Published: Apr 11, 2024 by GannIntegral
What is Forex Trading
Forex trading is online currency trading; a retail trader buys one’s currency and sells the other to make a profit. It is a famous way to make side income because people don’t need to do marketing to sell products.
How Forex Trading Works
Broker Trading Platform
In online forex trading, everything is done electronically through a broker trading platform called the Electronic Communication Network (ECN). The transaction between you as the broker’s client and the broker as your dealer is called Over-the-counter (OTC).
The most popular forex trading platforms available online are:
- MT4 / MT5.
- CTrader.
- TradingView.
Forex Currency is Quote in Pairs
Example: EUR/USD – Euro (EUR) is the base, and the US Dollar (USD) is the quote, which is if the price of EURUSD is 1.08526, this means 1 Euro equal to 1.08526 USD.
Each currency in online forex trading is quoted in pairs that group into three categories:
Major forex pairs
Major pairs forex currency are the most traded in the forex market. Due to their large trading volume compared to other pairs, they are actively traded among market players. They are popular among retail traders, especially scalpers and daytrader due to their liquidity, which often leads to tighter spreads, making it easier for traders to execute trades and reduce their trading costs.
Pros:
- Tight spread most of the time leads to low trading costs.
- Most volatile pairs.
- Best for scalping trading strategy.
- Less slippage.
- Fewer price gaps.
Cons:
- Not suitable for swing trading strategy.
- Lots of economic data that need to be aware of.
- Highly speculative.
Minor forex pairs
Minor forex pairs have lower trading volumes, making them less volatile than major forex pairs that result in a wider spread, making them unsuitable for scalping trading strategies. Typically, long-term traders choose to trade these pairs because their nature aligns with their trend-following trading strategy.
Pros:
- Less speculation compared to major currency pairs.
- Ideal for carry trade trading strategy and swing trading strategy.
Cons:
- Bigger spread compared to major currency pairs.
- Not suitable for scalping trading strategy.
Exotic forex pairs
Exotic forex pair is the widest spread among forex currency pairs, and retail traders that don’t have strong trading skills want to avoid trading it at any cost and let me give you the pros and cons:
Pros:
- Less speculation.
- Best suitable for trend trading strategy, especially for those focusing on carry trade trading strategy.
Cons:
- Widest spread mostly on major economic news releases, end of day and weekend.
- Low liquidity to apply the scalping trading strategy.
- Aggressive slippage.
Bid and Ask in Forex Trading
When you do online forex trading, the currency rates are offered at two prices. The first price is called the Bid price, and the second is the Ask price.
The bid price is the best available price offered by your forex broker when you want to buy the currency, and the ask price is the price offered by your broker if you intentionally want to sell the currency at that moment.
How to Calculate Forex Pip
Forex currency pairs price movement is measured in ‘PIP’. Let’s take the EURUSD price as an example; if the current price is 1.06401, it tells us that EURUSD has five decimal places after a point. Now, if the price climbs to 1.06501, this tells us that the price has already moved 10.0 pips from the initial price.
Let’s take another currency pair example, USDJPY. If the current price is 153.260 and the price drops to 153.150, you can divide both prices, and you will get 0.110. Since the USDJPY price only has three decimal places, the PIP count read as 11.0pips drops from the initial price.
Bid-Ask Spread
The difference between bid and ask price is called as spread. This spread depends on your broker’s liquidity provider; the more LPs they have, the tighter the spread, and this is why you want to find lowest spread forex broker so that you can reduce your trading cost. You can compare major currency pair spreads between weekends and weekdays below, and this is the best spread I could get from my trading broker.
What is Technical Analysis?
If you look at a Forex chart, you might wonder how to determine if the price is going up or down. Now let me explain what is technical analysis in trading, and next, you will understand why it is crucial in forex trading!
Technical analysis is one method traders use to predict the forex market. With this knowledge, traders can time their market entries and exits as needed. Without mastering this skill, it’s like trading the forex market unquestioningly! Below, I list the most commonly used technical analysis by forex traders for you:
Support and Resistance Level
The last known lowest price is considered the support level, and the last known highest price is viewed as the resistance level. To determine if you are in a downtrend market, you need to observe whether the price is breaking the last nearest low price and respecting the previous high price. It is better to refer to higher timeframes such as D1/Daily as your compass and use the H1/Hourly timeframe for trend reference, whether it’s a trend continuation, reversal, or sideways movement.
Trend lines
To obtain a strong trend line, you must identify multiple strong and reasonable support or resistance levels, as shown in the image above.
When the price approaches this trendline, it’s a sign of a potential reversal point. But if the price breaks above the trend line, you might want to wait until the price retraces back to the trendline before you can execute the buy position with the lowest risk.
Best Forex Trading Indicators
Indicators are commonly mathematical formula that calculates price data and draw the output on a forex chart. Traders use this indicator to evaluate price trends and patterns to find the best trading setups. The most popular indicators used by forex traders are;
- Moving Average
- Relative Strength Index
- MACD
- Stochastic
- Bollinger Band
Chart Patterns
Chart patterns are a combination of multiple candlesticks that form specific patterns significantly. Some traders call them candlestick patterns, but I prefer to call them chart patterns because of their more significant wave stronger signal and better for reading large trend movement. These patterns can give signs to traders if the price trend is going to reverse, consolidate, or continuation trend. The most common patterns are:
- Double top
- Double bottom
- Head and shoulder
- Engulfing
What is Fundamental Analysis?
Fundamental is a method the trader uses to analyze the market using economic data. You can access this economic data on popular sites like the Forexfactory Economic Calendar. Trader commonly uses this economic data to confirm their technical analysis and execute their trades if the economic data and technical analysis are aligned or exit their existing trades if the economic data is opposite to their trade direction.
Forex Trading Strategy
Once you understand technical and fundamental analysis, you can create your trading strategy or use a popular trading strategy that suits your trading lifestyle to secure capital and maximize your potential profits for an example COT Report Trading Strategy.
Choosing the Best Forex Broker
When you trade forex online, you want to deal with a reputable CFD broker that provides you with secured funds. Segregated funds are one of the criteria that traders consider to put their money on the table; this advantage allows you to focus most of your time on finding trading opportunities. Therefore, I created an article specifically if you want to know how to choose the best forex broker.