Learn to Trade

All you need to know about Forex

Between about 1875 until after the Great War ended in 1918, gold was the benchmark for valuations. Gold underpinned the “gold standard”, which was a monetary system based on a fixed weight of gold such as an ounce. It could be used in payment for goods and services. Countries pegged a currency to the price of gold to calculate its exchange value. The downside and the weakness of the system was the fluctuation in gold’s value as supply ebbed and flowed. That uncertainty eventually led to most countries dropping the gold standard, as it became known as.

Foreign exchange (FX), as trading currencies is called, was restricted to banks and specialist brokers. That has changed with the advent of computers and the Internet. Nowadays, anybody can become a trader and access the markets on the go from any location using their smartphones and tablets.

The Forex market is open 24/5 from early Monday Eastern time until late Friday evening. It starts in Wellington, New Zealand on Sunday night at 22:00 GMT and closes at 22:00 GMT on Friday in New York.

Trading Currencies on the FX market

Foreign exchange (Forex or FX) currency trading, involves buying and selling currencies at a price, or exchange rate, agreed between the two parties. These can be central banks and other financial institutions, international corporations, speculators, hedge funds or simply individual private traders like you and me.

Currencies are arranged in pairs in Forex for trading purposes. In a pair such as EUR/USD, the first named currency is the base currency and the second one is the quote currency. The price for the base currency is expressed in the quote currency. So, for example, if the price of EUR/USD is stated as 1.1067 it means that 1 Euro costs US$ 1.1067.

Successful trading in any financial market is all about correctly predicting which way the market will move. That means investing in a financial instrument such as a currency pair and making a profit after the price has moved in your favor – typically buying at a low price and closing that position at a higher price, or selling it at a higher price and buying it back when the price has dropped.

Traders watch for trends or indicators in the market and then place an order to buy (go long) if they expect the price to rise or sell (go short) if they expect the price to fall. The Forex market is decentralized, meaning that markets are traded in several large financial centers around the world in New York, Sydney, Tokyo, Frankfurt and London.

What Buying and Selling is all about

Opening a Buy position executes an order in the market to buy an asset. In order to close that position, traders must Sell that asset in the market.

Here are 5 pointers that guide traders after opening a Buy position when their trade is live in the market:

  1. The price shown for the currency pair is the current Sell price.
  2. Don’t forget to consider the spread.
  3. A Stop-Loss level can be set to close out the position at any point up to 100% of the investment without requiring any additional funds.
  4. A Take-Profit level can be set to close the position once it is in profit at any point from 1 pip upward with no upper limit.
  5. The Stop-Loss price and the Take-Profit price are the current Sell price to sell the position back to the market.

Similarly, if traders open a Sell position, they are selling the asset to the market. That means that closing the position involves raising a Buy order from the market.

Here are the corresponding 5 points to be aware of when a Sell trade is live in the market:

  1. The price shown is now the current Buy price.
  2. Take the spread into account.
  3. The Stop-Loss (SL) level can be set to anything up to 100% of the investment without requiring any more funds.
  4. The Take-Profit (TP) level can be set to anything from 1 pip profit to any maximum.
  5. The SL price and the TP price are the possible Buy price to buy the position back from the market.