Commonly accepted as the largest financial market in the world, it’s for good reason that the extremely lucrative forex market appeals to so many across the globe. What’s more, due to its online appeal and flexible market hours (24 hours a day, 5 days a week), no longer is this incredibly accessible market exclusively traded by banks and professionals alone, but instead can be taken up by almost anyone on either a part-time or full-time basis.
So, whether you’re a beginner looking to tackle the tricks of the trade (literally!) or would regard yourself an industry veteran looking to brush up on the basics, this essential guide will cover the ins and outs of this especially liquid market, answering the question we all want the answer to – what is forex trading?
How does forex trading work?
Simply put, forex – otherwise known as foreign exchange, FX and currency trading – is the global financial market where all global currencies are exchanged. This is done by buyers and sellers trading currency between one another at a specified price. As aforementioned, forex trading is the world’s most liquid financial market, trading roughly $5.1 trillion per day in 2016 – as such, this market is incredibly desirable to both financial professionals and those with little to no finance knowledge alike. So, how does it actually work?
Broken down, those trading foreign currency are able to make a profit (also known as a ‘win’) or a loss through the varying exchange rates when buying and selling global currencies. So, while changing your ZAR to Euros for your summer travels on the Italian coastline is intended for a purely practical purpose, those trading on the forex market do so with the intention of profiting from the improved rate of exchange of the currency they buy when it comes to selling it.
This is done by trading what is typically known as a ‘pair’ – for example, the US dollar and the Euro (EUR/USD). A trader will enter a trade upon predicting that one currency will either weaken or strengthen against the other, then buying or selling this currency as a result, with the hopes of profiting from the fluctuation in price determined by the exchange rate. Let’s look at an example…
On Monday, the EUR/USD pair is valued at 1.1200 (whereby €1 equals $1.12 and the EUR is the base currency, with the USD being the quote currency). As a result, a trader could buy this pairing with the view to sell it at a higher valuation when the EUR strengthens. Now, let’s say that on Wednesday the EUR/USD pair is valued at 1.1300 – this would mean that for every EUR the trader bought, they have earned $0.01, making a ‘win’.
How is money made on the forex market?
Now, having laid down the basics of what forex trading is and understanding that profit is made from fluctuations in currency exchange rates, we’re delving a little deeper into how money is actually made on this lucrative (although highly risky) financial market.
What is equity in forex?
Arguably the most important aspect of forex trading, equity is the real-time total amount held within a trader’s account, including any floating profits or losses associated with a traders current open positions – as such, equity constantly fluctuates.
What is leverage in forex?
In forex, leverage allows a trader to be exposed to large sums (otherwise known as ‘lots’) of currency without needing to pay for this total amount upfront. Rather, he or she can put down a smaller deposit (usually in ‘pips’) which is also known as a margin. This means that, when a leveraged position closes, the trader’s profit or loss is dependant on the full size of the trade. While, ultimately, this maximises profits, the trader is also at extreme risk of their losses being amplified due to losses exceeding their margin.
What is margin in forex?
A crucial aspect of leverage trading, a margin in forex is the deposit a trader puts down to open a leveraged position – the requirement of which will change depending on the size of your trader and your broker.
Typically, a margin is depicted in a percentage of the full position. For example, a trade on the pair GBP/USD might only require 2.22% of the total value to be paid – as such, a trader would despite £2,200 instead of the full position value of £100,000.
What is a pip in forex?
As aforementioned, a pip is the unit that is used to measure a forex pair’s movement. A pip tends to be equal to a one-digit movement of the fourth decimal point in a currency. So, for example, if the EUR/USD pair moves from $1.76141 to $1.76151 then it has moved one pip.
What is spread in forex?
In the world of forex trading, a spread refers to the difference in the quoted buying and selling price of a currency pair. In FX trading, traders have the option to either open a short or long position – the latter entailing trading at the selling price (slightly below the market price), while the former requires traders to trade at the buying price (of which is marginally above the market price).
This decision naturally depends on your own strategic decisions. So, as a trader, if you predict your base currency to weaken, then you’d typically opt for a short position. Comparatively, if you suspect it will get stronger against your quote currency, you’d go long.
What times does the forex market open in South Africa?
Known as the globally interconnected financial market, the forex market incorporates the world’s four major time zones, those being; London, New York, Sydney and Tokyo. As a result, it’s open 24 hours a day, 5 days a week. Below, you’ll find the four major forex market trading sessions, according to South African time scales:
New York opens at 14:00 PM and closes at 22:00 PM the same day (SAST)
Tokyo opens at 01:00 AM and closes at 09:00 AM the next day (SAST)
Sydney opens at 11:00 AM and closes at 07:00 AM the next day (SAST)
London opens at 91:00 AM and closes at 17:00 PM the same day (SAST)
Typically, the best time to trade is between 10:00 AM and 16:00 PM SAST (South Africa Standard Time) as this way, you’re able to catch up with the latest economic news from both London and New York, allowing you to make trades based on the impact of such news.
What is a forex broker?
Otherwise referred to as retail forex brokers or currency trading brokers, forex brokers are trading intermediaries between the trader and the interbank system. They provide traders with access to FX trading platforms and, in return for executing traders’ positions, they will charge a commission per spread.
After reading this, we hope that instead of looking for answers for ‘what is forex trading?’, you want to start learning how to get started and build a forex strategy. If that’s the case, and you think you’re ready for the next step in your forex journey, join our industry experts at one of our free workshops, where they’re waiting fully equipped to answer your next set of questions. Additionally, benefit yourself further by reading up on our forex industry glossary, filled with useful definitions sure to help you understand the competitive forex sphere.