Forex Trading: 10 Most Frequently Asked Questions Answered

There are many reasons why people get into forex trading. If you too are considering entering the world of currency trading, the first step is to get all your questions answered. We’ve done part of the homework for you. Here are some of the most commonly asked questions about forex trading.

1.      What is Forex Trading?

Forex is a combination of the words – “foreign currency” and “exchange rate.”

Forex trading (or currency trading) means buying or selling currency pairs. By buying one currency and selling another, traders attempt to earn a profit from the interest rate differential between the two currencies. The forex market is open 24 hours a day, 5 days a week. Trading takes place online, rather than through exchanges, making forex a global market.

For example, if you believe that the value of the European currency, the euro (EUR), will rise against the United States dollar (USD), you might decide to buy the EUR and sell the USD. Similarly, if a trader believes that the euro will fall in value compared to the dollar, they might sell the EUR in exchange for USD. As mentioned earlier, forex trading always occurs in pairs.

Traditionally, currency trading was only done by large institutional players, such as governments, banks and multinational companies. But now, anyone can participate in the forex market. Forex trading is legal in most countries, with the exception of countries such as Belgium, France and North Korea.

In countries where currency trading is legal, you can trade through a regulated forex broker. A forex broker is a firm that will execute trades on your behalf. 

2.      Why Should I Trade Forex?

The reason can differ from person to person, but you need to gain insight into why you wish to participate in this market. Knowing the reasons will help you set your trading goals and understand your risk appetite better. Here are some of the most common reasons why people trade FX over other financial instruments.

• Low Trading Cost – Since the market is so highly liquid, there is no shortage of buyers or sellers. This means that the trading costs can be comparatively lower than those for other classes of assets.
• Diversification – With more than 180 currencies to choose from and several pairs fluctuating independently of each other, you have opportunities to hedge your trades.
• Leverage – You can increase your market exposure with the availability of leverage. This means that you fund only a part of the trade, and your broker will fund the remaining amount. So, with little capital, you can open large positions. However, use leverage with caution as both profit and loss are magnified.
• Trading via Derivatives – You can choose to trade forex via derivatives instruments, such as Contracts for Difference (CFDs), where you do not need to own the underlying asset to trade it. This way, you get to trade both rising and falling currency prices.
• Convenience – Since the forex market functions 24 hours a day, 5 days a week, you can choose to trade at any time that is convenient. With the ability of trading apps and trading platforms compatible with multiple devices, you can access the markets and your trades at any time and from anywhere.

3.      What is the Cost of Trading Forex?

Any asset you choose to trade will involve some cost. However, as mentioned earlier, the cost of forex trading tends to be lower than that of other asset classes. The most common costs include:

• Spread – The spread is the difference between the ask and bid price of a currency pair. This difference tends to be narrower for more liquid pairs. The spread can also be impacted by market volatility. The narrower the spread, the less costly your trade.
• Commission – Brokers might charge a commission, along with a spread. Commission is a fixed fee, charged per trade per lot. For example, the commission may be $1 per lot per trade. If you are a high-volume trader, it may be more cost-effective for you to pay a commission rather than a wider spread. Many traders prefer to choose brokers who do not charge a commission. 
• Swap Rates – The swap rate is the fee charged by online brokers for holding an open position overnight.   If you are a follower of the Islamic faith, the payment of such fees is forbidden. So, choose a broker who offers swap-free, or Islamic, accounts.
• Deposit or Withdrawal Fee – Some brokers might charge a fee for deposits or withdrawals from your trading account. This fee is usually in addition to the charges levied by your bank or your payment service provider. It is usually a flat fee and does not depend on the amount you deposit or withdraw. To keep costs low, choose a broker that doesn’t charge Deposit fees.
• Inactivity Fee – Some brokers might charge an inactivity fee if you have opened a trading account but have not made a trade for a long period of time (usually more than a month). This inactivity fee is charged to compensate the broker for maintaining your trading account.

4.      How Do I Open a Forex Trading Account?

The process of opening an account is quite simple and should not take more than a few minutes. Here is an indicative list of the steps that you need to take:

• Choose your broker and the type of trading account you wish to open.
• Provide basic information about yourself, such as name, country of residence, etc.
• Provide identification documents for KYC purposes by uploading them on the website.
• Wait for your information to be verified by the broker. 
• Once your account is activated, deposit money into it, if it is a live account.
• Download the trading platform on your device or use a web browser-based trading platform to access the forex market.

A great place to familiarize yourself with the trading platform and how the forex market works is a demo account. This allows you to trade with virtual funds under live market conditions. Once you gain confidence, move to a live account.

5.      Which Currencies are Traded in Forex? 

More than 180 currencies exist worldwide, although not all of them are highly traded nor highly liquid. Over 80% of all trades take place in just seven currency pairs, known as the “majors.” The remaining currency pairs are classified as “minors” or “exotic.”

As a beginner, it may be best to start with a highly liquid currency pair. This will ensure that there will be a counterparty on the other side of your trade whenever you wish to open or close a position.

6.      What is a Major Currency Pair?

These are the most frequently traded forex pairs and contain the US dollar as one of the currencies in the pair. There are 7 major pairs in the world:

• EUR/USD (euro/US dollar)
• USD/CHF (US dollar/Swiss franc)
• USD/JPY (US dollar/Japanese yen)
• GBP/USD (Great British pound/US dollar)
• NZD/USD (New Zealand dollar/US dollar)
• USD/CAD (US dollar/Canadian dollar)
• AUD/USD (Australian dollar/US dollar)

With the USD being part of these currency pairs, 90% of all forex transactions include the US dollar.

7.      When is the Forex Market Open for Trading?

The forex market functions 24 hours a day, from 9:00 pm UTC (5:00 pm EST) on Sunday to 8:00 pm UTC (4:00 pm EST) on Friday. Due to the time zone differences across the world, the market in one particular region is always open through this time. Each day’s session usually starts with the opening of the Sydney session and ends with the closing of the New York session.

There are 4 main sessions:

• Sydney: 9:00 pm to 6:00 am UTC
• Tokyo: 12:00 am to 9:00 am UTC
• London: 7:00 am to 4:00 pm UTC
• New York: 1:00 pm to 10:00 pm UTC

As you can see, there are times when sessions across time zones overlap. The highest trading volumes are usually seen when the London and New York sessions overlap, since these two financial centers account for over 50% of the trading volume.

8.      Which is the Best Forex Trading Platform?

There are multiple trading platforms available today, such as Metatrader 4 (MT4), Metatrader 5 (MT5) and ProTrader. However, the most popular platform for forex trading is MT4. It was built specifically for forex trading and offers robust features and functionalities for traders of all experience and skill levels. MT5 is more popular with experienced traders, since it offers advanced analytic tools and back-testing capabilities.

It may be a good idea to try the platforms for yourself via a demo account to see which one suits your trading style and goals the best.

9.      How to Manage Risks in the Forex Market?

Forex price fluctuations mean that the market can move in an unfavourable direction at any time. The best way to stay prepared for market movements is to strengthen your knowledge and skills in technical and fundamental analysis. If your trading decisions are based on robust analysis, the chances of your price predictions panning out tend to increase.

Also, remember that emotions can play havoc on your trading decisions. For instance, fear can make you pull out of a profitable position too soon or greed might lead you to hold on to a losing position in hopes that it will reverse. Basing your trades on a tried-and-tested trading plan and sticking to it is a good way to keep emotions out of the equation.

There also are some measures that you can put in place to mitigate risks. Here are the most commonly used measures:

• Stop Loss – Here, you set a predefined price point at which your position will be automatically closed. This can help limit losses when the market suddenly changes direction.
• Trailing Stop – This is similar to stop loss, except the price point moves in a specified direction while the market is moving in your favour. When the market reverses, the position is closed.
• Take Profit – Here too, you set a price point at which your position will be closed. This price is at a specific distance from your entry price. It helps lock in profits before the price moves in the opposite direction.

10. What are the Most Commonly Used Forex Trading Terms?

Familiarising yourself with the jargon is essential to understanding trading.

• Currency Pair – All trades involve a pair of currencies, where one is bought and the other is sold. For example, when we talk about “buying” the EURUSD, we mean you’re purchasing the euro and selling the US dollar.
• Base & Quote Currency – The first currency in a pair is called the base currency. In the above example of the EUR/USD, the euro is the base currency. The second currency is the quote currency because the price of the pair is quoted in this currency. So, when we say the price of the EUR/USD is 1.0401, it means that you can buy €1 for $1.0401.
• Bid Price – The bid price (from the trader’s perspective) is the price at which you wish to sell a currency. 
• Ask Price – This (from the trader’s perspective) is the price you are willing to pay to buy a currency.
• Pip – The pip is the lowest amount by which a currency price can move. For most currencies, a pip is quoted to the fourth decimal place (0.0001). The only exception is the Japanese yen, where a pip is quoted to the second decimal place (0.01). So, for most currency pairs, 0.0001 is one pip.

Wrapping Up 

If you’re a new trader or thinking about trading forex for the first time, the best way to start learning is by opening a demo account. A demo account will not only help you learn the basics, but will also expose you to real-world trading conditions. Using a demo account is completely free of cost. Also, look for tutorials, articles and guides on your broker’s site to learn more.