What is Forex Trading | Complete Basics Guide
The Basics of Forex Trading: How to Trade with Exness
Contents
- 1-What is Forex?
- 2-Understanding the Forex Market
- 3-The basic of Forex Trading
- 4-Currency Pair, Cross Pairs, Base Currency, and Quote Currency
- 5-Bid Price and Ask Price
- 6-Spread
- 7-Lot and Contract Size
- 8-Pip, Point, Pip Size, and Pip Value
- 9-Leverage and Margin
- 10-Balance, Equity, and Free Margin
- 11-Profit and Loss
- 12-Margin Level, Margin Call and Stop Out
- 13-Understanding Market Makers
- How to trade with Exness
- 14-What do I need to do in order to start trading?
- 15-What are market orders and how do I set them up?
- 16-Buy orders
- 17-Sell orders
- 18-How do I make profits when trading?
What is Forex?
Forex is short for foreign exchange; which means exchanging one currency for another for a variety of reasons, usually trading, commerce or tourism.
Let us take a look at an example to understand how fluctuations in currency rates can lead to profits/losses.
Assume a person is travelling from the US to Italy for vacation. Let us say he exchanges USD 10,000 to euros. Assuming the USD/EUR rate at that time was 0.91000, he now has EUR 9100. When returning from Italy let’s say he has EUR 1000 left with him which he hasn’t spent. The value of this amount is USD 1098.90 based on the rate at which he had exchanged it at the start of his trip.
Let us assume that in this short time period, the euro has grown stronger compared to the US dollar and the exchange rate is now USD/EUR 0.86000. On exchanging the remaining euros to dollars, he is able to get USD 1162.79.
Thus, this person has unintentionally made a profit of about USD 63 from this transaction.
Forex traders make transactions in the forex market similarly, but with the intention of making gains from such fluctuations in currency exchange rates. They study the economic and political conditions and predict the trend in which the market is going to go.
Based on that, they either buy or sell a currency which they later sell or buy back respectively.
This is forex trading.
Note: In Exness we offer CFDs (Contract for Difference) on forex, which means that there is no physical exchange of currencies. Clients only bid on the difference in price of the currencies involved in a particular currency pair of their choice.
Understanding the Forex Market
The market where foreign exchange transactions are carried out is known as the forex market. It is an international market where transactions are carried out electronically over-the-counter (OTC) - via computer networks between traders around the world, rather than on one centralized exchange.
Features of the forex market
- The forex market has a daily trading volume in excess of $5 trillion. No commodity market, futures market or stock exchange can equal forex.
- Forex trading occurs round the clock, Monday through Friday. The forex market makes it possible for a currency to be bought and sold by various market-maker banks, brokerage companies (such as Exness), independent brokers, investors, and traders.
- Quotes (or prices) are in perpetual motion and react to many trading, economic and other indicators, interest rates, bank operations, the time of day and the preferences and expectations of traders.
- Client transactions are executed over easy-to-use trading platforms such as MetaTrader 4 or MetaTrader 5. With the help of such platforms, every trader can receive quotes in real-time mode from market participants, such as banks and marketmakers.
Exness is a broker that offers high quality trading services to clients all over the world. It provides a convenient platform for carrying out these transactions and also offers very low spread which is always a win for the forex trader.
The basic of Forex Trading
It’s time to acquaint yourself with a few terms and concepts that are fundamental to Forex.
In this article we will be covering the following:
Currency Pair, Cross Pairs, Base Currency, and Quote Currency
Currency pairs can be defined as the currencies of two countries combined together for trading in the foreign exchange marketplace. Some examples of currency pairs can be EURUSD, GBPJPY, NZDCAD, etc.
A currency pair that does not contain USD is known as a cross pair.
The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency".
Bid Price and Ask Price
Bid Price is the price at which a broker is willing to buy the first named (base) of a currency pair from the client. Subsequently, it is the price at which clients sell the first named (base) of a currency pair.
Ask price is the price at which a broker is willing to sell the first named (base) of a currency pair to the client. Subsequently, it is the price at which clients buy the first named (base) of a currency pair.
Buy orders open at Ask Price and close at Bid Price.
Sell orders open at Bid Price and close at Ask Price.
Spread
Spread is the difference between the Bid and Ask prices of a particular trading instrument and also the main source of profit for market maker brokers. The value of spread is set in pips.
Exness offers both dynamic and stable spread on its accounts.
Lot and Contract Size
Lot is a standard unit size of a transaction. Typically, one standard lot is equal to 100,000 units of the base currency.
Contract size is a fixed value, which denotes the amount of base currency in 1 lot. For most instruments in forex, it is fixed at 100,000.
Pip, Point, Pip Size, and Pip Value
A point is the value of price change in the 5th decimal, while pip is the price change in the 4th decimal.
Derivatively, 1 pip = 10 points.
For example, if the price changes from 1.11115 to 1.11135, the price change is 2 pips or 20 points.
Pip size is a fixed number that denotes the position of the pip in the price of an instrument.
For example, for most currency pairs like EURUSD where the price looks like 1.11115, the pip is at the 4th decimal, thus the pip size is 0.0001.
Pip Value is how much money a person will earn or lose if the price were to move by one pip. It is calculated by the following formula:
Pip Value = Number of Lots x Contract size x Pip size.
Our trader’s calculator can be used to calculate all these values.
Leverage and Margin
Leverage is the ratio of equity to loan capital. It has a direct impact on the margin held for the instrument traded on. Exness offers up to 1:Unlimited leverage on most trading instruments on MT4 accounts.
Margin is the amount of funds in account currency that is withheld by a broker for keeping an order open.
The higher the leverage, the lesser the margin.
You may read more about the relationship between leverage and margin in our blog.
Balance, Equity, and Free Margin
Balance is the total financial result of all completed transactions and depositing/withdrawal operations on an account. It is either the amount of funds you have before you open any orders or after you close all open orders.
The balance of an account does not change while orders are open.
Once you open an order, your balance combined with the profit/loss of the order makes for the Equity.
Equity = Balance +/- Profit/Loss
As you already know, once an order is opened, a part of the funds is held as Margin. The remaining funds are known as Free Margin.
Equity = Margin + Free Margin
Profit and Loss
Profit or Loss is calculated as the difference between the closing and opening prices of an order.
Profit/Loss = Difference between closing and opening prices (calculated in pips) x Pip Value
Buy orders make a profit when the price moves up while Sell orders make a profit when the price moves down.
Buy orders make a loss when the price moves down while Sell orders make a loss when the price moves up.
Margin Level, Margin Call and Stop Out
Margin level is the ratio of equity to margin denoted in %.
Margin level = (Equity / Margin) x 100%
Margin call is a notification sent in the trading terminal denoting that it is necessary to deposit or close a few positions to avoid Stop Out. This notification is sent once Margin Level hits the Margin Call level set for that particular account by the broker.
Stop out is the automatic closure of positions when the Margin Level hits the Stop Out level set for the account by the broker.
To find out the Margin Call and Stop Out levels for the various account types, you may refer to this blog.
Understanding Market Makers
A market maker is a financial company always ready to buy or sell a financial asset at an openly quoted price on a long-term basis. As the name suggests, these entities or individuals “make” the market tick by participating in transactions directly as either the seller or buyer.
A market maker typically does three things:
- Sets bid and ask prices within a certain currency pair.
- Commits to accepting these prices, with specifications (leverage, spread, etc).
- Market makers can hedge their orders to mitigate risk, but have a variety of options on how they approach orders.
An important function of a market maker is to provide liquidity, considered by most to be the pillar on which the forex market is built. They create opportunities for other market participants to buy or sell a fairly large range of stocks, currencies, futures and other trading instruments at an openly quoted price. Market maker transactions make up a significant portion of the total volume of forex trading, giving them influence on currency exchange rates.
A market maker aims to act as the counterplay, meaning they match buy and sell activity between their clients, typically only collecting profits through the spread.
The largest and best known market makers are known as Large Market Participants, which include: Deutsche Bank, Barclays Capital, UBS AG, etc. A bank’s share in overall trading volume is more important than its total capital in determining whether or not the bank is a market maker or not. In other words, what matters is a bank’s actual ability to influence movement on the market by offering its buy and sell prices. Even small and medium-sized financial companies can be forex market makers, but only the biggest market makers are known as Large Market Participants.
Exness is a market maker that offers partners and clients trading services in the financial markets.
How to trade with Exness
What do I need to do in order to start trading?
In order to start trading, you will need access to two things - a trading account, and a trading platform.
To create a trading account, you will need to sign up on our website and create an account (or use the one that is automatically created for you.
We offer numerous trading platforms for download on our website. Go to Tools and Services Trading Platforms and download the platform of your preference. There is also a web browser platform option available in case you do not wish to download.
Once you have set up your account and downloaded a platform of your choice, make a deposit and begin trading.
What are market orders and how do I set them up?
Market orders are trades made for immediate purchase or sale of a security at the price of the market. The two types are Buy and Sell.
Buy orders
A buy order is an order for the immediate purchase of a security. Buy orders open at Ask price and close at Bid price.
To set up a Buy order:
- Double-click on any instrument from the Market Watch to bring up the trade window.
- Set up necessary parameters such as trade volume and check for the execution type available for that instrument.
- Click Buy.
- You will be able to monitor this trade from the Trade tab at the bottom of your trading terminal.
Sell orders
A sell order is an order for the immediate sale of a security. Sell orders open at Bid price and close at Ask price.
To set up a Sell order:
- Double-click on any instrument from the Market Watch to bring up the trade window.
- Set up necessary parameters such as trade volume and check for the execution type available for that instrument.
- Click Sell.
- You will be able to monitor this trade from the Trade tab at the bottom of your trading terminal.
How do I make profits when trading?
A trade is said to be in profit when the price is moving in your favor. To understand this, you will need to know what is the favorable price direction for Buy and Sell orders.
Buy orders make a profit when the price rises. In other words, if the closing Bid price is higher than the opening Ask price, the Buy order is said to have made a profit.
Sell orders make a profit when the price falls. In other words, if the closing Ask price is lower than the opening Bid price, the Sell order is said to have made a profit.
Reviewed by Forex Guider
on
December 01, 2021
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