a fundamental metric used by traders to evaluate the potential reward of a trade compared to its risk. It helps determine the viability of a trade by assessing whether the potential return justifies the risk taken. A favourable ratio implies that the potential reward surpasses the risk involved.

Margin Call and Forced Closure

A Margin Call is a broker’s alert indicating that a trader’s account balance has fallen below the minimum required margin. It necessitates the trader to either deposit additional funds or close open positions. If the trader fails to act, the broker might initiate a Forced Closure, automatically selling positions to restore the account to the required margin level.

FAQ

How much do I need to start trading forex?

The amount you need to start trading forex varies based on your preferred trading strategy and the leverage you choose to use. Leverage lets you trade with a value greater than your initial deposit, so even with just $100, you can make larger trades. 

For instance, using 10:1 leverage, $100 could let you trade with $1,000. However, trading with high leverage also comes with significantly higher risk, as you may lose more than your initial capital.  

What time does the forex market open?

The forex market operates 24 hours a day, five days a week. Here are the 4 major trading sessions:

  • Sydney Session: Opens at 5:00 PM EST (10:00 PM GMT).
  • Tokyo Session: Opens at 7:00 PM EST (12:00 AM GMT).
  • London Session: Opens at 3:00 AM EST (8:00 AM GMT).
  • New York Session: Opens at 8:00 AM EST (1:00 PM GMT).

It’s important to note that the opening times can vary slightly depending on daylight saving changes. Also, the most active trading periods are when two sessions overlap, as the market sees more volume and liquidity during those times.

What is the best time to trade Forex?

The best time to trade forex largely depends on market activity, which varies across the 4 major trading sessions. Here’s a rough idea about the overlapping sessions which you can trade:

  • Overlap of London and New York Sessions: This period, from 8:00 AM EST (1:00 PM GMT) to 12:00 PM EST (5:00 PM GMT), can be considered as one of the best times to trade. Both sessions are active, resulting in higher volume and liquidity, making it a prime time for trading opportunities.
  • Opening of London Session: Beginning at 3:00 AM EST (8:00 AM GMT), is another active trading window, which will capture the bulk of European trading activity.

Remember, the ’best’ time also depends on your trading strategy, currency pairs you are focusing on, and market news or events. Always consider these factors in conjunction with the above timeframes to determine the most suitable trading hours for you.

How Do Taxes Work in Forex Trading?

When you engage in forex trading, any returns you earn may be subjected to taxes based on your local regulations. The specific tax rate often depends on how long you’ve held a position and the tax laws of the country in which you are trading. It is important for forex traders to always familiarise themselves with the local tax laws of the countries they trade in to understand their tax obligations.

References

  1. “Foreign Exchange Global Market Report 2023 – The Business Research Company” https://www.thebusinessresearchcompany.com/report/foreign-exchange-global-market-report Accessed 18 Sep 2023
  2. “Foreign Exchange Global Market Report 2023 – The Business Research Company” https://www.thebusinessresearchcompany.com/report/foreign-exchange-global-market-report Accessed 18 Sep 2023
  3. “What Is Swing Trading? – Investopedia” https://www.investopedia.com/terms/s/swingtrading.asp Accessed 20 Sep 2023
  4. “Day Trading: The Basics and How to Get Started – Investopedia” https://www.investopedia.com/articles/trading/05/011705.asp Accessed 20 Sep 2023
  5. “What Is a News Trader? ‘Buy the Rumor, Sell the News’ Explained – Investopedia” https://www.investopedia.com/terms/n/news-trader.asp Accessed 20 Sep 2023
  6. “What Is Range-Bound Trading? Definition and How Strategy Works – Investopedia” https://www.investopedia.com/terms/r/rangeboundtrading.asp Accessed 20 Sep 2023
  7. “The Anatomy of Trading Breakouts – Investopedia” https://www.investopedia.com/articles/trading/08/trading-breakouts.asp Accessed 20 Sep 2023
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