What are forex pairs?
Forex pairs, also known as currency pairs, compare the values of two currencies. The first currency (known as the base – the currency being bought) is priced versus the second currency (quote), showing how much you need to pay in the quote currency to buy one base unit. Typically, each currency is named based on its three-letter ISO currency code (such as EUR for euro).
Common forex pairs include euro (EUR) to US dollar (USD), pound sterling (GBP) to euro, and US dollar to Japanese yen (JPY). In the first example, a currency pair might be expressed as 'EUR/USD: 1.01700'. This would mean that one euro is worth 1.01700 dollars.
Listings of forex pairs also show traders the bid and ask prices for the currency pair. These are the prices you must pay to buy or sell the pair respectively.
The bid price is always smaller than the ask price by a few pips, due to platform charges – this difference is called the bid-ask spread. Typically spreads are smaller on pairs with higher trading volumes. EUR/USD spreads are lower than those for JPY/HUF (Hungarian forint), for example. Note that the spread of each currency pair vary according to market conditions.
How does forex trading work?
At its most basic level, Forex trading works by buying currencies when their value is low and selling them when they increase.
This is done electronically over a trading platform. Forex trades can be made remotely worldwide, 24 hours a day, five days a week. Forex markets are open in every time zone, so as one closes, another opens:
- Pacific session: Sydney, 10:00 PM to 7:00 AM UTC
- Asian session: Tokyo, 12:00 AM to 9:00 AM UTC
- European session: London, 8:00 AM to 5:00 PM UTC
- American session: New York, 1:00 PM to 10:00 PM UTC
Whenever a trader sends an order to the forex market, brokers facilitate the transaction by extending margin. This allows the trader to open new positions far greater than the capital they have at hand to profit from beneficial increases or decreases in price. However, pricing volatility can pose the risk of rapid, significant loss.
To complete each forex trade, the market's technological infrastructure matches contradictory orders from market makers, individual traders, and other liquidity providers.
There are three ways that forex is most traded:
- Spot market trades – The spot market is the main forex market that sees traders trading currencies over-the-counter (OTC) for real-time prices based on current supply and demand.
- Futures market trades – This speculative trade sees traders enter contracts with one another to buy or sell forex at a specified exchange rate on a specific date. Futures trades are typically performed on a public exchange, for example, {suggest to list a UK exchange}. This benefits buyers if the seller agrees to sell at a rate that ends up lower than the future exchange rate, and vice versa.
- Forward market trades – Forward market trades are the same as futures trades, except they are traded privately in an OTC market. That means they are less regulated and customisable. Non-deliverable forwards (NFDs) are a common type of forward market trade.
Note that FXCM only offers leveraged spot Forex trading.
What are the pros and cons of forex trading?
Forex markets feature a unique collection of pros and cons. For any aspiring forex trader, it's important to conduct adequate due diligence and decide if forex trading is suitable for you before you begin.
The pros of forex trading
- High accessibility – Forex trades can be done from anywhere via an online platform. Signing up takes only a day or two, and the market is open 24 hours a day, five days a week. What's more, forex trading only really requires technical analysis of historical price moves, not the in-depth fundamentals and financial analysis required of shares traders.
- Low capital requirements – If you want to start trading forex, the availability of leverage means you can start speculating with many times more than your initial margin.
- Low operational costs – Trading forex typically means you'll be exposed to fewer fees and commissions compared to other types of investing.
- Consistent depth and liquidity – Forex is the world's largest marketplace. This means that consistent depth and liquidity are all but assured, so you can trade whenever you want.
- Diverse array of products – As a mature OTC market, there are plenty of different forex products you can choose from. This provides a great amount of strategic freedom.
The cons of forex trading
- Need for discipline – Given the availability of enhanced leverage and abundance of trading options, forex traders' discipline is frequently tested. It's important to have the right mindset and attitude to risk so you don't get carried away.
- Pricing volatility – Changes in pricing can be swift and dramatic, posing the risk of rapid, significant losses.
- An ever-changing market – Past performance is not indicative of future results; forex trading is always changing, emphasizing the need for sound strategy and strong risk management.
Learn more about the pros and cons of forex trading. How do you start trading forex?
If you've done your research and understand the fundamentals of trading forex, it's easy to start:
Step one: open an account
Open an account with a forex broker, inputting your personal details. It will take anywhere between one to three days to get fully set up and ready to trade.
Step two: pick a pair
Select a currency pair that you would like to trade: a major pair like EUR/USD or an exotic pair like JPY/SEK.
Step three: set your orders
Choose whether you wish to place stop or limit orders on your trade.
Step four: keep an eye on your position
Using trading tools, monitor the movement in your currency pair's price. In doing so, you can sell or buy at the correct time.
Step five: close your position
When the time is right, close your forex trade, and realising your profits or losses.
What are forex trading platforms?
The forex trading platform is the trader's window to the world's currency marketplace. To be effective, your trading platform must be up to the many challenges of the live forex market.
At FXCM, we offer a collection of capable and reliable forex trading platforms, each with unique features and functionalities.
Our flagship platform, Trading Station gives you everything you need to execute trades, perform in-depth technical analysis, and access your account wherever and whenever you need to.
We also support the industry-standard MetaTrader 4 (MT4) software and assorted speciality platforms. So, no matter what your approach to forex trading may be, rest assured that FXCM has your needs covered.
Explore our platforms
What are the most common ways to trade forex?
Unsure which strategies to use when learning how to trade forex? There are four main ways traders make money:
- Day trading – Short-term day trading involves starting and completing a single position within a day. It's a straightforward way to trade, giving you lots of time and mental breadth to research and monitor a trade before closing your position in time. Read our guide to forex day trading.
- Position trading – This long-term forex trade involves holding onto a pair for a prolonged period, waiting until it reaches a certain price level weeks or months into the future. It's great if you don't have plenty of time to spare or want to trade based on larger, long-term economic factors. Learn more about position trading.
- Swing trading – A medium-term strategy, swing trading involves holding a pair for a few days and selling it when the price swings in a manner consistent with historical price charts and other forms of technical analysis. Find out more about swing trades.
- Scalping – Scalping involves holding trades for a matter of minutes, profiting a small amount but highly frequently. This form of forex trading requires plenty of time, so suits traders who treat forex as their day job. Learn more about scalping.
What is forex trading best practice?
Unless you're playing the lottery, success isn't an accident. Mastering any discipline takes desire, dedication and skill. Becoming a successful forex trader is no different. To become an expert, there are some key best practices to follow:
Have a plan
The most common attribute among effective forex traders by far is that they have a plan. A trading plan is a structured approach to trade selection, trade management, and risk management. Without this, a trader is likely to flounder in live market conditions.
By incorporating a viable strategy to sound money management principles, a trading plan lets you consistently engage in forex, remove chance and generate statistically verifiable, repeatable results. So how does one build a successful forex trading plan? The answer lies in personal experience, technical analysis and input from market professionals.
Start small
If you're new to forex trading, it's best to start small. Trading lower leverage ensures you have enough capital to become experienced in the market. There's plenty of time to implement higher degrees of leverage once you gain competency and security in the marketplace.
Create objectives
Whenever you make a trade, understand at what price you want to execute your trade, and utilise stop-loss and limit orders to automate your loss prevention and profit taking.
Adopt the right mindset
While there is no exact science of profitable forex trading, establishing good habits regarding risk versus reward, leverage, and timing is a great way to enhance your performance.
In 2015, the team at FXCM conducted an in-depth study of client behaviour and identified three areas where winning traders excelled: cutting losses and letting profits run, using leverage properly, and trading at the right time of the day.
Discover the three traits of successful traders
Choose FXCM and become a forex trading expert
With FXCM, learn to trade forex and raise your trading IQ with expert courses, tutorials, blogs, guides, and expert webinars all readily accessible online 24/7/365. Then, use our trusted platforms to start your trading in the forex market.
Visit our online classroom or start trading with FXCM below. If you have any questions, be sure to visit our help and support hub or chat with a specialist today.
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