Basic Forex Principles

Forex Terminology & Conventions

Let’s look at some of the terminology that is used in Forex trading. The basis for all trades is the fact that the prices of currency are always listed in pairs. For example, the British Pound and the American dollar would be portrayed as GBP/USD – 1.7500. To buy the base currency (in this case the British Pound) you would need to pay $1.75 of the quote currency (in this case the US Dollar). The base currency is always listed first and the quote currency is listed second.

It is possible to trade most currencies in the world but the most frequently traded currencies are:

Forex symbols are always three characters where the first two letters identify the country and the third identifies the currency.

Involved in 86% of trades, the US Dollar is the most traded currency, followed by the Euro at 37% and the Japanese Yen at 16.5%.

The Basic Premise of Forex Trading

The basic premise behind a Forex trade is the trader’s expectation that one currency will weaken or strengthen in relation to another. In the above example, we saw a ration of 1/1.7500 between the GBP and the USD. What a trader will do is either buy or sell GBPs or USDs based upon his expectation of what the currencies will do in the future. And remember, with the speed at which you can make trades and the ease with which you can do it, the word future can mean a lot of things from mere minutes to days or longer.

So, if the trader thinks that the American economy is weakening and the USD will weaken against the GBP he would sell USDs and buy GBPs. If the USD does, in fact, weaken then he can sell his GBPs back into USDs for more than he paid for them and realise a profit.

Forex trading is really no more complicated than this. What can get complicated is the degree to which analysis by traders is done to try to determine which way the currencies will go. This is where things get really interesting and this is something that will be covered in the next series of articles on this exciting and potentially lucrative world of Forex trading.

Forex Market Hours

Forex trades can be made at almost any hour of any day. There are just a few gaps over the weekend between market openings but other than that it’s an open market. What does this mean for the trader? Well, it’s just one of the advantages that forex trading has over other forms of trading. You have much more control over when you can trade and since the forex market can be so volatile being able to make trades whenever you want is extremely important.

The forex market can be broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and the New York session. Below are tables of the open and close times for each session:

You can see that in between each session, there is a period of time where two sessions are open at the same time. From 3:00-4:00 am EDT, the Tokyo session and London session overlap, and from 8:00-12:00 am EDT, the London session and the New York session overlap.

So, when should one trade and why?

The best time to trade is when the markets are active and have the biggest volumes of trade, usually this is when the sessions overlap and two markets are open at the same time.

The best way to understand Forex trading is to see some trade examples. In the next section, we will provide some numerical examples with notes for you to see how the trade works.