The forex market is surely on a wild ride right now, and the rest of forex 2020 is probably going to be just as wild as its start so you might be wondering, as a beginner, how you might be able to tread these murky waters. Don’t worry! This article is here to help you navigate through this jungle.
So, off to the market!
What is Forex?
Forex is simply a shortcut for “foreign exchange.” You can also write FX or fx, and it will mean the same. But what is it, really?
In its simplest form, forex is when you exchange a currency for another currency using an exchange rate. When you travel abroad and you want to buy something, you have to exchange your money to the local currency. That’s foreign exchange.
So, what is forex trading?
Obviously, forex trading runs on the same principle as the exchange of one currency to another. But there are extra layers.
For one, forex trading means trading: you don’t simply exchange money. You trade money: you have a broker or trading account, you place orders, and your goal is to make more money. And we’re not talking about only your currency here.
Currencies
There are literally hundreds of currencies in the world. It’s a mind-bender if you need to trade them all! Luckily, you only really have to focus on a handful of currencies to start. These are:
- US dollar (USD)
- Euro (EUR)
- Japanese yen (JPY)
- British pound (GBP)
- Australian dollar (AUD)
- Canadian dollar (CAD)
- Swiss franc (CHF)
Cool, you might say. So, you only need to focus on seven currencies. But you need to focus on two currencies each time you trade.
Currency Pairs
As we’ve described, you trade forex by exchanging one currency to another. So, you need to focus on two currencies at a time. The following are the major currency pairs:
- EURUSD
- USDJPY
- GBPUSD
- USDCHF
- AUDUSD
- USDCAD
- NZDUSD
The first four are practically the rock stars of the forex world. The last three pairs are majors because of their heavy volume and reliance on commodities. However, what does trading a currency pair entail?
Since you’re looking at two currencies at a time, you’re looking at two countries and when you’re looking at two countries with the goal to gain profits off of their currencies, you’re looking at two economies. You’re going to study two economies every time you trade a pair.
Bid, Ask, Spread
Okay, so here come some technical things you need to know when you start trading. You,ve got a broker, and that broker may or may not also be your market maker. A market maker, by the way, is an entity taking the opposite position to your bet or trade.
So, this market maker will offer to sell a pair at a given price, which here is known as the ask price. Then, they will also buy a pair at a given price, which here is the bid price.
When you trade, you either buy at the ask price or sell at the bid price but what about the spread?
The spread is simply the difference between the ask and bid prices. This amount is the principal transaction cost the market maker collects. As you may suspect, the tighter the spread (the smaller gap between ask and bid prices), the better.
Long and Short Positions
“Long” and “short” positions are two of the terms that aren’t really that important to learn, but it’s necessary to understand them if you don’t want to get lost in the sea of jargon and terminologies. So, basically:
- Long position: you buy
- Short position: you sell
When you trade a currency pair, in which the first currency is the base currency and the second currency is the quote currency, you automatically go long on one currency and go short on the other.
Say, for instance, you want to go long on the EURUSD pair. It simply means you want to buy the euro AND simultaneously sell the US dollar. The reverse is true if you go short on the EURUSD pair: you sell the euro AND simultaneously buy the US dollar.
Ways to Trade Forex
Admittedly, that’s the most basic and simplest way you can trade forex. But there are other worlds than this one. You can also trade forex through:
- Futures
- Options
- ETFs
- Spot
Currency Futures
To simplify, futures are contracts that buy or sell a specific asset at a specific price at a specific future date. You can trade currencies through futures. You trade them on a centralized exchange. So, you benefit from transparency and regulation.
Currency Options
An option is just like futures, but with a catch.
The option contract buyer gains the right but not the obligation to buy or sell the asset on the agreed price at a future time. The other party, though, is obligated to honor the contract. Currency options are pretty complex but flexible.
So, if you want more features and flexibility, this method is good for you. However, if you’re a newbie and you still want to learn the ropes, better try another method first.
Currency ETFs
Exchange-traded funds (ETFs) are funds traded on an exchange. A currency ETF offers exposure to a single currency or to a bunch of them. What’s nice is that financial institutions manage such funds. They then offer a share of the fund to the investors on an exchange.
But on the other hand, what’s bad is that the market isn’t open 24 hours. The forex market itself, meanwhile, is open 24 hours a day, five days a week. You can trade practically anytime you want.
Spot Forex Market
And the last method through which you can trade forex is the spot forex market. Through this market, you can trade currencies on the spot. Hence, the name.
It’s simple, liquid, and always available. You’ll be using the current market price. The only downside here is that prices tend to move very fast and there isn’t a lot of flexibility since the process is extremely straightforward.
If you plan to use any of these methods, make sure your broker offers the correct tools and platforms. A broker review of the features, platforms, and services might help.
The Forex Market in 2020
If it’s not obvious yet, the forex market is a HUGE market that’s also lucrative and exciting. That is exactly why any attempt to declare any specific or definitive prediction would not only be difficult but also futile.
So, instead, we try to see the opportunities and risks present right now on the forex market this year.
Volatility
It’s not a secret that analysts and economists expected 2020 to be a year of recovery and gains. However, expectations quickly fizzled out at the start of the year.
Volatility in markets went up as the US and Iran batted heads in what had been a tense few days in the Middle East. World War 3 speculations were rampant. Fortunately, that didn’t happen. Currency pairs stabilized and safe-haven currencies steadied.
However, the world is now faced with the coronavirus pandemic.
Market Crash 2020
While the world got through the threat of a wider conflict in the Middle East, the novel coronavirus silently crept around the world. February saw a spike in the number of infected cases. Then March came, and the virus already infected Europe, Asia, and America.
The World Health Organization declared it a pandemic. That caused further volatility in the already-turbulent market.Then, Saudi Arabia and Russia decided it was a good time to get mad at each other. That led to OPEC+ talks collapsing, and oil prices crashing.
Inevitably, financial markets crashed, too. The world saw the Black Monday Crash of 2020 (March 9, 2020) and the Black Thursday Crash of 2020 (March 12, 2020). The forex market was equally turbulent. Trade-exposed currencies plunged while safe havens climbed.
Opportunities
Savvy traders and investors see that despite the bear market, there are opportunities. Currencies are moving wildly now, and price action and active traders are having a good time betting on currencies. With the steady flow of news from central banks and governments here and there, 2020 is a fire year to start trading more actively.
Also, assets are near their record lows. This means traders can buy them at bargain prices, with lots of upside potential once the dust settles.
Risks
Of course, we need to proceed with caution.
Just like after the US-Iran tensions, markets were pretty confident. They thought they only had to wait until the US-China trade deal had been sorted out. But they were wrong. The risk for the forex market, as well as other markets, is that it’s quite difficult to predict where the markets bottom.
Good news also apparently has a muffled impact nowadays to a market that has suffered great beatings. So, there you go. It’s still going to be tricky moving forward.
So, Why Choose the Forex Market?
Simple: there’s a lot more room to move. The forex market is flexible and has proven to be a better choice for investors seeking refuge from crashing equities.
There are safe havens and there are those that provide good returns if you know how to use them. However, overall, the forex market is the better option if you want to stay away from extreme risks but you still want to stay invested in the financial markets.
To conclude, we say that the forex market remains a good place to trade amid the market fiasco. If you want to hedge away from risks but still stay invested, forex trading is for you.
This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.