Forex might seem like a bit of a minefield to begin with, but once you nail the main principles, you’ll be well on your way to trading like a pro in no time.
In this article, we’ll give you the rundown on what exactly Forex is, how to analyse and understand charts, as well as some helpful tools to use in your traderoom.
Let’s get to it!
What is Forex?
Firstly, it’s important to understand what Forex is exactly, why it exists and why it’s existence is necessary.
The term ‘Forex’ is short for ‘foreign exchange’ and is mostly referred to as ‘FX’. The foreign exchange market is not just the largest market in the world, but it’s also the most liquid. It’s decentralised: it’s not just one place, it’s a system of stable economic connections between banks, brokers and individual traders, with one main goal of speculating on foreign currency (buying, selling, exchanging etc).
The FX market doesn’t set the value for currency; it simply determines its value against another currency. This is why you’ll often see currency pairs like EUR/USD, AUD/JPY and so on. Its pairs like these that Forex focuses on.
To understand Forex charts, there are a few points to consider:
- Base and Quote currency: The exchange rate always shows two currencies. The first currency is called the base and the second one is the quote. The price of the base currency is always calculated in units of the quote currency. For example, if the exchange rate for GBP/USD is 1.29, it means that £1 Sterling costs $1.29 US dollars. Based on this price, a trader can better understand how the chart is formed. If the chart is going up, it means that the price of the USD has depreciated against GBP. If the chart is going down, it means that the price of the USD is growing against the GBP.
- Major and exotic currency pairs: All currency pairs can be sorted into major and exotic currencies. Major world currencies are predictably called Major currencies, which include: EUR, USD, GBP, JPY, AUD, CHF and CAD. Exotic currency pairs are those of developing or small countries, such as TRY, BRL, ZAR etc.
- CFD: On many trading platforms, including IQ Option, Forex is traded as CFD (Contract for Difference). When a trader opens a CFD, they don’t own it, but they trade on the difference between the current value and the value of the asset at the end of the contract (when the deal is closed). This means that a trader will receive their outcome in accordance with the entry and exit price.
- Multiplier: Using a multiplier allows the trader to manage a position that is greater than the amount of funds at their disposal. However, this of course increases the risks involved.
Analysis tools for Forex
On a variety of trading platforms, traders are able to make use of analytical charts that, when utilized correctly and effectively, may assist in a preferable outcome.
Each asset may be provided with an ‘information’ section on a trader’s specific trading platform.
For example, on the IQ Option platform, you can find the “Info” button which opens a tab with asset info. This button can be found on any asset, not just Forex.
The information provided in the tab includes the information about the change in the asset’s price, news that may affect the currency as well as collective technical analysis of the asset based on signals of popular indicators.
Such analysis may come in handy for traders who make multiple trading deals in a day and need all the analytical data to be in one place, in easy access.
Of course, this information should not replace a trader’s own analysis, however, it may be very useful when deciding how, when or what to trade. It can also be helpful for beginner traders, who still need some guidance regarding the usage of analysis tools.