FAQ
Forex, FX, and Foreign exchange trading refer to the trading of foreign currency from one country’s currency to another in the Forex market.
The Forex market is the largest global financial market in the world with trillions of dollars changing hands every day. It is a global marketplace that is open 24 hours a day for the exchange of global currencies for different reasons that include, but are not limited to, trading, travelling, tourism and commerce.
The Forex market is open 24 hours a day from Sunday at 5:00 pm EST / 10:00 pm GMT to Friday 5:00 pm EST / 10:00 pm GMT.
The Forex market hours are broken down into 4 trading sessions: the New York session, the London session, the Tokyo session (or Asia session), and the Sydney session.
No, the Forex market as a whole can not crash like the stock market, unless one day currency ceases to exist. This is because each currency moves independently against one another. A good analogy would be that currency pairs are like elevators. Let’s say we’re looking at the Euro against the US Dollar. If the EUR elevator is going down relative to the USD elevator, then the USD is going up (against the EUR). So while a European may think that the EUR crashed that day, an American may think the USD soared that day. It is all relative to the currency they are trading against.
The 8 major currencies include the US Dollar (USD), the Great Britain Pound (GBP), the Euro (EUR), the Japanese Yen (JPY), the Swiss Franc (CHF), the Canadian Dollar (CAD), the Australian Dollar (AUD), and the New Zealand Dollar (NZD).
These are the major currencies cooped with the US Dollar (USD). These include: EUR/USD, GBP/USD, USD/CAD, USD/JPY, USD/CHF, AUD/USD, and NZD/USD.
These are the major currencies paired with one another, that don’t include the US dollar (USD). These are also called cross pairs, and they include: EUR/CAD, GBP/JPY, AUD/NZD, CHF/JPY, etc.
Lower barrier to entry, lower transaction costs, longer hours of operation, higher leverage, higher liquidity and higher volume are just some advantages of Forex trading over the traditional equities/stock market.
You must first test different trading styles and strategies to see what works best for you, then backtest until you find something that works consistently for you. It does not need to work for everyone else but yourself, because everyone has a different trading personality.
You can backtest by opening a demo trading account to test your trading strategy, with the goal of seeing what type of performance you can achieve using that particular strategy. You can also backtest by looking back at past price data and determining how many times you would have won and lost based on your trading strategy and the parameters you set.
A “PIP” stands for Point in Percentage, and is the unit of measure used by forex traders to define the smallest change in value between two currencies. This is represented by a single digit move in the fourth decimal place in a typical forex quote (except JPY pairs). For example, if the price of EUR/USD moves from 1.1402 to 1.1403 this would be a one pip change. If the price of a JPY pair like USD/JPY moves from 113.31 to 113.30, that would be also one pip. To understand the value of a pip, you must first understand what “Lots” are.
Lots refer to the specific units traded with currency pairs, which essentially means the number of currency units you wish to buy or sell. There are 3 types of lots:
Micro Lot size = 0.01 = Controls 1,000 units of currency
Mini lot size = 0.10 = Controls 10,000 units of currency
Standard Lot size = 1.00 lot = Controls 100,000 units of currency
If your account is in US Dollars, and you are trading a pair with USD as the base currency (ex. EUR/USD), then the following is true:
1 pip trading with a 0.01 (Micro Lot) is equivalent to $0.10 USD
1 pip trading with a 0.10 (Mini Lot) is equivalent to $1.00 USD
1 pip trading with a 1.00 (Standard Lot) is equivalent to $10.00 USD
Candlesticks (or Japanese candlesticks) is a style of chart used to present price movements of a currency. Each candlestick represents a specific amount of time depending on the timeframe. If you’re on the 15 minute timeframe, each candle is equivalent to 15 mins (M15). If you are on the Daily (D1) timeframe, each candle represents 24 hours.
A wick, or a shadow, is the vertical lines above and below the body of the candle.
A candlestick give you the following information: open price, close price, and the high and low of the candle (top and bottom of the wicks).
Going long, or buying, is a bullish action for a trader to take. Put simply, being a bull or having a bullish sentiment means that you believe a currency pair will increase in value, or go up. To say “he’s bullish on USD/JPY,” for example, means that he believes the price of the US Dollar will rise against the Japanese Yen.
Going short (shorting), or selling, is a bearish action for a trader to take. Put simply, being a bear or having a bearish sentiment means that you believe a currency pair will decrease in value, or go down. To say “he’s bearish on EUR/USD,” for example, means that he believes the price of Euro will fall against the US Dollar.
Traders can think of ‘short’ as another word for ‘sell.’ If you are ‘going short’, or ‘shorting’, it means you are selling it. When traders sell (or go short on) a currency pair, it means they believe it will decrease in value.
Traders can think of ‘long’ as another word for ‘buy.’ If you’re ‘going long’ in a currency, it means you’re buying it. When traders buy (or go long on) a currency pair, it means they believe it will increase in value.
Spread is part of the cost you pay the broker to open a position. It is the difference between the bid and ask price. The bid price is the best price a buyer is willing to pay, and the ask price is the best price a seller is willing to accept.
Metatrader 4 is the most commonly used trading platform for Forex traders, despite the release of Metatrader 5. There is both a desktop and mobile version.
A market order is a direct entry in the markets with an option of buying or selling at the current market price.
A stop order becomes a market order only once a specified price is reached. A buy-stop order is an instruction to buy a currency pair at the market price once the market reaches your specified price or higher; that buy price needs to be higher than the current market price. A sell stop order is an instruction to sell the currency pair at the market price once the market reaches your specified price or lower. That sell price needs to be lower than the current market price.
Leverage allows you to control a larger amount of money using a limited amount of your own. For example, with a $1,000 account trading on 100:1 leverage, you will be able to control a $100,000 position.
Ability to profit from small moves in price, and allowing you to amplify your winning positions as if you were trading a much larger account size. But, don’t forget this is a double edged sword. Your losses are also amplified as high as the profits. Trading with leverage requires implementing good risk management principles.
Margin is the amount of money you need to have as a good faith deposit in order to open a trade with your account. Using the above example, your margin is the $1,000 that’s trading on 100:1 leverage.
This is the threshold where your broker will send you a notification to take action before they liquidate your position, or close your trade(s).
You never want to see this. It means you are over-leveraged on your account or don’t have enough margin and your broker forcibly liquidates your position, thereby closing your trade(s) at market price.
This measures how much you are risking in relation to the potential gain. The risk is usually defined by the stop loss from the entry point of the trade. Whereas the take profit price from the entry point defines the potential gain.
Risk-reward ratio = Absolute value (Price entry value – stop loss value) divided by Absolute value (Price entry value – Target price value)
Ebb and Flow refer to something repeatedly increasing and decreasing, or rising and falling, like ocean tides. It is the visual representation of how markets respond to daily events.
This information has been prepared by Forex41. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Forex41 accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our members.
