Whether you’re a seasoned investor or a novice looking to explore the world of trading, understanding what Forex trading entails is essential.

In this blog post, we’ll delve into the fundamentals of Forex trading, its key components, and how it operates.

What is Forex Trading?

Forex- is a global over the counter (OTC)market for trading currencies (Buying and selling currencies online at a current or determined prices)

The foreign exchange Market determine foreign exchange rates.

OTC(over the counter market) its trading that’s done directly between two parties without supervision of exchange.

Foreign exchange Rate – Exchange Rate is the rate at which one currency (international currencies) will be exchanged for another currency.

Participants in Forex trading

1. Largest international banks, Financial institutions, insurance companies and financial firms.

Banks turn into smaller financial firms known as brokers/dealers who are involved in large quantities of foreign exchange trading.

2. Traders.

Are the individuals taking up the tax and bidding in order to make a profit.

A trader will be betting that the price of a currency will either tighten or get easier and then decide to buy or sell.

A trader should not trade everyday, Do not use forex as your main job unless you are trading large volumes of sum. It’s an investment not a job.

Qualities of a trader to be able to succeed in Forex trading.

• Patient – Forex trading is not a get rich quick scheme it takes time.Forex has scammers do not send anybody money to trade for you.Be ready to learn any mistake you pay dearly using your money.

• Do not invest your savings, fees or loan kindly invest extras.
• Discipline ( financial and self discipline)

The site where you create account and trade is called broker. Brokers connects traders with banks or large financial providers.

Examples of brokers are;

1. ICM markets
2. Derive
3. CMC markets
4. LCG(London capital group)
5. Sexo capital
6. XTB online trading. Etc.
7. Fx Pesa, Fx ness, octa Fx
8. Pepperstone
9. BD Swiss. Etc.

Factors to consider when choosing a broker.

Brokers are so many around the world, You can decide to trade with a local broker or international broker. Factors to consider are;

• Regulation – make sure that the broker that you choose is registered and licensed and their activities are closely monitored by the government so that anytime you request to withdraw your money they can’t start playing you games.

• Online reviews of the broker– Its some times hard to identify the correct reviews as some brokers uses some people or accounts to get good reviews or other fellow brokers post bad review that attack the credibility of the broker because at the end of the day its all about business. You can use the following tips to spot the correct reviews; check the nature of the complain….. as the person provided long complain with evidences such as screenshot and dates, check which complains are coming over and over again such as are they giving the traders hard time in withdrawing the money.

• Live support– Availability of live support must be considered, do not choose a broker that only provides a email as the only means of communication. Make sure the broker is in hand because at the end of the day they have your money and issues regarding money should be addressed immediately.

• Easy deposit and withdrawal processes– Consider a broker that has mention both withdrawal and deposit processes in the platform, the deposit mean should be favorable in terms of deposit and withdrawal fee…. Preferably consider broker with both M-Pesa and PayPal processes not only bank option so that you reduce deposit fees.

• Transaction costs – Brokers make their money through spreads and commissions, when you place a trade(you buy or you sell) the first thing that will disappear from your account is commission(fee that a broker charges you for using their services.) So choose a broker that offers a competitive commission so as not to eat on your profits.

Function of dealers or brokers

• Act as a firm or individuals that buys foreign exchange from one party and sells it to another party. You must deal with a trustworthy brokers.
• Dealers make difference between the buying and selling prices or the spread.
• A trader needs a broker because stoke exchange require those who execute trades on the exchange market to be licensed.

TRADING IN FOREX

It’s the process of speculating on the currency prices to potentially make profit.

In forex trading, you sell one currency and buy another. You profit if the currency you buy moves up against the one you sold.

For one to trade the first step is to find a trusted, licensed and experienced broker.

When you want to trade forex you buy or sell in currency pairs.

Currency pairs.

Is the quotation of two currencies or one currency being quoted with the value of the other.

Currency is the medium of exchange for goods and services. I.e KSH,USD,JPY.

Example of currencies used in forex.

1. The Euro(EUR)
2. Japanese Yen (JPY)
3. U.S dollar (USD)
4. British Sterling Pounds(GBP)
5. Swiss Franc(CHF)
6. Australian dollar(AUD)
7. Canadian dollar (CAD)
8. New Zealand dollar(NZD)

The abbreviations are what are used to trade.

Analysis of currency pairs.

Examples of currency pairs includes,

1. EUR/USD (euro dollar).
2. USD/JPY (dollar Yen)
3. GBP/USD (Pound Dollar).
4. USD/CHF (Dollar swissy)
5. AUD/USD (Aussie Dollar).
6. USD/CAD (Dollar loonie)
7. NZD/USD (Kiwi Dollar).

In the analysis; i.e EUR/USD.

The first listed currency in the pair is called the base currency and the currency listed after is called Quote currency.

Base currency.

It’s the first currency in any currency pair .

The currency quote shows how much the base currency is Worth the as measured to the second currency.

Fundamentally, Your base currency is what you should use fore your accounting.

The Quote currency.

Is the second listed currency in a currency pair.

It determines weather you’ll make a profit or a lose.

The currency quote shows how much the base currency is worth as compared to the quote currency.

An exchange rate is also the relative price of two currencies from two different countries.

Exchange Rates fluctuates based on which currency is stronger at the moment.

Example;

USD/CHF rate = 1.6350 then 1 USD =6350.

If “dollar swissy” rate is equal to 1.6350 then 1USD equals to 1.6350 in swissy franc.

Note. The forex market has neither a physical location nor a central location. The entire forex market is run electronically within a network of banks continuously over a 24-hour period.

The market is open 5days a week (Monday-Friday) while weekends its closed and that’s the period when to trade.

The thesis of forex is to understand the price action and movement in the forex market and to develop a profitable trading strategy for retail traders, invest and make profitable investment.

Liquidity and volatility in forex trading.

Liquidity refers to how active a market is. It is determined by how many traders are actively trading and the total volume they’re trading.

One reason the foreign exchange market is so liquid is because it is tradable 24 hours a day during weekdays.

Volatility is the measure of how drastically a market’s prices change.

A market’s liquidity has a big impact on how volatile the market’s prices are.

Lower liquidity usually results in a more volatile market and cause prices to change drastically; higher liquidity usually creates a less volatile market in which prices don’t fluctuate as drastically.

Liquidity provider in forex trading.

A liquidity provider in forex is a market broker/professional market makers which work on both ends of currency pairs (buying and selling) to increase forex liquidity volume. Examples;

• Financial banks.
• Foreign investment managers
• High net worth individuals
• Forex brokers
• Hedge funds, retail traders.

Top liquidity providers in the foreign exchange market are known as tier 1 liquidity providers.

Importance of Liquidity in forex.

1. It enables attractive rewards in trading.
2. Liquidity providers (banks) will make sure that more price stability is achieved by negotiating position in forex pairs that can’t be offset with another market maker(broker) or added to the market makers book to be liquidated at a later time.
3. Some market makers (brokers) will watch orders and call levels for clients and can execute market orders on their behalf.
4. Individual traders will never get direct access to a tier 1 liquid provider. Their access to the forex market will be provided by an online broker.

The site where trading is done belongs to a broker, therefore the broker is the one who associate with liquidity providers.

This therefore explains why we have unsilenced brokers and scammers do not therefore trade on any broker platform unless you are sure they are licensed.

Not all currency pair are liquid, infact currencies tend to have varying levels of Liquidity depending on weather they are major, minor, or exotic.

Major currency are most traded currencies such as USD, EUR, JPY,GBP, CHF, and AUD. Minor currency includes NZD and CAD.

Exotic currency includes PLN etc.

The dollar(USD) is the most liquid currency (most traded currency/king) in forex market this is because;

• The United States economy is the largest economy in the world.
• The US dollar is the reserve currency of the world.
• The United States has the largest and most liquid financial market in the world.
• The United States has the most stable political system.

Forex liquidity tends to dries up as a trader moves from major pairs to minor pairs and finally exotic pairs.

High liquidity refers to the currency pair that cannot be bought or sold in significant sizes without large variances in its exchange rate.(price level) e.g. major pair such as EUR/USD.

Low liquidity in forex refers to a currency pair that cannot be bought or sold in significant sizes without large variances in its exchange rate price level. E.g. exotic pairs PLN/JPY.

Signs to liquidity versus illiquidity.

A high liquid market (deep/smooth market) the price action is also smooth.

Most traders need and should require a liquid market because its very hard to manage risk if you’re on the wrong side of a big move in an illiquid market.

The signs to check are;

• Gaps when trading forex comes about (price gaps) if an interest rate announcement or high impact announcement in the country comes against the expectations i.e. political news.

Can occur at the weeks opening on Sunday afternoon in US. If there’s news announcement over the weekend then overall gaps in forex are usually less than 0.50% of currency value.

• Forex liquidity indicator brokers often offer a volume option on the chart whereby a trader can gauge the Liquidity of the Market.

This forex liquidity indicator is interpreted by analyzing the bars on the volume chart. Each volume bar represent the volume traded during specific term period, thus giving the trader a suitable approximation of liquidity.

Remember that most brokers only reflect their own liquid data and not the overall forex market liquidity. However, using a Brokers Liquidity as gauge can represent the retain market fitting depending on size of the broker.

• Different time of the day offer varying amounts of Liquidity There are less active hours like the Asian session that is often range bound meaning support and resistance levels are less more likely to hold from speculation point of view.

The moving market sessions such as the London and US sessions are more prone to breakouts and larger percentile moves on the day.

The time of the day that you are likely to see the biggest moves are the US morning session because it overlaps with the European/London sessions which alone accounts to +50% of total global volume. The US session alone accounts for around 20% and in the afternoon, you will often see a sharp drop off in aggressive moves except for when the Federal open market committee (FOMC) comes out with a surprise announcements which is but a few time a year.

Tool used to know news occurrence that affect forex.

Forex traders rely on news sites to notify us when key events will occur thus we don’t trade on volatile moments i.e. When US president does his speeches hence you know what to expect. The most useful site used is Forex factory.com.

It gives you the exact times during the day that the events are going to occur in the events and also it also shows news articles.

It should be checked daily before trading is executed to enable one to know the events and news. Events in forexfactory.com are categorized into 4 potential impacts;

Red – Shows that the news may have high impact on forex i.e. issues involving payroll and stock market.

Light red – shows medium impact news as may affect it on low scale compared to high impact.

Yellow – shows low impact, don’t expect much volatility however anything can happen so be aware.

Grey- shows non- economic impacts and you have nothing to worry about.

Understanding the basics of Forex trading, including currency pairs, leverage, brokerage firms, and trading strategies, is crucial for anyone looking to venture into this exciting realm.

However, it’s equally important to be aware of the risks and approach trading with a well-thought-out plan and a commitment to continuous learning.

Forex trading offers the potential for financial growth, but it’s not without its challenges. With the right knowledge and discipline, traders can navigate this market and work towards their financial goals.

Note that this is just an introduction to forex trading. Don’t stop here. Next we are going to learn about terms used in forex trading click here to continue learning.