FOREX BASICS: Forex affects every aspect of your dally life, From buying your morning cottee, to refuelling your car, to going on holiday. This is all made possible through the process of forex in motion. So what is Forex, exactly? ‘The word Forex is a mash-up of Foreign Exchange and is commonly used to refer to the Foreign Exchange Market, the largest financial market in the world, Picture a massive marketplace trading across all the corners of the globe, but rather than goods on sale, this market trades in global currencies. ‘AS a global institution, you might wonder where on Earth the Forex is based, Well, it's actually everywhere! Forex is a decentralized market with no single central authority or exchange that governs it al Instead, it is mace up of a network of banks, brokers, dealers, and even governments who trade currency with each other, Imagine the Forex Market as a labyrinth of connections stretching across the globe, Traders navigated these connections like skied sailors forging new trading paths while studying the patterns of the tides and upcoming weather charts, cLIQUIDITY The Forex Market is the largest liquid financial market in the world. So, what does a liquid market even mean? Visualize a vast global marketplace where many players are trading. Each transaction barely makes a ripple on the surface, like dropping a tiny pebble into the ocean, Because of the market's vast size, people can quickly enter in and out of trades without causing much disruption to the exchange rate. Simply put, a liquid market is a financial market where lots of trades occur, and it's easy for traders to buy and sell. In fact, a massive 6.6 trilion can be traded on the Forex daily! Also, thanks to Forex’s global nature, the market operates 24 hours a day, Monday to Friday.MARKET VOLATILITY High volatility means prices are changing rapidly and by significant amounts, like a crazy roller coaster ride with sudden drops, and steep climbs. ‘When the markets are going through a period of high volatility, you better hold on because you're in for a thrilling and unpredictable ride. In times of low volatility, the market is calm, with smaller exchange rate fluctuations and price changes. Low market volatility is like leisurely riding on a scenic railway, tootling steadily along its gentle track. There are many factors that can cause market volatilty to increase or decrease, = Inflation - Market Demand - Foreign Policy Announcements - Political and economic conditions - Economic Data releases - Central Bank Decisions - Natural Disasters or Crisis - Changes in Interest Rates With all these factors at play that cause swings in price, speculating on exchange rate fluctuations is one of the most common ways for individuals to make money trading in the. Forex market. So, how do people make sense of the forex market? Well, traders can employ a range of trading strategies, once of which is: “TECHNICAL ANALYSIS With technical analysis, traders study historical price movements and data in order to help predict similar patterns that have the possibility of repeating themselves in the future. The idea here is history loves to repeat itself. Think of technical analysis like a detective hunting down clues to uncover the how an individuals acted in the past in order to try and predict how thing will act again in a similar way in the future Now, another method people use to trade the forex market i“FUNDAMENTAL ANALYSIS Fundamental analysis, on the other hand, examines the broader macroeconomic and geopolitical factors that influence the exchange rate and currency value, Picture fundamental analysis like compiling a weather forecast. As a forecaster, you are analyzing the atmospheric conditions to create a prediction for future weather events. Rather than atmospheric conditions, forex traders are looking at factors like: + Acountry's economic indicators, such as GDP growth, inflation, and unemployment to, gauge the health of the country's economy. + Interest rates and monetary value + Political events and government policy change + Central Bank Statements + Any breaking news and or significant market events They use this information to try to predict the upcoming market fluctuations in exchange rates and currency value and use them to their advantage. Many traders use an economic calendar as a way to keep track of upcoming economic events or announcements. Let's now dive deeper into some key forex trading concepts. URRENCY ABBREVIATIONS Each currency is represented by a three-letter code called an ISO code. ‘Here are some of the main currencies traded: USD = is the US Dollar = also known as simply “The Dollar” AUD = is the Australian Dollar = also known as “The Aussie” NZD = is the New Zealand dollar = also known as “The Kiwi” CAD = is the Canadian dollar = also known as “The Cad” GBP = is the British pound = also known as simply “The Pound”- JPY =is the Japanese yen = also known as simply “The Yen’ ~ CHF = is the Swiss franc = also knows as simply “The Swiss” In Forex, currencies are traded in pairs, because, when you trade Forex, you are buying one currency while selling another at the same time, Let's look at the GBP/USD currency pair for example. The first currency in a pair is the base currency (GBP), and the second is the quote currency (usp). BASE CURRENCY Ne GBP / USD < QUOTE CURRENCY Let's say you get a quote of GBP/USD 1.2655 This means for ever 1 GBP. you get 1.2655 USD There is always an invisible 1 beside the base currency on the left (1 GBP = 1.2655 USD) 1 GBP / USD 1.2655 1 GBP = 1.2655 USDSo here's what happens when you actually trade currency pairs: - When you buy a currency pair like the GBP/USD, or when you “go long” on the GBP/USD, you're expecting the pound to appreciate while the dollar depreciates = When you sell a currency pair like the GBP/USD, or when you “go short” on the GBP/USD, you're expecting the pound to depreciate while the dollar appreciates “WHAT IS A PIP. In the land of the Forex, exchange rate changes are measured in Pips. A pip stands for: a “Percentage in point” of a “Price Interest Point” This a standardized measurement for the smallest whole unit price move that an exchange rate can make. If the Australian Dollar were sitting at 0.6751 and its value gained by one pip, it would move to 0.6752, Most currencies are written to the fourth decimal place, with the fourth decimal place representing one pip. However, some exceptions buck this trend such as with Yen crossed pairs. ~ The Japanese yen (JPY) is often quoted to two decimal places = USD/JPY 146.22 - Soa one pip gain would be 146.22 to 146.23, “Pipette: there is a a pipette, which is a fractional pip that is one-tenth of a pip and is represented by the fifth decimal place “LOTS SIZES & PIP VALUE So, what is the value of a pip? ‘Well, the value of a pip depends on three things. The currency's value, exchange rate, and trade value. Since each currency has a different value and exchange rate, you need to calculate the worth of a pip or price interest point to determine its monetary value relative to the currency value and exchange rate. The basic equation you use to work out the value of a pip is as follows. Value of 1 Pip = (Pip Value in Quote Currency / Exchange Rate) Let's break this calculation down a little.We are determining the value of one pip in terms of the quote currency (the second one in the pair). The pip value depends on the lot size being traded, and the lot size refers to the amount of the currency being traded. The Forex traditionally has standardized lot sizes. ~ Asstandard lot is the largest lot size on the Forex and represents 100,000 units of base ourrenoy. = A mini lot is a tenth the size of a standard lot and represents 10,000 units of the base currency. = Armicro lot is 1000 units of base currency, and a nano lot is 100 units of base currency. You can see that these lot sizes are reduced by a fractional size each time. So now we've got the lot sizes figured out, we can go back to figuring out the pip value, To determine the pip value, we use the calculation. Pip value = 0.0001 x the lot size So, for a standard lot, it would be 0.0001 x 100,000 So, in this example, the pip value would be ten units of the quote currency. For example, if you're trading the EUR / USD currency pair and the change rate moves from 1.1750 to 1.1761, it has moved by one pip. In this case, the value of your position would change by 10 units of the quote currency (in this case, the US dollar) Many currency pairs feature the US Dollar. However, if you need to calculate the value of a pip for a yen-crossed pair (Where Japanese Yen is the quoted currency), the calculation will differ slightly. Due to the yen’s lower value and historical conventions of the Japanese financial markets, the yen is commonly written to the second decimal place, and the second decimal place represents a 10 pips rather than one. When trading yen crossed pairs, the calculation is adjusted slightly to Pip Value = 0.01 x the lot size This means for yen pairs such as USD/JPY or EUR/JPY, each pip movement in the exchange rate actually represents a change of 10 pips in terms of pip value. Understanding the pip value is essential for traders to access potential losses and gains, create trading strategies, and implement risk management.“BID & ASK & SPREAD Each transaction has a Bid and an Ask price. These two prices form the basis for trading on ‘the Forex market. ‘The Bid price is the price the market is willing to buy a specific currency pair from you. Whereas the Ask price is the price, the market is willing to sell. When you're looking to buy an asset on the Forex, you will pay the Ask price for the base currency. But when you're looking to sell an asset on the Forex, you will sell at the Bid price, So, if you are selling a currency pair on The Forex, you would enter the market at the Bid price; however, if you're looking to buy currency, you will enter the market at the Ask price, Take the currency pair EUR / USD. If the market data at the time was Bid Price 1.2000 Ask Price 1.2005. It means that the market would be willing to pay you one euro for 1.2000 dollars at that specific moment in time. {As a seller of US Dollars in exchange for Euros, you would receive the bid price. In this case, you would receive 1 Euro for every 1.200 US Dollars you sold. ‘As a buyer looking to purchase the base currency, you will pay the Ask price because that is. the price the market is willing to sell to you, So, in this example, as a buyer, you would purchase Eures by exchanging US Dollars. You will receive one Euro for every 12,005 Dollars you sell. The difference between the Bid and Ask prices is called the spread. In essence, the bid-ask spread is the difference between the price a dealer will buy a currency and what they will sell it for. The spread covers the dealer's profit and the cost of the transaction. It is essentially the cost you pay to enter the market. It's important to note different brokers can offer different spreads, or they may offer variable spreads that can change based on market conditions, Like making buying anything, it pays to shop around to get the best deal.DIFFERENCE BETWEEN BID AND ASK PRICES ‘LONG & SHORT When speculating on currency price fluctuations, traders can either go long or they can go short. Going Long means buying a currency pair with the expectation that the interest rate will rise over time. Imagine you are a fisherman patiently waiting for that big monster catch. Going long means waiting for just the right moment in the fishing season to catch the biggest fish. You're holding off, hoping the fish will increase in size by the time you reel it in. Going short means you're selling a currency pair with the expectation that the exchange rate will fall over time, “BROKERS & LEVERAGE BROKER LEVERAGE (01) Sk, =Most individual retail traders, by that, | mean private individuals trading on the Forex using their ‘own money, will use brokers to trade on the Forex, Brokers provide online trading platforms. They may offer their customers trading and research tools, educational resources, and leverage. Effectively, brokers act as a key to the Forex door. So where does leverage come in, and what exactly is it? ‘Well, leverage involves using borrowed capital from a broker to trade in much larger positions than the actual amount of money you hold This approach can lead to higher returns as gains and losses are calculated on the full position size. Imagine leverage like using a financial lever. With a lever and minimum strength, you can lift heavy loads with less effort. Like a lever that magnifies physical strength, financial leverage magnifies your trading power. FINANCIAL LEVERAGE TRADING PoweREssentially, leverage turns up the volume on trades; however, with the potential for more profit comes the potential for more loss. It's important to keep in mind that leverage can act as a double-edged sword. Using leverage can increase trading options and can be used to make trading capital more efficient rather than tying up a significant portion in a single trade. Leverage offerings vary from broker to broker and are usually expressed in a ratio such as 1:50, 4:100, or 1:500. Usually, traders will be required to deposit a margin of the trade to act as collateral for the leveraged position. LEVERAGE OFFERINGS RATIOS | 1:50 1:100 | 1:500 |