The word ‘Forex’ stands for Foreign Exchange. You can also name it as FX or Currency Trading. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. The forex market is an over-the-counter market where currencies are traded. Traders Buy a currency pair and Sell it back when it is profitable (or vice versa) based on the predictions made by analyzing the market movement. Because, the value of a currency keeps changing in relation to any other currency. The currency pairs are termed Major Pairs, Minor Pairs and exotic pairs based on their association with dollar.
What is Forex trading?
When you place a trade in Forex, it involves buying a currency and selling another currency simultaneously. For example, if you buy EUR/USD, it means you are buying Euros by selling US dollars.
Here is an example of a typical Forex trade. A trader buys EUR/USD when he predicts that the price of Euro in relation to USD will go up. Once the price of EUR has gone up to a reasonable level, he sells EUR/USD to gain profit.
Similarly, It also works the opposite way too. A trader can choose to sell EUR/USD and buy it later when the price of EURO goes down to a reasonable level to gain profit.
Buying is also called as ‘going long’. Likewise, selling is also called as ‘going short’.
What are the types of currency pairs in the forex market?
There are three types of currency pairs: major pairs, minor pairs or cross currency pairs and exotic pairs.
Major Pairs are the ones that contain US dollar on one side. Similarly, currency pairs that don’t have USD are minor pairs or cross pairs. In contrast, exotic pairs consist of a major currency and a less popular and less liquid currency of an emerging economy.
For example, USD/JPY is a major pair while EUR/CAD is a minor pair. USD/SEK is an exotic pair because it contains a major currency (USD) and the currency of Sweden, which is less popular in Forex market.
When can you trade Forex?
Forex market is open 24 hours a day except weekends. Hence, A retail Forex trader cannot trade Forex during Saturdays and Sundays. There are four trading sessions which are the Sydney session, the Tokyo session, the London session, and the New York session. Each session has its own opening and closing hours and last for 9 hours per day. During any time of the day except the weekends, at least one of the four sessions is open. When more sessions are open, there is more volatility in the market. Therefore, the best time to trade will be the timings when more sessions are open simultaneously.
Avoid trading during the late hours on Fridays as liquidity drops during the latter part of the US session. Likewise, trading on holidays is not recommended as well since a lot of traders won’t be trading during these times.
The exotic pairs and minor pairs are volatile compared to major pairs. So exert caution while trading the volatile exotic pairs and minor pairs. The trading sessionalso plays a major role in the volatility of the currency pairs.
Trading during the major news events is also not advisable unless you have a very good plan. It is extremely risky to trade during a major news event because of the larger moves that follow. So, unless you really know what you are doing, don’t trade right after a major news release.