Forex or foreign currency exchange market, which is called Forex or FX for short, is derived from the term Foreign Exchange Market. Unlike the stock market, Forex does not have a centralized physical market, but the main centers of foreign exchange trading in the world are England, America and Japan.
In this article we will explore together:
- What is the forex market?
- What are the working hours of the forex market?
- How to buy and sell shares in the forex market? (Trading in the forex market)
- The first step to enter the forex market: choosing the right broker
- Different types of brokers in forex
- The impact of daily news on forex
- What are the trading costs in Forex?
- Different types of currency pairs in the forex market
- Practice account (demo)
- Conditional Orders (PO) in Forex
- Leverage in Forex
- Determining the volume of transactions in forex
- Forex market analysis methods
What is the forex market?
The global currency market was formed in a coherent manner in 1971 and its growth and development process began in 1998 due to the advancement of technology.
Two major historical events played an important role in the creation and expansion of the forex market. Gold standard and Bretton Woods system.
Trading in this market means converting one currency into another currency at a certain rate.
The transaction rate is determined in a free system based on supply and demand among traders around the world. The rate of foreign exchange transactions in the forex market is a reference for conducting international transactions in all relevant economic fields.
The main actors of the foreign exchange market are:
Central banks, large financial institutions, commercial banks, investment companies, stock exchanges and real speculators.
What are the working hours of the forex market?
According to the international working calendar, the forex market is a 24-hour working day from Sunday to Friday.
Based on the major currency trading centers and different time zones, there are 5 main trading sessions in this market, which are Sydney, Japan, Frankfurt, London and New York respectively.
Each of these trading sessions lasts an average of 9 hours, and usually the main activity of East Asian and Eurasian traders is in the Japanese market, Europeans in the London and Frankfurt markets, and Americans in the New York market.
Of course, it is important to mention that there are no restrictions on trading at any hour of the day and night in this market, and any person from any part of the world can trade in the trading session of their choice.
How to buy and sell shares in the forex market? (Trading in the forex market)
Similar to the stock market, transactions are carried out through brokerage firms that are connected to each other through an interbank channel and act as intermediaries between buyers and sellers. Brokerage companies conducting foreign exchange transactions operate under the supervision of regulatory institutions.
Due to the decentralized nature of the forex market, these organizations try to prevent various problems and violations by them by establishing rules and following up the activities of brokers. It should be noted that these institutions themselves are under the supervision of the economic system of the countries of origin.
Today, many regulatory organizations are active in all parts of the world, the most important of which are; NFA (USA), FCA (UK), FINMA (Switzerland), BaFin (Germany), Mifid (EU), ASIC (Australia), FMA (New Zealand) and CySEC (Cyprus).
The first step to enter the forex market: choosing the right broker
Before starting the transaction in the forex market, you should have a brief familiarity with the types of brokerage companies and their differences in order to choose the best option.
Brokerages are divided into 4 main categories based on how orders are implemented and their credit levels:
Different types of brokers in forex
MM (Market Maker)
These companies are not connected to the central core of transactions and the buying and selling prices are determined based on the market margin and by the broker himself.
In such accounts, the commission amount is fixed and your trading party is your broker, in other words, you do not have access to real market prices.
NDD (No Dealing Desk) main market
In this type of trading account, you connect to a global system of supply and demand, where fees are usually not fixed. Such accounts are divided into two categories: STP and ECN.
Direct processing of STP (Straight Through Processing) orders
It is a mode where customer purchase and sale orders are entered exactly based on the details and are sent to the central system without any waste of time and are executed based on global market prices.
Optimum direct processing of ECN (Electronic Communications Network) orders
The broker receives all trading offers according to the STP procedure. But the difference is that it offers the customer the best price for placing an order based on the demand in the market. In this case, the fee is not fixed and you will have access to the depth of global market transactions.
Usually, the most reliable brokerage companies that are approved by the best and largest regulatory bodies are in this category.
The impact of daily news on forex
Considering the international and strategic nature of the forex market, news and important events of major economic powers during the day have a direct and significant impact on the fluctuations of this market.
For this reason, in recent years, news sites dedicated to global currency market events such as Forex factory, Dailyfx, Investing, etc., have been created, and the economic news calendar in them informs traders of all the important upcoming events.
Today, due to the expansion of software and financial facilities of trading platforms, Forex market brokers, in addition to currency pairs, provide their customers with the possibility of trading precious metals, oil, strategic commodities, shares of international prestigious stock exchanges, and recently, digital currency as well.
What are the trading costs in Forex?
Forex trading costs are lower than parallel markets. In general, your main cost in trading currency pairs is the commission of the difference between the buying and selling rates or the spread.
In addition to this, there is another concept called commission, based on the symbol, account liquidity and volume of transactions, a small amount will be deducted from your account.
Swap also refers to the amount that will be credited to your account or deducted from your account if the transaction remains open the next day based on the difference in the interest rate of the currency or the base asset.
In general, trading costs in the forex market are completely different between different brokers, and these companies offer various discount arrangements in all the mentioned cases in order to retain and attract more customers.
Currently, various analytical and trading platforms are used by global currency market participants, the most famous of which is made by a Russian company called Meta Quotes.
This software with the brand name Meta trader is available for free in versions 4 and 5 for all kinds of operating systems including Windows, Mac, Android and IOS. Forex trading is based on symbols in currency pairs.
Different types of currency pairs in the forex market
Currency pairs are classified into three main categories:
Major currency pairs
More than 70% of market transactions are related to these currency pairs. Most of the time, they have low volatility, rational behavior, low fees and high liquidity. The currencies in this category are related to the leading and powerful economies of the world.
Pair of minor currencies or crosses (Minors)
Currency pairs without dollars are called cross or sub. In terms of transaction value and popularity, it is ranked lower than the main symbols, and the fees are usually higher. The price stability of these currency pairs is less and their liquidity is almost similar to the first category.
Unknown or exotic currency pairs
Currency pairs that include a main currency along with the currency of one of the emerging economies are called exotic. These symbols account for the lowest amount of forex transactions.
Along with very high fees, their extreme and unreasonable price fluctuations have made them not very popular among traders.
Practice account (demo)
Due to the high risk of operating in the global currency market, today all brokerages offer a practice account (demo) for new traders so that these people can trade without capital and in completely real market conditions and gain experience.
The main purpose of practice accounts is to prevent the destruction of the capital of non-professionals in this market. According to the advice of many financial experts and trading coaches, when you can achieve continuous profit in the practice account, open a real trading account.
Nowadays, due to the high desire of brokerage companies to attract more customers, it is possible to operate with real money in this market with amounts such as 10 to 100 dollars.
But it should be noted that trading with very little capital for non-professional traders, due to the impossibility of managing capital and position (trading position), can be quickly destructive.
Conditional Orders (PO) in Forex
Forex trading platforms, like the stock market, have the ability to specify the type of order in the order registration section, which is based on two types of current market price (Market Execution) and conditional orders (Pending Orders).
Using market spot price (ME) orders, the trade is executed based on the current price at the time the buy or sell button is pressed.
Conditional commands are divided into 4 categories, which are:
- Buy stop: setting a purchase order higher than the current market price
- Sell stop: setting a sell order lower than the current market price
- Buy limit: setting a purchase order lower than the current market price
- Sell limit: setting a sell order higher than the current market price
These orders are activated at the price levels set by the trader. Determining the volume of the transaction is required before the final confirmation, but the values of profit limit and loss limit can be entered at any time.
The expiration date of the conditional orders must be determined before entering into the transaction.
Trading in the forex market is two-way. This means that in addition to buying, there is also the possibility of selling transactions. In fact, when you expect prices to drop, you should take advantage of this opportunity.
In the selling position, based on the balance of the account and taking into account the volume of the transaction and the leverage factor, borrow to sell, and if the prices decrease after entering the transaction, you can exit the transaction with a profit.
But if the market has an upward trend, it will be to the detriment of the seller, and finally, the transaction will be closed at the predetermined stop loss point or as a Margin Call (automatic closing of transactions by the broker due to the end of the account balance).
Leverage in Forex
One of the most attractive features of the forex market for traders is the leverage factor. When you don’t have enough money to make a transaction, you use the leverage factor.
To put it simply, this leverage helps you to trade with an amount multiple times your account balance without any interest or bank guarantee.
The value of the leverage factor depends on the brokerage rules and the trader’s request.
For example, with a capital of 1000 dollars (guaranteed amount) and a leverage factor of 1:100, you will be able to trade a position of 100,000 dollars. When the loss of your trading position exceeds the initial margin, the trade will be closed automatically.
Determining the volume of transactions in forex
According to the latest statistics, the volume of transactions in this market is more than 5 trillion dollars per day, which is considered the largest financial market in the world. In the currency market, the volume of transactions is determined based on a unit called Lot.
There are different types of this volume unit, each code of which includes different amounts of the base currency:
Each Standard Lot is equal to 100,000 units of base currency, each Mini Lot is equal to 10,000 units, each Micro Lot is equal to 1,000 units and each Nano Lot is equal to 100 units.
In the order registration system, the minimum approved volume is 0.01 lot, but some brokerage companies sometimes offer the possibility of trading with lower volumes such as 0.001.
The unit of forex market volatility is based on pip and point. Each point is one tenth of a pip. In general, currency pairs without Japanese yen, their prices are calculated with 4 to 5 decimal digits, and the fourth digit after the decimal is called a pip.
But the procedure governing symbols based on the Japanese yen is different, in these currency pairs, the price is calculated with 2 to 3 digits after the decimal point, and the second digit is a pip.
Note that in some pip brokerage companies, the fifth and third digits are after the decimal. One of the most important issues for traders in the forex market is to calculate the dollar value of the pip so that they can calculate their overall profit and loss based on it.
Pip calculations are different for each type of currency pairs, which are detailed in the table.
| The type of currency pair | value of each pip in dollars |
|---|---|
| base currency dollar | number of lot units * (current market price / decimal value of each pip) |
| secondary currency dollar | current market price * number of lot units * (current market price / decimal value of each pip) |
| In Japanese yen | number of lot units * (current market price / value of decimal place of each pip) |
As it is clear from the table above, the dollar value of each pip is not a fixed figure, because it is determined based on the current market price.
Keep in mind that the above formulas are based on the usual rules in the market and it is possible that a brokerage company follows similar rules.
Now that we have learned how to calculate the dollar value of each pip, we can easily determine the amount of profit and loss of each transaction.
Consider this example:
Consider a long position in the GBP/USD currency pair for the size of a standard lot with the following details.
Entry price (plus fees): 1.2768 + 0.0002 = 1.2770
Exit price: 1.2790
Dollar value of each pip: $10
Amount of profit based on pip: 20 Pip
Amount of profit based on dollars: $200 = 10×20
At present, almost all brokerage companies and sites that provide trading tools such as Myfxbook provide traders with forex market trading calculators on the web or in the form of software for free, and practically there is no longer a need for market operators to provide these items in person and to calculate manually.
After understanding the fundamental concepts of the global currency market, it is necessary to familiarize yourself with the conventional analytical methods in it.
Forex market analysis methods
Like the stock market, there are several major analytical approaches in forex. We will briefly review them below.
Technical analysis
Technical analysts focus on what is happening on the price charts. Today, due to the progress of this method and its countless fans, various technical styles such as classical analysis, harmonic patterns, Elliott waves, price action, etc. have emerged, each of which claims the highest possible accuracy.
Chart analysis has the same framework in all financial markets, but features such as market liquidity affect the way of analysis and its efficiency.
Therefore, those who have learned the technical method correctly in the forex training course and have enough experience in trading, can work in any of the financial markets such as the stock market, forex, etc.
Fundamental analysis
In the stock market, fundamental analysis means examining the balance sheets and financial documents of companies, industries and the country’s economy as a whole. But the main philosophy of the forex market is the exchange of currency pairs, so for a fundamental analysis in this market, you must examine the conditions and economic, political and sometimes social factors of the countries and perhaps at the world level.
For example, a decrease in the unemployment rate is a positive economic event that strengthens the country’s currency if other influencing factors are stable. In such cases, fundamental analysts buy currency pairs in which the currency of the respective country is the base currency.
Technical-Fundamental
In recent years, in order to reduce the risk of analysis, some experts examine both the technical and fundamental dimensions of the market.
According to them, in this method, by examining all aspects, the error of predictions is reduced to a great extent.
Suppose the economic crisis covers the European Union, in this case, from the point of view of fundamental analysis, currency pairs in which the euro is the main currency will suffer a downward trend. Then, based on the technical method, in times of correction and in the direction of the decreasing trend, the opportunity of selling transactions should be used.