Forex is the term used to describe the foreign exchange market or the currency market or simply FX market. It is the largest market in the world. In this market any person, firm or country can sell one currency or buy another.
The foreign exchange market is a global decentralized marketplace where different currencies are exchanged for each other. Unlike other markets, there is no centralized depository or exchange where transactions are conducted. Instead, these transactions are conducted by market participants (investors) worldwide. In the Forex market the exchange rate between two currencies constantly changes. This provides investors with the opportunity to profit from these price fluctuations.
When to Trade?
The Forex market is open 24 hours a day, 5 days a week. Therefore it provides an excellent opportunity for traders to trade at any time of the day or night. The right time for trading is one of the most important points in becoming a profitable Forex trader. The Question is WHEN? And the ANSWER is – it depends on traders’ style and trading strategy. For some the best time to trade is when the market has the most activity and subsequently has the biggest traded volumes. For other traders it may be more suitable to find and follow an established trend.
Major Markets and Opening Times
Sydney Session 10:00 PM - 7:00 AM (GMT). Other countries which are active during this session are China, Russia, New Zealand and Australia.
London Session 8:00 AM - 5:00 PM (GMT). During the time the London Session is open other European markets trade as well like Germany and France.
New York Session 1:00 PM - 10:00 PM (GMT). Other US Stock exchanges trade the same time with New York Stock Exchange and it elapses with the time the European Stock Markets are open.
Glossary of common terms
There are some definitions that can help you with understanding the basics in Forex terminology.
Leverage - investors use leverage provided to them by their broker to significantly increase the returns that can be achieved on an investment (but in the same way it can also significantly increase the losses incurred). Leverage in the Forex market is one of the highest that investors can obtain. For example: if a trader uses leverage 1:200, it means that his/her buying power is multiplied 200 times. With 500 currency units a trader can buy or sell 100,000 (200*500) currency units or 1 Lot. Currency price movements are usually very small in percentage terms during intraday trading which compensates for the increased risk leverage provides. However, at times these movements can be very large and can result in the loss of more than the amount invested in a trade.
Fundamental Analysis - it is a method of market analysis which involves evaluating the economic and political situations of countries. It gives an insight into how big economic or political events influence the currency market and the direction it takes.
Technical Analysis - technical analysis is a methodology for forecasting price movements and future market trends by studying charts, prices and volumes of past market actions.
Support and Resistance - support refers to a price level below which the price is not expected to slip and is formulated after a bearish movement has taken place. Resistance refers to a price level that may prevent the price to move onwards and is formulated after a bullish movement has taken place.
Bull Market - is characterized by optimism, positive outlook about the economy, investor confidence and expectations that the market will increase as prices for certain assets rise.
Bear Market - characterized by pessimism, negative outlook about the economy, investor uncertainty and expectations that the market will decrease as prices for certain assets fall.
Lot - volume unit of the instrument used to conduct a transaction, it is equal to 100 000 base currency units.
Long position - a trader goes long by buying an asset when he expects the price of the asset to increase. In doing so, he believes he will sell his position at a higher price later. A trader with a long position has a bullish sentiment.
Short position - a trader goes short by selling an asset when he expects the price of the asset to decrease. Doing so, he believes he will buy his position at a lower price later. A trader with a short position has a bearish sentiment.
Bid - the price a trader can sell a particular currency pair. The bid price is always lower than the ask price.
Ask - the price at which a trader can buy a particular financial asset, such as currency pairs.
Spread - is the difference between the bid and ask price.
Pip - means “percentage in point”. For most pairs, it is the fourth decimal point, so that a pip is 0.0001 of a cent.
Roll over - fee/income for keeping positions open overnight, which is depending on the interest rate difference of the two currencies. Long/short positions determine your charge/income.
Margin (requirement) - collateral needed to open a deal.
Margin call - notification by the broker that the trader should add additional funds to sustain the margin (collateral).
Volatility - in forex, it is related to price fluctuations - when the market is volatile, we mean that there may be sudden and significant movements of prices in either direction.
ECB (European Central Bank) - the Central Bank of European Union.
Fed (Federal Reserve Bank) - the Central Bank of US.
FOMC (Federal Open Market Committee) - the Committee that formulates monetary policy in the US. Its meetings and decisions are of major importance for the Forex market, since the impact on the USD is significant.
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