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Note: Non-Members are strongly recommended to sign up for the online free course to have a better understanding of the setups as discussed below:
What Is Forex Trading?
What is Forex Trading
While many of you are familiar with stock trading, some of you may be wondering what is forex trading? In this article, I will briefly explain what it is and you may explore further whether the forex market is suitable for you…
1.How forex trading works?
If you have traveled abroad, then it is likely that you have made a forex trade. When you go for a holiday or business trip, you’ll need to go to the money changer to exchange your home currency for the currency of the country where you are going to.
Suppose you intend to go to US at the end of the year and want to buy USD10,000 for the trip at the rate of 1.3576. To buy USD10,000, you’ll need SGD 13,576.
Now, suppose the trip is cancelled and you’ll need to exchange the USD back to SGD. You go back to the money changer and the quote now is USD / SGD = 1.4258
The new exchange rate now means that every USD 1 will buy you 1.4258 SGD. The exchange rate increased from 1.3576 to 1.4258 (up 0.0682) means you’ll get SGD 14,258. Although the trip is cancelled, you got a 5% return* from this forex transaction.
*Note: all figures are for illustration purpose and does not take into consideration the fee that you’ll need to pay for the transaction.
2.How is currency trading quoted in Forex Trading ?
As forex trading always involve buying one currency and selling another, it is quoted in pair. For example, in the currency pair USD/SGD , USD is the base currency and SGD is the quote currency:
|Base Currency||/||Quote Currency|
If USD/SGD is trading at 1.3576 dollars, then 1 USD is worth 1.3576 SGD.
3.What makes the Forex Market moves?
What factors cause the 5% move in the above USD/SGD example?
There are many factors that cause the price movements of a country’s currency against other currencies. . However, they are primary driven by the forces of supply and demand which react to any of the below main factors:
2. Interest Rate
3. Economic Data
4. Political Stability
4.What are the currency pairs to trade in Forex Trading?
The most traded pairs of currencies in the world are called the Majors. They represent some of the world’s largest economies and are traded in high volume. The bid and offer spreads are usually lower in such high volume forex trades:
5.Leverage and Risk of Forex Trading
In forex trading, the price movement is measured in pips. If the EURUSD moves from 1.1200 to 1.1300, it is a 100 pips move and is equivalent to a 1 cent move of the US dollar. A pip is the smallest change in the forex market exchange. In the above EURUSD example , a 1 pip change is 1/100 fraction of a US$0.01 or US$0.0001.
In order to allow market players to make a sizable profit from a small price movement in the currency pair, leveraging of trading account is allowed. With leveraging, it allows you to trade up to $100,000 with just $1,000 in your trading account, i.e 100 : 1 . However, leveraging can be a double edge sword. Just like it can magnify your profit with a small price movement, it can also increase your loss substantially.
The greater the leverage you apply in your trading account, the greater the risk you take. So be careful with your risk management!
6. Why trade Forex?
Whether to trade stock or forex on leverage depends on which asset you are interested in trading and your financial goals. While stock trading has it own benefits, below are some reasons why some traders prefer to trade forex too.
i. Go Long or Go Short
In forex market, beside going long to buy a currency pair, you can go short to sell it. For example, If EURUSD is trading at 1.1210, then 1 Euro is worth 1.1210 US dollars. If you think the Euro is going to increase against the US dollars, you would buy the pair (go long). If you think the Euro will decrease in value against the US dollars, you would sell the pair (go short). As long as your prediction is right, it is possible to profit whichever way the market moves.
ii. Forex Trading Hours
The foreign exchange market is open for trading 24 hours a day, five days a week. It is a global market and you can plan your trading hours with your free time throughout the day or night.
iii. High Liquidity
With over $5 trillion dollars transactions each day by traders, companies and banks, the forex market is the most liquid market in the world. The high liquidity means trades can be done easily and quickly at lower cost. Consequently, these create many opportunities for traders to trade on the price movements.
7. Trading Platform : Phillip MT5
If you are new to forex trading and is looking for a platform to trade, The Phillip MetaTrader 5 (Phillip MT5) is the latest platform available for trading forex from Phillip Futures. You may read more details on the Phillip MT5.
If you are interested to open a free demo account to try out the platform, you may register and indicate under Phillip Future A/c No (if any) : Hector VXL so that I can be in charge of your trading account with Phillip Futures.
If you want to learn price action trading on forex or stocks, sign up for our free online course for members.
One Good Trade