Forex is a combination of the words foreign exchange, and this is exactly what takes place in forex trading (Also known as FX Trading). This is essentially the trading of one currency for another.
We are here to teach you the terminology used, and to guide you on getting started as a forex trader.
Basic Terminology of Forex Trading
Before you can walk the walk, it is always good to be able to talk the talk. Within forex trading, you’ll encounter a variety of terms that have significance in the market. Understanding this terminology will have a positive impact on your forex trading journey and help you to become a better trader.
Here is a basic rundown of a few terms that you are most likely to encounter along the way:
The Forex Market
The forex market is the market on which you are trading. It is completely decentralized and is where all currency exchange takes place. The exchange of one currency for another is exactly what forex trading is, and precisely what the forex market facilitates.
The volume traded daily on the forex market is more than any other trading market in the world and because of this globalized, decentralized nature, it operates 24 hours a day, 5 days a week around the world. When you get into forex trading, you will have access to the forex market through your forex broker.
A forex broker is your link to the forex market, due to licensing requirements different brokers can only accept clients from specific regions. We offer a list of trusted brokers below, and recommend the best for each region.
Not all brokers you that find online are well-regulated, many of them have a poor history of fraudulent behavior, which is why performing due diligence is important. Below we include a list of brokers which you should avoid.
Currencies within the forex market are always traded in pairs. This is just the same as when you frequent a bank or currency exchange. You may see the symbols EUR/USD, or USD/JPY, and more. These are known as currency pairs and signify how much it costs to trade one currency for another.
The layout is also important, the first currency is the base currency, and the second is the quote currency. So where you see EUR/USD is 1.15 for example, this means that 1 Euro is worth $1.15, or that it costs $1.15 to buy 1 Euro at the current rate. Hundreds of currency pairs are available with forex brokers offering them in three categories, major pairs, minor pairs, and exotic pairs.
When we talk about leverage in forex, in the most basic of terms it means the additional money that you can borrow from your broker based on the balance of your account. As forex is typically traded in $100,000 standard lots, a lot of trading on leverage takes place. Within Europe, most brokers will offer a 30:1 leverage (the maximum allowed under EU regulation). This means that if you have an account balance of $1,000, you could potentially enter trades to the value of $30,000.
The leverage available really depends on where you are trading from and in some areas, under different regulations, brokers can offer leverage of 500:1 or more.
Margin in forex trading is invariably linked to leverage also. The margin is how much of your own funds you must have in your account to open a trade, or to keep that trade open. So, if you are trading with a leverage of 50:1 and you want to enter a trade worth $100,000, then you will need a $2,000, or 2%.
Pip is something you will see a lot of in forex trading and is short for “percentage in point”. A pip is defined as the smallest movement that a foreign currency market can make based on how the rates are listed to four decimal places. The value of 1 pip then is always 1/100 of whatever market you are trading. It is an important measurement to be aware of and calculate, as things like your spread will also be calculated in pips.
When trading forex you will always see two prices, the buy, and the sell price. The spread is the difference between these prices. Given that many of the top brokers operate on a commission-free basis and with minimal fees, the marginal spread that they do apply is an area where they can make a slight amount from each trade.
The spread in forex differs from market to market and changes all the time based on a number of factors like market volatility and volume, though most of the top brokers start their spread from as low as possible.
How to Get Started in Forex Trading
Armed with all of the most common terms in the industry, you are now well placed to start your journey as a forex trader. Here we will go through a few of the most common steps to take in finding the best broker for you, and what you will need in order to set up a forex trading account.
Choosing a Regulated Broker
With forex trading being completely decentralized, that means there is no one authority overseeing the market and the operations of the many forex brokers within that market. This makes choosing the broker with the best regulations in place a very important task.
There are a number of key, very well-respected regulatory bodies around the world that forex brokers try to become regulated by. The best among these include CySEC in Europe, FCA in the UK, and ASIC in Australia. There are many more that can also point to trusted regulation, but these are some of the most sought after.
Regulatory oversight of your broker from one of these bodies is a very positive sign that you can trust them completely. These regulators also put in place a number of things to help protect you as a trader, including maximum leverage amounts, negative balance protections, and more. Therefore, if you are a new trader and entering the industry for the first time, we would highly recommend choosing a well-regulated forex broker.
Consider all of the Trading Conditions
Every forex broker will of course have their own trading conditions. Some of these will be bound by the regulatory body that your broker is under. Within CySEC regulation for example, trading leverage offered by the broker can’t be more than 30:1. Other conditions though are left very much to the discretion of the individual broker.
This means that you should take a close look at things like minimum deposits, spreads charged by the broker on the different account types, commission charged, and all other fees that can increase your cost of trading such as deposit/withdraw fees and any fee for inactive traders or holding your positions open for a period of time.
With that said, you can also keep in mind that some of the top forex brokers strive to offer the best deals and often have loyalty programs and rebates for more active traders. Some with have welcome bonuses and other kinds of incentives though this again will depend on the rules of the local regulator.
Try a Demo Forex Trading Account First
One of the best ways to get started and completely risk-free, is to select a forex broker who offers a good quality demo account. These demo accounts from the top brokers are often unlimited in the sense that you can keep them open for as long as you like, and allow you to trade with virtual currency, but in an environment that completely replicates that of a real trading account.
This is a really great way for you to get to know exactly what a broker has to offer, and also learn more about the trading platforms and how to trade forex in general. It is a crucial step that we highly recommend, particularly if you are trading forex for the first time.
Choose Your Account Type & Trading Platform
Almost all of the top forex brokers will have a number of account types that you can choose from when opening your account. The trading conditions may vary on these types of accounts, and the minimum deposit usually also changes.
Typically, the higher the minimum deposit is on an account type, the better the trading conditions tend to be in terms of spread, fees, and any bonuses available.
You may also have the chance to choose your trading platform with most major brokers offering the top trading platforms from Metatrader of MT4, and MT5, as well as cTrader. Some brokers will also have their own proprietary trading platforms that you can trade through which can be very user-friendly for new traders too.
The last step in opening an account with any forex broker is to make your deposit. Again, the top forex brokers usually make a range of deposit options available to traders. These can include bank wire transfers, credit and debit cards, or eWallet methods like PayPal and Neteller that are commonly found.
The majority of these funding methods the broker’s usually try to offer without any fee. This can make sure you receive the best possible value for your money when making a deposit. On this point though, you should also check with your own bank about their fee policy particularly if you are making a wire transfer.
– Regulated by NFA, CFTC, FCA, FSA, IIROC & CIMA
– Member of the National Futures Association (NFA# 0339826)
– Forex trading involves significant risk of loss and is not suitable for all investors.
– Authorized & Regulated by the FCA (# 113942)
– City Index is a trading name of GAIN Capital UK Limited.
– Head and Registered Office: Park House, 16 Finsbury Circus, London, EC2M 7EB.
– GAIN Capital UK Ltd is a company registered in England and Wales, number: 1761813. Authorised and Regulated by the Financial Conduct Authority. VAT number: 524837435
– 74% of clients lose money. Capital at risk.
– ASIC Regulated.
– City Index is a trading name of GAIN Capital Australia Pty Ltd. GAIN Capital Australia Pty Ltd, 100 Harris street, Pyrmont, NSW 2009 (ACN 141 774 727, AFSL 345646) is the CFD issuer and products are traded off exchange.
– All trading involves risk and losses can exceed deposits.
Regulated by the Monetary Authority of Singapore (MAS)
– City Index is a trading name of GAIN Capital Singapore Pte Ltd.
– GAIN Capital Singapore Pte Ltd 168 Robinson Road, Capital Tower #20-01, Singapore 068912. Tel: 6826 9988. Fax: 6826 9968.
– Company Registration # 200400922K.
– All trading involves risk and losses can exceed deposits.
Opening your Forex Broker Account
The final step in the process of getting involved in forex trading is to open your forex broker account. This means you will have selected your broker, and perhaps even tried their demo account, and you are now ready to open your own live trading account and start trading for real.
If that is the case, then the process is quite simple, though there are a few steps you should follow.
Prepare Your Documents
The process of opening a forex trading account can be pretty fast, though there are a couple of documents that you should be sure to have prepared to make the process as easy as possible. All major forex brokers will ask for the following:
- Proof of identification ( Your passport or driver’s license would be best for this)
- Proof of residence (A utility bill or bank statement within 3 months should be fine here)
With these documents, you typically upload them online through one of the broker’s trusted, secure services and they are verified within a few hours. Once you have completed verification, you will be completely free to trade on your new account.
Brokers to Avoid
These brokers should be avoided at all cost
Cyber Market Group
Fixed Star Investments Inc
Forex trading from an outside perspective may appear to be a complex, even daunting sector to start trading in. The reality is that, with some of the basic knowledge provided, and the help and educational infrastructure of a top forex broker, you can easily become involved.
Once you have made the first steps in forex trading, you can also be open to much of the great potential that a market with trillions of dollars in daily trading volume can bring. We also have a number of other trading articles that can really help you learn and grow on the next steps of your journey as a forex trader.
Forex Risk Disclaimer
“There is a very high degree of risk involved in trading securities. With respect to margin-based foreign exchange trading, off-exchange derivatives, and cryptocurrencies, there is considerable exposure to risk, including but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency or related instrument. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable, or that they will not result in losses.”
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Forex Market Boosted by Record US Jobs Data
- Payroll Data Smashes Expectation for June
- USD/JPY Increases on Optimism
- Asian Markets also Open Strong on Friday
US markets received an unexpected but welcome boost on Thursday. The release of nonfarm payroll numbers showed that the economy added a huge number of additional jobs beyond expectation. Unemployment numbers also fell. The positive ripple from this has been felt in the forex market around the world with early trading in Asia showing the Japanese Yen up slightly, and a positive start to the day in China, where PMIs came in strong, and other parts of Asia.
Largest Single Month Job Gain in US History
The numbers reported yesterday in terms of US nonfarm payrolls have easily eclipsed previous highs in terms of being the largest single month job gain the country has ever seen. Analysts had forecast a still impressive gain of 2.9 million jobs added, though the actual number came in much greater at 4.8m. This was quickly heralded by President Trump as a sign of the “economy roaring back”. Wall Street also reacted positively on the back of the news, with the Dow Jones rising more than 400 points.
The Labor Department also confirmed that unemployment had fallen more than expected, to a number of 11.1%. This is the lowest since the coronavirus pandemic started. Though these numbers may not paint an entirely accurate picture since they fail to capture the period when states started to rollback their reopening measures, they have still provided a timely economic boost.
JPY Moves Slightly Higher but Remains Hampered
The USD/JPY is one of the most traded markets in the world. Forex brokers though have noted that the market has been trading without much direction for some time. The pair was boosted slightly to a high of just below 108 on news that the US jobs data had come in much better than expected. This positive move was tempered with caution though amid the increasing concern with COVID-19 cases increasing across many American states.
As a well-known safe haven currency in times of difficulty itself, it may be some time before those forex trading the Yen feel like moving out of that safety zone. Later today, Japan will publish their own bank services PMIs from June. Should this number come in greater than expected, it may provoke an additional boost in the market.
Chinese and Other Asian Markets Positive
Yesterday’s positive news from the US has extended into the Asian trading session on Friday. Markets opened strongly across the Asia Pacific region. The Shanghai Composite index jumped almost 1.5% in early trading, with major indices in Japan, South Korea, and Australia, also displaying positive signs.
Markets were further buoyed by the release of Chinese PMI data from the services sector which showed a number of 58.4 for June. This would indicate the sector is growing at the fastest rate since 2010 after much of China returned to normal activity in the month of June.
What are Carry Trades in Forex?
As you continue increasing your knowledge about forex trading and the market in general, more and more new concepts and ideas will pop up. This includes a growing range of trading technique and strategies. One such trading strategy which has been around for a very long time in the industry, is the carry trade. Here we will take a closer look at exactly what a carry is in forex, and provide all the information you need to decide if carry trading is a good strategy for you as you move forward on your trading journey.
The Basics of How a Carry Trade Works
In its most simple form, a carry trade in forex, is borrowing one currency, and using it to buy another. For example, you may borrow (sell) $100,000 Australian Dollars, and use those funds to purchase the same amount of JPY. Placing a carry trade is one of the most popular trading strategies in the entire sector, and used by many traders to benefit from the position of currencies around the world.
So, what is the benefit in borrowing one currency and using it to buy another? This comes from the difference in interest rates between the two currencies. Let’s look again at our example in more detail.
Presuming the interest rate on the Australian Dollar was 4%, and the interest rate on the JPY was 0.1%, a carry trade would be where you buy the AUD/JPY market, as here, what you are effectively doing is selling (borrowing) Japanese Yen, to purchase Australian Dollars. In the most simple of ways, you will now have placed a carry trade. Here you will earn 4% interest on the Australian Dollars you are holding, while paying 0.1% interest on the Japanese Yen you have borrowed. This should leave you in a profitable position if the rate does not change, and is known as a positive carry trade at +3.9%.
Why is Carry Trading in Forex So Popular?
From an outside perspective, even looking at our hypothetical example where there is quite a gap between the interest rates, you may wonder why placing carry trades is so popular when the potential profit may seem quite small. There are two main elements at play in the forex market though which make this a very attractive type of trading strategy.
Currency Pairs: The fact that currencies are traded in pairs make a carry trade very accessible, and convenient for all traders. The difference in interest rates has never been so easy to take advantage of as it is in forex trading, where you can directly trade low and high interest currencies in pairs.
Leverage: The availability of extensive leverage in forex makes it the ideal place to carry trade. Many forex brokers can make leverage of up to 500:1 available on certain currency pairs. This basically means that even a relatively small deposit of $1,000 can open up huge buying power of $100,000 at 100:1 leverage, or more. Dealing with such large numbers, even low percentage profits are very meaningful.
Popular Forex Pairs to Carry Trade
Given the fundamentals of how a carry trade works, borrowing a low interest currency, to buy a high interest currency, then this is precisely what traders are on the lookout for in the forex market when it comes to placing a carry trade. There are a couple of currencies in particular that are most popular in this regard.
As a selling currency, the Japanese Yen is always a very popular choice. This is thanks to the historically very low cost of borrowing in Japan. The country has not had an interest rate of above 0.5% in more than 20-years. Another popular choice as a selling currency may be the Swiss Franc (CHF).
On the buying side, popular choices include both the Australian, and New Zealand Dollar as countries which typically hold slightly higher interest rates, yet are recognized as quite stable currencies.
Benefits of a Carry Trade
A carry trade in forex can be an excellent long-term investment strategy. You will have the potential to benefit from a carry trade even if the rates do not change at all thanks to the difference in interest rates. This makes it perfect for an investor who intends to hold the position for a long time.
Added to that, if the rate does change in your favor, then you can potentially have a sizable profit when added to the interest rate difference, and factoring in the leverage used. The fact that many brokers nowadays also cater for trading with very competitive fees and low spreads also plays to your advantage if placing a carry trade, and is something that many look out for.
Risks Involved in a Carry Trade
With every form of trading, there is always a certain element of risk. With a carry trade, though it is seen as a low-risk strategy, there are still a couple of things to be mindful of.
The market can still move against you. A change in the market can certainly negate any benefits you have gained from the positive interest rate difference. Particularly if you decide to trade in minor, or exotic currency pairs which are less common, you should note that these markets can be highly volatile, and subject to change in a very swift fashion. Some examples include trading with the MXN (Mexican Peso), or NGN (Nigerian Naira). Both may appear attractive for a carry trade, but can be subject to intense volatility. This risk can be amplified even further if you are trading with a lot of leverage.
You should also remember that, just because there may be a positive rate difference at the moment, the monetary policy in every country is subject to change at different times. The perfect example of this would be right now, in the midst of the coronavirus pandemic, many nations have moved to cut interest rates. This has the possibility to really change the dynamics of your carry trade.
Forex Market Majors Trading Lower Amid Coronavirus Concerns
- GBP/USD Struggling after GDP Dip
- EUR/USD Also Sluggish as States Halt Reopening
- Markets Await Key Testimonies After Monday Surge
Major currencies in the forex market are trading slightly lower today. Both the Euro, and Pound have dropped back against the Dollar as concerns over a spike in Coronavirus numbers persist. The final UK GDP figures for the first quarter released today, were also worse than expected. Meanwhile, US markets are looking quiet after a strong rally to open up the week on Monday. This may change as the day progresses and today’s testimony from the Fed Chairman is digested.
UK Suffers Biggest Quarterly GDP Decline Since 1979
Forex trading in the GBP/USD market today was struggling below the 1.23 mark for a number of reasons. One of the major points which seems to have rocked trader confidence in Sterling is the release of GDP figures for the first quarter today. These show a 2.2% drop in GDP, worse than had been expected.
This GDP drop is the largest the nation has seen in more than 40 years. It is compounded by the fact that a double digit drop is expected in the next quarter, and also the fact that a new spike in cases has led to local lockdown in at least one British city. British leader Boris Johnson is due to speak later today where he will introduce plans to inject more than £5 billion into infrastructure in a bid to bolster the economy.
Euro Also Drops Back as Virus Concerns Persist
The EUR/USD is looking to end the quarter in successful territory today although that has been threatened by negative pressure which has pushed the pair down at the beginning of the day. Forex brokers noted that traders are appearing to favor a move back toward the safety of the US Dollar.
This move has largely been led by the uncertainty of the US economic situation as several states have now moved to impose renewed restrictions, or halted their reopening plans as cases of COVID-19 continue to rise again in many areas. This has been the case in New York who have slowed reopening, as well as in Texas and Florida where renewed closures have been put in place on many bars and restaurants after cases in those states showed a heavy increase.
Market Opening Appears Quiet as Traders Await Testimony
Today’s market opening on Wall Street would appear to have hit a lull following yesterday’s great surge to begin the week. The Dow Jones rose more than 500 points yesterday to get the week off to a very positive start. The picture today, pre-market numbers have indicated, is much less active. Many could be awaiting the remarks of Federal Reserve Chairman Jerome Powell, who will address the House Financial Services Committee later today.
These remarks are expected to raise more questions than answers though, with Powell set to comment that the path forward remains very uncertain, and reliant on successfully containing the virus.