We’re going to go through some of the basics of the foreign exchange market. How does it work? How people trade it? And, what makes currency pairs move? So, what I thought we’d do is take maybe something of a step back now. I appreciate plenty of people are quite familiar with foreign exchange trading but for some people, it might be a new thing. So, we’ll do a few minutes just explaining how this market works when you’re trading.
What you’re actually trading and what makes currency pairs move. Now first of all foreign exchange market, it’s the biggest market in the world. It trades trillions of dollars a day around the clock so it appeals to both traders who are trading small size and larger size. Because it’s relatively easy to get your trades filled and the cost of doing business is much lower when compared to other markets with currency markets, no currency moves in isolation. So we have the idea of currency pairs one currency quoted against another, so to make sense of this let’s take a quick look on the platform.
So we’re on the trading two-on-two platform, let’s click on currencies now so here’s the list of various currencies Australian dollar, Canadian dollar, Swiss franc, Czech koruna and so it goes on so there are potentially hundreds of permutations we could trade. For example, PLN polish zloty, if you wanted to you could take a view on the Polish zloty against the Japanese yen, polish zloty against the Mexican pesos. There are all sorts of combinations. You can do it what most people tend to do in the beginning at least is stick to the major markets that the major currency pairs. Because there’s normally plenty going on in those markets and with trading – and – if you’re trading 25,000 units or less you can trade these with zero spread. So let me just highlight these by typing in zero at the top so there we go that the most popular market. Euro-dollar then we have the other Majors dollar-Japanese yen, Pound-US dollar and the dollar against the Swiss franc. So when we’re looking at currencies and currency pairs it’s all about relative value is one currency stronger or weaker than another currency and to get an idea of this.
Let’s take a look at how one currency pair has moved over recent months. So all the currency pair is showing is the relative value of one currency versus another. So if we’re looking here in this example pound-US dollar we can see at the beginning of 2017 so January 2017 one pound would buy you around about one dollar and 22 cents. At the beginning of September, the pound had risen in value and one pound would buy you one dollar and almost thirty-two cents. So when we’re looking at Forex pairs foreign exchange trading we’re looking at the value of one currency versus another. Now because we have currency pairs I think it can be a bit confusing at the beginning for some people when they click and they buy dollar-yen or what am I buying. I saying that dollars gonna go up my saying the yen’s gonna go up it’s understandable. Why this is confusing to some but it’s really easy I think to understand. Again, to understand when we’re trading what direction are we actually trading in when it comes to the directional trading it’s really easy like I said it can be a bit confusing for people in the beginning but the way to remember if you buy pound US dollar it’s the first quoted currency in the currency pair that you’re buying and selling buying or selling. So if I buy pound-US dollar I’m speculating that the pound is going to go up means this chart is going to go up and correspondingly the US dollar is going to fall. So the value of the pound is going to increase against the US dollar. For example, if I’d bought down here bought pound US dollar at the beginning of the year and we’re still holding the position I’d be sitting on a reasonable profit. if I thought the pound had gone up too far and I think why the markets gonna fall how do I profit from this well how do I try and profit from this the way to do it I would click on sell. I would sell pound against the US dollar. So I’m speculating the value of the pound is gonna drop on this it’s going to turn lower okay, so that’s the rule of thumb. When you’re buying or selling it’s the first quoted currency that you’re buying or selling against the other one so if we sold the dollar against the Japanese yen we’re speculating the dollar-yen is gonna fall so the dollars gonna fall and the yen is correspondingly gonna rise. When it comes to trading hours foreign exchange market is a true 24-hour market so it starts off Sunday night UK time when the Asian markets open for business and it trades all the way around the clock till Friday evening. When New York finishes off for the weekend than on Sunday the whole thing starts again but you don’t need to be intimidated or worried by there’s 24-hour market.
Let’s take a look at some of the moves that we see and how we might want to trade it. Here’s a snapshot of a few days paired against the dollar where each of these candlesticks represents 10 minutes worth of trading. So going back to the 5th of September and ending up at the end of that particular week on the 8th of September so we can see from the scale just down here that this is a 24 market. For example, this section here we’ve got from 11 o’clock UK time Asian trading kicks in the market moves higher then we have sort of 7:00 to 8:00 in the morning UK time. When the focus shifts to Europe and the market continues to rise in this example and then we have US time. So from about five-six o’clock in the evening UK time the focus is very much on the US and we had something of a quiet finish but don’t think worried about this being a 24-hour market you know. Thanks to stop losses and take profit orders you can set up your trade so if a certain level gets to hit you come out for a small loss or you come out for the profit you’re expecting just because it’s a 24-hour market you don’t need to watch these markets around the clock sitting there in your pyjamas with matchsticks holding your eyes open. You know you can use orders to manage the risk for you when you’re trading foreign exchange that like so many other products these days you’re trading using leverage. So even though you might have let’s say $100,000 position in one currency you don’t actually tie up the whole amount because traditionally currencies don’t move that much during the day you’re trading using leverage. So you may only have to put up half a percent or one percent value of the position so you have a situation where a small sum of money can control a much bigger financial position. Of course that gives you the potential for greater profits but hand-in-hand with that goes the risk of bigger losses which is why it’s important I think to manage the risk using stop losses.
The last thing we might want to look at is what moves foreign exchange pairs. The short answer and maybe not too helpful is potentially everything can have an impact on the currency markets. From things like interest rates, for example, if the interest rates in one country is higher than the interest rates in another country that can make that currency appealing. But hand in hand with that sometimes higher interest rates mean maybe a weaker economy so that can make money flow the other way things like unemployment numbers have an impact as well and as we’ve seen you know in the past from 12 to 18 months political events can have an impact the great example of that is the pound. We’ve seen the pound very volatile since the referendum vote in June 2016 so all of these things can come together with an effect of foreign exchange markets. So that’s it that’s a brief introduction to some of the basic mechanics of foreign exchange.