Basic Forex Principles

April 22, 2014

Basic Forex Principles | Vantage FX Education

What you need to know before you start trading Forex

Before you start trading, there are some basic principles and general market conventions you will need to know.
As you may have read on the previous article, currency prices are always referred to in pairs where the base currency is referenced first and the quote price second. In the example below, the British Pound is the base currency and the American dollar is the quote price.

GBP / USD
Base / Quote

You will see the price of one such pair GBP/USD as 1.5800. This means that you will need $1.58 USD is required to buy 1 GBP.

Forex symbols are always three characters long – where the first two letters identify the country and the third refers to the currency. The most commonly traded currencies in the world are listed below along with their symbol codes and their nicknames.

Symbol Country Currency Nickname
USD United States Dollar Buck
EUR Euro Members Euro Fiber
JPY Japan Yen Yen
GBP Great Britain Pound Cable
CHF Switzerland Franc Swissy
CAD Canada Dollar Loonie
AUD Australia Dollar Aussie
NZD New Zealand Dollar Kiwi

When is the best time to trade?

The best time to trade Forex is when the markets are most active with the largest volumes of trades happening. The highly active periods occur when the market sessions time overlap (when two sessions are open at the same time).

Forex Market Hours

Handy to know with Forex trading is that it technically open 24 hours a day with only a few closures gaps over the weekend. This is extremely advantageous in allowing traders to jump onto their platforms at a moment’s notice when something adverse happens in the market.

The four main trading sessions can be viewed in the table below.

Time Zone (Summer) EDT GMT Time Zone (Winter) EDT GMT
Sydney Open 6:00 PM 10:00 PM Sydney Open 4:00 PM 9:00 PM
Sydney Close 3:00 AM 7:00 AM Sydney Close 1:00 AM 6:00 AM
Tokyo Open 7:00 PM 11:00 PM Tokyo Open 6:00 PM 11:00 PM
Tokyo Close 4:00 AM 8:00 AM Tokyo Close 3:00 AM 8:00 AM
London Open 3:00 AM 7:00 AM London Open 3:00 AM 8:00 AM
London Close 12:00 PM 4:00 PM London Close 12:00 PM 5:00 PM
New York Open 8:00 AM 12:00 PM New York Open 8:00 AM 1:00 PM
New York Close 5:00 PM 9:00 PM New York Close 5:00 PM 10:00 PM

 

The Basic Premise of Forex Trading

The movement and activity in the Forex market is all dependent on the expectations of traders. Before an order is placed, a trader will decide whether they think a particular currency will weaken or strengthen against another currency in the future. This will affect their decision of whether to buy or sell as well.

Factors such as political climates, economical events and announcements, monetary policies and even environmental factors, such as natural disasters, will affect a trader’s expectations on the future movements of a nation’s currency.

Using the above quoted currency GBP/USD 1.5800, a trader can look at either currency to make predictions. So, if a trader thinks that the US economy will weaken against the British economy, they would sell the USD and buy GBPs. If their prediction is accurate and the USD does weaken, when they close their trade (reverse the original trade) – they would in essence be selling the GBPs back into USDs at a profit.

On a simple level, that is all the basic understanding that is required to trade Forex. What makes it much more exciting and complex is the degree into analysis which is undertaken for foresting. Traders generally have to keep up with news from all over the world and use a mix of charting and analytical tools to support their market prediction decisions.

The next sections of this guide will introduce you to examples of trades, charts and basic technical analysis.

 

Lesson Three: How do Forex Trades work? »

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