How to trade Forex: introduction to currency trading

Foreign exchange trading is one of the most popular ways for online investments along with commodity, index, stock, and cryptocurrency trading. Millions of traders wonder how to trade Forex and invest in currencies daily, creating an incredible Forex trading volume on the market. A variety of Forex pairs allows retail traders to pursue diverse opportunities and chase their financial goals with major, minor, and exotic currency pairs. Even though the most popular currency pair is EUR/USD, investors do not limit themselves from adding other currencies to their portfolios.

The Forex market is liquid since thousands of transactions are performed daily. Today it is so convenient to trade currency pairs. FX trading does not require a centralized location, and every deal can be done in a virtual environment with the help of a broker. While the market is working 24/5, foreign exchange trading is almost non-stop. Beginners and seasoned traders access the market online to reach major financial exchanges in New York, London, Paris, Hong Kong, or Tokyo and make their way to meet the desired investment objectives.

The foreign exchange market offers to trade one currency for another at an exchange rate. Currency trading is an essential part of the financial world. We sell and buy goods and services from different countries, and therefore we need to exchange money. If the U.S. businessman wants to buy wine from Spain, he needs to pay for it in euros instead of dollars. So, he performs a Forex trade with the EUR/USD currency pair to get the product he wants.

People can also trade currency pairs to preserve their wealth. For example, the Russian ruble is much cheaper than the U.S. dollar. Plus, Russia's economic situation is unstable because of sanctions imposed by the many leading countries due to Russian political and military aggression towards different countries. Thus, a Russian citizen can trade rubles for dollars to preserve his capital in a more stable currency.

To understand how to trade Forex, it is crucial to learn Forex terminology. So, here are some of the important terms for novice traders:

• Base currency is the first unit in the pair that shows how much of the second currency (quote currency) is required to buy or sell this one. Since Forex assets are traded one against another, currency units always come in pairs. For example, in the EUR/USD pair, the euro is the base one. 

• Quote currency is the second unit in the Forex pair. It represents how much it costs to buy or sell the base currency. When trading the EUR/USD pair, the dollar is the quote currency. 

• Bid price represents the highest amount of money a Forex trader is asked to pay to buy an asset.

• Ask price (selling price) is the minimum amount of money a seller is ready to pay for a currency. 

• Spread represents the gap between the bid and ask prices and serves as a commission that traders usually pay to a Forex broker for services provided. It is also an indicator of the liquidity of selected assets on the market. A low bid-ask spread in Forex trading means better liquidity. 

• Pip (price interest point or percentage in point) is the smallest indicator of price movements. It is a basic unit for each trade. A pip is the last decimal in the currency pair quotation (0.0001). There is also a pipette (an extra decimal point), which shows even smaller price changes in a Forex pair. It is used for more accurate quotes.

Currencies can be exchanged on the spot market. Such trading implies immediate physical delivery of assets. However, there are also forward and futures markets where retail traders deal with underlying currencies.

With many currencies existing in the world, Forex traders may find it difficult to choose the currency pair suitable for their financial goals. Depending on strategies, investors can choose major, minor, or exotic currency pairs. Based on a chosen pair, the course of trading may take different turns.

Major currency pairs are actively traded, liquid, and have the lowest spreads. They are the choice of the majority of Forex traders. Because of the high liquidity on Forex markets, buyers and sellers can always find each other to perform a trade. Such pairs always include the U.S. dollar and another currency of a developed country.

Some of the examples of major currency pairs in Forex trading are:

• EUR/USD (euro/U.S. dollar)
• GBP/USD (pound/U.S. dollar)
• USD/CAD (U.S. dollar/Canadian dollar)
• USD/JPY (U.S. dollar/Japanese yen)
• USD/CHF (U.S. dollar/Swiss franc)

Minor currency pairs are less liquid, have higher spreads. However, they are still popular among traders. Those are also called cross-currency pairs and are assembled in pairs with major currencies apart from the USD.

Some of the examples of major pairs are:

• CHF/JPY (Swiss franc/Japanese yen)
• GBP/EUR (pound/euro)
• AUD/JPY (Australian dollar/Japanese yen)
• EUR/JPY (euro/Japanese yen)
• GBP/CAD (pound/Canadian dollar)

Exotic currency pairs include the money of developing countries and some major currencies. Some currencies can be very liquid, and some of them can have very low liquidity. Usually, those have the highest spreads. It can also be problematic to find a trader who wants to perform a transaction with an exotic currency pair.

Some of the examples of exotic pairs are:

• GBP/ZAR (pound/ South African rand)
• EUR/TRY (euro/Turkish lira)
• EUR/RUB (euro/Russian ruble)
• AUD/MXN (Australian dollar/Mexican peso)
• EUR/PLN (euro/Polish zloty)

One of the common ways to trade Forex is contracts for difference (CFDs). Those are the type of financial contracts when two parties (a buyer and a seller) agree to trade underlying currency pairs by speculating on their price movements' trajectory. A trader opens a position with an entry price and leaves this position with a closing price. The difference between these two Forex prices can be a potential profit.

In contrast to exchanging actual fiat money or investing in stocks or bonds, CFD traders do not need to hold a tangible asset. Forex trading via CFDs implies that underlying currencies derive their prices from physical assets. CFD Forex trading is performed on the over-the-counter market. It is a network of multiple brokers that manage trades and set currency prices according to supply and demand. Any CFD trade is settled in cash.

The example of Forex trading via CFDs is as follows:

Traders prefer CFDs since these contracts do not have an expiry date, allow crafting short-term and long-term trading strategies, give the possibility to go short and long. Forex CFDs also involve leverage, which makes trading accessible. It increases buying potential by boosting the market exposure. However, leverage also implies a high risk of losing money. So, both potential profits and losses can be magnified. Considering that prices on the Forex market are volatile, the risk of increased losses is a critical point that should be included in trading strategies.

The conditions in terms of the leverage size available for Forex traders vary from one broker to another. It also depends on an asset price. The leverage is shown as ratios. For example, 1:2, 1:10, 1:30, 1:50, 1:100, 1:200, etc. When trading Forex CFDs, a trader does not pay the full price for the underlying asset thanks to leverage. He can make an initial investment, which is just a fraction of the trading lot’s total cost. A broker finances a trading account with the rest of the price. Forex CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

To figure out how to trade Forex CFDs and make predictions on the future direction of asset price movements, investors need to know what factors affect prices of currencies and, consequently, exchange rates. Those are crucial points that show the level of investments in a country and globally. A trader pays careful attention to an exchange rate of a preferred currency pair to analyze the market behavior and adjust a trading strategy accordingly.

Currency strength is determined by political and economic events in a country. If there are no political uncertainties or economic turmoil, a currency is considered to be stable. Thus, a trader may choose this currency for his trading plan. A Forex pair with such assets as the U.S. dollar, euro, Australian dollar, Japanese yen, or other currencies of developed countries are the most attractive options for a trading portfolio.

However, countries with unstable political and economic situations may experience depreciation in the value of their fiat money. Traders may not want to risk and can avoid investing in currency pairs of developing countries.

Inflation may cause considerable fluctuations in the exchange rate of currencies. While crafting FX trading strategies, CFD investors focus on inflation rates to determine the value of underlying assets. A low inflation rate in a country means decreasing prices for goods and services in a country. A high inflation rate means rising prices and, consequently, depreciating the currency value. Forex traders tend to choose those currencies that have considerable value on the Forex market.

Public debt (also called government debt) means that a country can experience lesser foreign capital flow. It can be challenging for a country to arrange governmental funding, and it can start printing money for covering domestic expenses. That can cause inflation and decrease the value of a national currency. Lower prices for currencies mean they become less attractive for Forex trading.

When interest rates change, exchange rates on the Forex market change as well. High-interest rates make exchange rates rise, attracting foreign investors who want potential returns. On the other side, when interest rates in a country are low, it causes inflation, and the demand of a particular Forex asset on the market goes down. CFD traders often monitor interest rates to make a correct prediction on the direction of prices.

Some Forex price fluctuations can be caused by rumors, fear, or herd instinct. Fabricated financial news in the media may force traders to invest in CFDs on one or another currency pair. Fear makes traders buy or sell CFDs on underlying currencies because they may believe that their prices are rising or falling, and the deal can be lucrative. Other novice traders may also follow many investors that trade CFDs on assets because they believe that those are more experienced and know what they are doing. However, Forex trades should never be performed based on false news, subjectivity, and emotions.

Novice traders can delude themselves that Forex trading via CFDs is easy. In fact, CFDs are complex instruments and come with a high risk of losing money. Every Forex trader should develop a trading strategy before entering the market. Taking into account the market’s volatile nature, traders should be vigilant about buying and selling price changes on the market and balance risks with profits. A trading plan helps to work out specific actions and elaborate fundamental steps while trading Forex CFDs.

Here are some of the popular trading strategies:

One of the most actively used Forex trading strategies for CFDs is day trading. It implies opening and closing a position within a single day. Day trading allows taking advantage of short-term price movements. People might think that potential profit from such trade may not worth such full involvement and careful attention to the tiniest price fluctuations on the Forex market. However, day traders accumulate small profits from multiple successful trades and may receive a relatively large sum of money.

Traders who want to try to take advantage of short-term price movements can also opt for a swing trading strategy. It takes days, weeks, or rarely even months to perform this approach. Since prices on the Forex market fluctuate each second, such a short-term strategy can be a practical option for CFD investors.

A swing Forex trader opens a position and waits for several trading sessions before closing it. Since investors who trade Forex CFDs with this approach need a few days to anticipate a potential profit, they are exposed to overnight and weekend fees. The prices can gap during this time, and traders will need to deal with substantially different prices during the following sessions.

Unlike the two approaches mentioned above, this trading strategy focuses on long-term price fluctuations. Forex traders tend to analyze currency strength and price trends to take advantage of market momentum. Trend trading implies simply following the current trends on the Forex market since traders believe that the direction of market momentum is predictable.

Trading Forex CFDs requires an understanding of the market dynamics. Traders need to know how price trends and patterns change and what global events may affect currency prices. Technical or fundamental analysis can help with that.

Traders who prefer technical analysis collect past market performance data to develop charts, figure out entry and exit points, identify the value of underlying assets, gather historical price data, and use them for their strategies. They also study market signals and trends. Day and swing traders usually opt for technical analysis. Such tools as moving average, Bollinger bands, relative strength index, Fibonacci retracement, stochastic oscillators, and others are used for this market analysis type.

Some traders may choose to focus on fundamental analysis and study financial news. For example, they can monitor political and economic events, GDP, natural disasters, inflation and deflation rates, and other factors that affect currency prices. Fundamental analysis often helps to develop long-term strategies.

Using one type of analysis does not mean that a Forex trader should ignore another one. The combination of both types may provide even more insights for Forex trading via CFDs.

The Forex market is a dynamic place. InvestGlo is a Forex broker that offers CFD trading and allows to keep up with the market speed. It is a leading broker that offers transparent conditions for trading. We assure fair pricing and a wide array of tools that can help to perform quick moves to open and close a position on the Forex market at the right moment.

The following InvestGlo advantages can help you to be a step ahead of other traders:

• Tight spreads
• Choice of 350+ CFDs on various assets
• Advanced Forex trading platform MetaTrader 4
• Daily news updates from the financial sector
• Education center with courses, tutorials, e-books, VODs about Forex trading
• Demo account for practice

Trade Forex CFDs with a popular broker and get an excellent market experience in a flash.

It is a complex task to trade Forex CFDs. Many traders lose money when trading CFDs on the Forex market. It is crucial to trade currency pairs with polished financial knowledge and skills. A market is a dynamic place, where prices change very quickly. Plus, many traders are exposed to the risk of losing money rapidly due to leverage.

If you are striving to learn how to trade Forex, InvestGlo offers various educational resources to boost your trading knowledge. You can find e-books, courses, tutorials, VODs, and the latest financial news about Forex trading on our website and find out about:

• Bid price and ask price
• Risk management strategies
• Capital management
• Trading orders, such as take profit or stop-loss order
• Forex trading strategies
• Tools available on the MT4 trading platform

You can also find other information that may help you minimize the market risk not to lose money when trading CFDs on Forex. However, you should use your knowledge to the fullest to make sure you open and close a trade at the right moment.

The reason investors fail while engaging in Forex trading via CFDs is wrong predictions on price fluctuations. Each trade should be thought-through and executed according to a trading strategy. Traders need to follow financial news and know the latest trends on the market. They should conduct technical and fundamental analyses. However, some global events that affect exchange rates on the Forex market are out of control. So, some risks are impossible to avoid. That is why traders are recommended to invest the sum they can afford to lose.