What is Forex?  

Beginners guide and explanation of how forex
trading works

 

Forex is simply explained as the buying and selling of currencies. Forex is coined out of foreign and exchange. The forex market is the platform where we trade ( buy and sell) currencies. The most-traded currencies are USD, EUR, JPY, GBP, AUD, CAD and CHF.

The forex market is open for twenty hours a day, five days a week and it has no headquarters. It is an electronic platform that comprises a network of banks.

 

different currencies

Forex trading and its benefits 
In forex, the currencies are written in pairs, for instance, EURUSD. The first currency ( EUR) in the currency pair is called the “Base Currency” while the second currency (USD) in the currency pair is called the “Quote Currency”. Basically, in EURUSD, we are buying the Base Currency (EUR) and selling the Quote Currency (USD) at the same time. 

Biginners guide 

                EURUSD= 1.04

From the pair above, you are buying 1 unit of EUR for $1.04


Forex trading risks 
Forex is classified as an investment with high risk and that is why you need to have a robust risk management skill. It is advisable not to trade more than 2% of your account. This strategy would make you keep coming back to trade even if you lose a trade, because you will still have enough money left in your account.

Do not over leverage. Using high leverage will increase the risk in forex trading. Do not get enticed with the money a broker will lend you. It could be a trap! 

You should also understand that no strategy is 100% accurate. If you keep tweaking or changing your strategy, you may likely lose a trade on the overall because you will get stuck in a cycle of doom. What is the meaning of a cycle of doom? When you win a position and subsequently lose the next trade, you will try to adjust or tweak the strategy, and you keep making profit again. Subsequently, you start losing again. This would make you tweak the trading strategy again. When keep doing this, you will get stuck in a cycle of doom. This will definitely make you go back to the starting point again and again.


The simple forex trading strategies 
How do we know when to buy or sell the currency pair? 

BUY  when you know that the Base Currency will be stronger than the Quote Currency.

SELL when you know that the Base Currency will be weaker than the Quote Currency. 

You will buy the EURUSD pair if you have predicted that the EUR will gain value relative to the USD. You will sell when you know that the USD will gain value relative to the EUR


What is Going Long, Going Short, Bullish and Bearish
Going Long: This is when a forex trader buys the currency pair in the expectation that the base currency will gain strength relative to the quote currency.

Going Short: This is when a forex trader sells the currency pair in expectation that the base currency will be weaker relative to the quote currency.

Bullish: This is when the currency pair goes up.

Bearish: This is when the currency pair goes down.

 

Bid, Ask and Spread
Bid: This is the price that the broker would buy the base currency in exchange for the quote currency. It is the price that the trader would sell the currency pair to the market. The broker would buy from the trader at the bid price.


Ask price: This is the price that the broker would sell the base currency in exchange for the quote currency. This is the price the forex trader would buy from the market.The bid price is always lower than the ask price.

Spread: This is the difference between the Ask price and the Bid price.

Let us consider the following example.
EURUSD
Bid= 1.34(56). Ask: 1.34(58)

In this case, the difference between the Ask and the Bid price is 2. This means that the spread is 2 pips.

 

Fundamental Analysis and Technical analysis
Fundamental and technical analyses are used to predict the market sentiment. It is very necessary for forex traders to be equipped with the knowledge of technical and fundamental analyses.

Fundamental Analysis is when you make prediction of the price movement based on the state of the country’s economy in terms of productivity, interest rate, manufacturing, etc. For instance, in the EURUSD pair, the EUR will form the basis of the market prediction, whether to buy or sell the currency pair. If you believe that the economy of the United States of America will weaken relative to the European economy, you will execute a buy EURUSD order. If you feel that the European economy will weaken relative to the US economy, you will initiate a sell EURUSD order. Forex traders rely on news sites for updates on major events. A typical example is when President Biden will issue a speech.

Technical analysis enables forex traders to predict the next price movements in the forex market using the historical price movements on the forex chart. All the market information is reflected on the forex chart. In technical analysis, we look for similar patterns that was formed in the past to predict the next price movement. Basically, the chart is used to visualise the historical data.