- A forex trade is the exchange of one currency for another
- To prepare for trading, you need to find a suitable broker and choose your forex pairings carefully
Ready to dive into currency trading? This article is designed to help you understand forex basics and make sure you’re prepared for your first trade!
Understanding Forex Pricing
To understand how forex trades work, it is important to bear in mind the underlying exchanges that are taking place. Basically, each forex trade order centres on a currency pair, in which one currency is bought for another. To be precise, the first currency is always the base currency, whilst the second is known as the counter or quote currency. Moreover, the order is set for each pairing. That means you’ll never see EUR/USD written in reverse, thanks to the way in which prices are quoted.
So for each forex pair quote, you find two prices: the bid (buy) and ask (sell) rates of the pair. The difference between these prices is called the spread, and the more liquid the pairing, the narrower the spread. In the example below, the pair in question is EUR/USD, or Euro/US Dollar, with Euro as the base currency.
Forex prices are generally quoted to four decimal places (or two, in the case of JPY). The last decimal place is referred to as a pip, and this unit is frequently used to measure spreads or price movements.
What’s In A Forex Trade?
At any given time, you have two options to trade on your pair: to buy, or to sell. Whether you go long (buy) or short (sell) will depend on the relative strengths of the currencies and where you anticipate the markets will move. But in any case, you can potentially draw profit from upward or downward price movement:
- If you believe EUR will rise vs. USD, you can go long to buy EUR/USD.
- If you believe USD will rise vs. EUR, you can go short and sell EUR/USD.
Types Of Forex Pairings
Traders looking to buy stocks will rigorously research their prospective options. Before committing capital against a specific company, responsible investors will analyse performance reports, earnings, and forecasts in order to gauge their market potential. In the same way, forex traders should not choose their forex pairs lightly. Each currency depends upon a unique cocktail of factors, so each currency pair represents an even more complex intercourse of different economic issues.
Overall, forex pairs fall into the following categories:
- Major pairs – the seven most prominent currency pairings are the USD crosses: GBP/USD, EUR/USD, USD/JPY, USD/CAD, USD/CHF, AUD/USD, and NZD/USD. Thanks to the dominance of USD, they tend to enjoy high liquidity and low volatility. These pairs constitute the largest share of trades in the forex market.
- Minor pairs – sometimes known as crosses, these are pairings that do not include USD. Examples of minors include EUR/GBP, GBP/JPY, AUD/NZD, or CAD/CHF; they are typically slightly less liquid but more volatile than majors, producing more opportunities for profit or loss.
- Exotic pairs – these comprise pairings with emerging-market currencies, such as EUR/TRY, USD/HKD, or GBP/ZAR. Liquidity tends to be lower and volatility higher, making sudden and dramatic price changes even more likely.
Over time, traders will utilize fundamental analysis to recognise the economic events and geopolitical developments most likely to affect their pairings. However, to start with, it is advisable for forex beginners to focus on one pair until they’re comfortable with its underlying fundamentals. Choosing lower-volatility pairings helps to reduce risk!
Forex Trading Strategies
Thanks to depth and breadth of the forex markets, it accommodates a vast range of trading styles and strategies. Beyond the choice of assets, there is no single ‘forex trading strategy’ that unites all currency traders. Instead, each individual can (and certainly should) find a system that suits their resources and goals.
Some common forex trading strategies include:
- Scalping – traders use fast, short-term positions lasting minutes or even seconds to capitalize on immediate price movements. Trades yield small profits on minimal price movements, but in high frequency.
- Swing trading – traders depend on technical analysis to identify likely turning points or reversals and place long or short positions as accordingly.
- Trend trading – traders utilize technical and fundamental analysis to identify and gauge the momentum of price trends upwards or downwards.
- Position trading – traders depend on fundamental analysis to decipher longer-term price trends.
- Carry trading – an advanced trading strategy whereby traders profit from the interest rate differential between two currencies.
Your choice of strategy will depend on your trading goals and the amount of time, research, and capital you are able to invest. Further, it will also need to fit your choice of assets, because as we’ve seen above, not all currency pairs act the same. Pairs of high volatility will require regular monitoring and careful risk management, whilst pairs of lower volatility will not be ideal for scalping.
Ready to start? You’ll need access to the markets, and for that, you’ll need to find a suitable broker.
How Do I Choose a Forex Broker?
As your first point of contact with the markets, your choice of broker can make or break your trading experience. Be sure to take into account the following when checking your options:
- Liquidity and brokerage – does the broker offer top-tier liquidity providers and market connectivity? Generally, ECN brokerages offer ideal trading conditions for retail traders through fast order execution and the elimination of intermediary processing.
- Customer support – is the brokerage responsive to customers, and does it offer comprehensive support for new users?
- Asset listing – does the brokerage offer a decent range of tradeable products, or is it specific to certain markets? This is especially important for traders looking to explore assets outside of forex. Multi-asset brokers allow you to consolidate your trading portfolio in one place.
- Technical capabilities – does the broker integrate industry-approved trading technology? As well as being technically proficient, you want your trading platform to be easy to use and compatible with your preferred devices.
- Fees and commissions – is the broker entirely transparent in the costs of trading? Different brokers implement different fee structures, so ensure you know what to expect once you sign up.
- Account types – does the broker offer an account suited to your trading interests? Sometimes, brokers will offer multiple account types ranging in lot size, commission rates, spreads, minimum deposits, and leverage.
- Security – are you happy for the broker to handle your money and your details? Look for brokers who segregate customer and company funds so you know your capital is safe. In addition, reputable brokers will employ technical security measures to encrypt your details and safeguard your privacy.
- Education – does the broker offer comprehensive support beyond its brokerage services? If you’re a forex beginner, it’s useful to have access to learning resources and professional advice.
Start Trading Forex With ThorFX
Overall, you need look no further than ThorFX if you’re ready to start your forex journey! ThorFX is an ECN brokerage that offers premium market execution and broad access to the markets. Created with our trading community in mind, the brokerage offers multiple account types alongside Affiliate opportunities, regular promotions and competitions to help individuals realize their true potential. We offer 24/7 expert support and sophisticated account security for complete peace of mind. And it’s not just about the markets: we’re passionate about seeing our traders grow in confidence and prowess, so we’ve built the Thor Academy as an all-inclusive educational resource centre to nurture their epic journey.
Your forex story begins here – trade with Thor on your side and become a hero of the markets!
What Is Involved In A Forex Trade?
Each forex trade order centres on a currency pair, in which one currency is bought for another. To be precise, the first currency is always the base currency, whilst the second is known as the counter or quote currency. Moreover, the order is set for each pairing. For each forex pair quote, you will find two prices: these are bid (buy) and ask (sell) rates of the pair.
What Are The Different Types Of Forex Pairings?
Major pairs are the seven most prominent currency pairings are the USD crosses: GBP/USD, EUR/USD, USD/JPY, USD/CAD, USD/CHF, AUD/USD, and NZD/USD. Minor pairs (sometimes known as crosses) are pairings that do not include USD but other major currencies. Finally, exotic pairs contain emerging-market currencies.
How Do I Choose A Forex Broker?
It’s important to assess your options carefully before settling on a particular forex broker. Things you should assess include the liquidity of brokerage services; level of customer support; asset listings; technical capabilities; fees and commissions; account types; security; and educational resources.