Forex trading / currency trading is all about speculating on the exchange rate fluctuations between different currencies with the obvious intention of making a profit.
Globally, it has for a very long time been very popular to trade on the exchange rate developments between the so-called major currencies;
Euro (EUR), US dollar (USD), Swiss franc (CHF), Japanese Yen (JPY), and the English Pound (GBP).
These 5 largest (traded volume) currencies in the world are in forex trading commonly referred to as ‘Majors’.
In this short forex trading guide, you will get a brief introduction to forex trading and how to get started trading forex.
Forex Trading in Practice
In forex trading, you always trade with so-called currency pairs (also called currency crosses) – i.e. two different currencies at once.
For example, if you buy euros against the US dollar, you are in forex trading terms; long EURUSD.
Long here means invested, as opposed to the term ’short’ meaning sold…
In other words, you have bought euros (EUR) and sold dollars (USD)…
You are in practice betting that the Euro will strengthen against the US Dollar…
Here you can open a trading account and be up and running with your forex trading in just a couple of minutes
The first currency of a currency pair/currency cross is called the base currency, while the latter is called the secondary currency.
In the EURUSD currency pair, the euro is the base currency, and the dollar is the so-called secondary currency.
If you choose to buy a currency pair, you effectively buy the base currency and at the same time automatically sell the secondary currency.
If you sell a currency pair, the situation would necessarily be the opposite. Hence, you sell the base currency and at the same time automatically buy the secondary currency.
This is the very essence of Forex trading…
For example, if you were of the opinion that the US dollar (USD) should strengthen relative to the Swedish krona (SEK), you would therefore buy the USDSEK currency pair.
Leverage (Margin Trading)
Forex Trading is in practice pretty much always leveraged.
This means that most people who engage in forex trading choose to trade for larger amounts than the actual size of their own equity.
Margin-trading is in short that you can take on a lot higher market exposure than the balance of your trading account would suggest.
Leverage is very widely used among currency traders as currency prices tend to fluctuate a lot less from day to day compared to asset classes such as stocks and indices etc.
If the price of a currency pair moves more than two percent during a day, this is in practice a very large movement in forex trading terms.
Leverage allows you to trade high volumes of forex without having equally large amounts of capital tied up in the actual trades.
In forex trading, currency pairs are usually divided into three main categories: Major, Minor, and so-called Exotic(s).
Majors include the largest currencies consisting of two of the following currencies:
U.S. Dollars (USD), Euro (EUR), Japanese Yen (JPY), English Pound (GBP), Canadian Dollar (CAD), or Swiss Franc (CHF).
Major currency pairs have the highest liquidity and can normally be leveraged up to 30 times, i.e., a margin requirement of 3.33 %.
This level of leverage is pretty much standard within the EU as regulations are given by ESMA (European Securities and Markets Authority).
However, if you choose to establish a so-called ‘non-EU account’, you will in practice be admitted to a lot higher degree of leverage.
Minors are currency pairs that consist of only one of the following currencies:
- Euro (EUR)
- British Pound Sterling (GBP)
- Canadian Dollar (CAD)
- Australian Dollar (AUD)
- Japanese Yen (JPY)
- Swiss Franc (CHF)
- New Zealand Dollar (NZD)
Minors usually also have a margin requirement of 3.33 % (X30 in leverage).
Exotics are currency pairs that normally experience far less trading and a lot lower liquidity than the larger currency pairs.
This includes Turkish Lira, Mexican Pesos, Norwegian and Swedish kroner, among others.
Margin Rates and Forex Trading
In forex trading, the so-called exotics can normally within the EU be traded with a leverage of up to 20 times, i.e., a margin requirement of 5 percent.
Let’s say you want to buy the Euro vs the Norwegian krona (EURNOK) currency pair with an exposed amount of 100.000 euros.
If the EURNOK exchange rate is 1 Euro to 10 Norwegian kroner, this corresponds to an exposure of NOK 1,000,000.
Since the Norwegian krone is classified as an “exotic” currency, you will typically have a margin requirement of 5 percent, i.e., maximum leverage of 20 times.
To take on exposure of NOK 1.000.000 in EURNOK, you will only be required to tie up a minimum margin of EUR 5.000.
If in this situation as an example you were to have the amount of EUR 10.000 in your margin account, you would have effectively have tied up 50 percent of that available margin with this trade.
A stop-loss order is an order that automatically closes your position(s) at a specific price.
In Forex trading, and especially upon trading on margin, this order type is very important as the effect of price fluctuations in practice are multiplied by the applied leverage.
If you have a very large position relative to the balance of your trading account, you can at worst risk losing the whole balance account by not using stop-loss orders…
You can easily place the desired stop-loss order in most trading platforms (and of course change, -or delete it afterward as you see fit).
The Skilling Trader trading platform automatically calculates your highest potential loss upon you entering your desired stop-loss level.
Take Profit orders
Take-profit orders are in practice the opposite of stop-loss orders and they close your forex position(s) automatically (in profit) at a pre-determined price.
Benefits of Forex Trading
The foreign exchange market has a great many advantages that traders can utilize.
The foreign exchange market is massive, and it is estimated that an amount of approximately USD 5 trillion is traded in the forex market every day.
Since liquidity is extremely high, you will normally never have a problem entering or exiting a forex trade.
The massive liquidity in forex trading enables the use of these very low margin requirements (this in practice compared to any other market).
Currencies are usually not particularly volatile compared to equities, indices, and commodities.
However, since liquidity in forex trading is so high and you can use a leverage of up to 30 times (or more), you can end up earning (or losing) a lot on just a small percentage movement.
Open 24 hours
The foreign exchange market opens Sunday evenings and closes on Friday night so that forex trading in practice can be carried out around the clock 6 days a week…
What affects the forex market?
In short: The price of a currency is affected by more buyers wanting to buy the currency vs another, or more sellers wanting to sell the currency in favor of another currency.
What causes the demand for a specific currency to rise can be both fundamental and technical factors.
The Norwegian krone is to a large extent correlated with oil price movements.
This is due to Norway being a major international oil and gas exporter and the relatively small Norwegian economy is heavily dependent on oil, -and all activities related to the oil industry.
If oil prices were to drop sharply, this will obviously influence the Norwegian economy.
Lower economic growth tends to lead to lower inflation, which in turn affects the foreign exchange market.
The central bank in Norway having a targeted inflation level of 2 % and may choose to lower the interest rate to stimulate the economy and hence the level of inflation given the drop in oil prices.
Lower Norwegian interest rates then make it less desirable to keep funds in NOK, and the Norwegian Krone may depreciate as a lot of currency traders and other market players chooses to sell the NOK in favor of other currencies…
Risk associated with Forex Trading
Since forex trading often involves the use of leverage, the risk involved will increase in line with the amount of leverage used.
You can significantly limit the risk by using stop-loss orders.
For example, if you as a maximum want to risk EUR 100 per trade, you can place a stop-loss order that limits your potential loss to this maximum amount.
Non-professional clients (the vast majority) who use a forex broker regulated within the EU will not risk losing more than the balance of their margin account.
This is as regulated forex brokers are required to cover retail client losses exceeding the balance of their accounts.
Hence, you will not risk losing more than your actual deposit due to this mandatory negative balance protection.
Forex Trading Platforms
When choosing a forex trading platform, it is important that you make sure that the broker (the company that offers the platform) is regulated and, -or have the right permits to operate within your jurisdiction.
Without the right regulation, you effectively lose investor protection, and you can at worst end up as a victim of fraud…
We recommend the forex trading platform of the Scandinavian fin-tech broker Skilling, as it is very user-friendly, has very low costs, as well as Skilling is regulated and approved globally (with some exceptions).
Further, having the opportunity to trade from a multitude of trading platforms from one single account is also a great advantage with trading with Skilling.
As a forex trading client with Skilling, you can trade on the following world-leading trading platforms;
You can read more about Skilling in our comprehensive review here.