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What is Leverage? How Does Leverage Work in Forex?

Forex trading has always been one of the most popular types of investment policies. But the thing that makes it so appealing to the investors is the fact that you can obviously get much higher leverage in forex than any other trading option. However, most of the investors do not understand how the leverage works in forex and it sometimes becomes the reason behind their losses. So, without spending much time; let us answer the question ‘’What is Leverage?’’ and ‘’How Does Leverage Work in the Forex Market?’’

Leverage in Forex

Leverage is actually nothing but borrowing some money for investing in some other thing. In forex trading, the money is basically loaned from a broker. Nevertheless, you can usually gain much higher leverage in forex when compared to the other markets. Why is it so? Well, here you can build up as well as control a huge amount of money for a small initial margin.

Leverage in Forex

Working of Leverage in Forex Trading: Actually, the concept of leverage has been used by smart investors as well as companies for a long time now. The individual investors usually use the leverage to increase the profit on their investments. On the other hand, the companies often use the leverage technique to get the finance for their assets and hedge their foreign currency exposure. What does that mean? It means that the companies use the method of debt financing to fund their business operations in order to increase their shareholder value instead of raising their stocks. In forex trading, investors make use of the leverage to gain more from the fluctuations in between the exchange rates of the currencies of two different countries.

As a matter of fact, investors can basically achieve the highest leverage in forex. As I said earlier, leverage is actually a loan that is provided to the investors by the forex brokers. If a trader wishes to trade in the forex market, a margin account must have to be opened first with the broker.

The leverage ratio provided by brokers usually ranges from 50:1 to 500:1 depending on the broker policy and regulation. What purpose does the leverage ratio serve? The leverage ratio actually signifies the minimum margin in forex. If the leverage ratio is 50:1, then it signifies that the lowest margin requirement is 2%. Similarly, the margin requirement for the 100:1 leverage ratio can be calculated as 1% and so on. But what does it mean?

Understanding Leverage through an Example

Let us take an example to understand the leverage ratio and margin requirement in a clearer way. You already know that leverage ratio signifies the minimum margin requirement. So, if the leverage ratio is 100:1, then the minimum margin requirement is 1/100 that is 1%. It means that the trader must have at least 1% of the total trade value in the trading account as cash.

Say you would like to go long 100.000 units of EURUSD at the current price which is 1.19. Without leverage, you would need $119.000 cash in order to be able to transact this trade. On the other hand, with 100:1 leverage, you would only need $1190 cash (or margin) to invest 100.000 units of EURUSD. In practice, the forex broker loans you the difference between $119.00 and $1190 and your trade is closed if your position is in loss of $1190.

Risk Management in Forex

Though a leverage ratio of 100:1 may seem very risky, the leverage is the whole purpose and benefit of trading currencies with an online forex broker. That is why; it is always wise to trade with forex brokers with high leverage.
Although the chances of doubling your profits are great, there are some substantial risks too in leverage in forex trading since the value of the currencies can go in the opposite direction at any moment. This is the reason you must never trade leveraged forex without an emergency stop or a guaranteed Stop Loss order. So, be smart and trade in the forex market with leverage to earn higher profit but never without risk management.

Technical Analysis vs Fundamental Analysis. Which is better?

Forex traders utilize benefits of fundamental analysis or technical analysis (sometimes both) in order to predict the future direction of a currency pair and initiate the trade in the hope of making profit.

Fundamental analysis attempts to estimate the real value of a currency using economic data, monetary policy stance and political factors such as GDP growth, unemployment rate, inflation, interest rates and political sentiment. On the other hand, technical analysis assumes that all of these information is already reflected in the value of the currency and uses past price activity in order to predict future value of the currency.

Same Question, Different Approaches

Both fundamental and technical analysis methods attempt to solve the same question, that is, to predict the direction prices are likely to take in the future. It is just that each method has different approaches to the question. The fundamental method examines the cause of price movement, while the technical method examines the effect.

Fundamental Analysis vs Technical Analysis

The technical trader is convinced that all he / she has to know in order to be able to make accurate predictions is the effect. The causes are irrelevant for technical traders. However the fundamental trader has to know the reason and causes of the price movement.

Most of the time, traders label themselves as either a technical trader or a fundamental trader. However, they are not completely detached from each other and there is a considerable amount of overlap.

Many fundamental traders have working insight for the chart analysis and price action. In the meanwhile, many technical traders have practical knowledge of the fundamental factors such as interest rates, growth, and unemployment rate.

The Clash of Technical and Fundamental Analysis

However, technicals and fundamentals may clash on their prediction about where the value of a currency is directed in the future. This happens frequently at the beginning of big trends. At the early stages of important price moves, the fundamental analysis fails to explain or comply with how the markets appear to behave.

This is because the price discounts already known fundamental factors which means that they are already reflected in the current market price.

Thus, prices are now adjusting itself to the unknown fundamental factors. When some of the biggest bull and bear trends in the history began, there was little or no obvious change in the fundamentals. By the time market players became aware of the reason for the fundamental change, the new trend was already ongoing for a while.

Fundamental vs Technical Analysis

On the other hand, technical traders are used to the situations where price action conflicts with known fundamental factors. Technician knows that the reasons for price movement will be revealed to all market players. It is just that the technician doesn’t see any reason to wait for the additional confirmation.

Technical traders usually find their approach superior over fundamentals because, by definition, technical analysis assumes that every fundamental factor is already priced in and reflected on the chart. This assumption makes the study of fundamentals unessential.

Different Time Horizons

Fundamental analysis is considered as a long term investment approach while technical analysis takes a shorter term approach for analyzing the markets. A change on the monetary policy stance of a central bank could cause a long term trend reversal and create trading opportunities for a period between several weeks to several years. Traders who like to invest in currencies for long run are tended to benefit from fundamental analysis.

However, trading currencies on technical analysis is a short-term oriented approach. Some scalping strategies that are based on technical indicators could last as low as few seconds. Therefore, short term traders use technical analysis more commonly.

Fundamental vs Technical - Which is better?

Which One is better?

It is hard to say whether fundamental or technical analysis is better since they are useful for different trading strategies on different time frames. Fundamental analysis is useful for identifying undervalued or overvalued currencies and finding trade opportunities in the long run.  On the other hand, technical analysis is useful for trading strategies focusing on shorter time periods and timing the order.

As an important final world, I must say that you don’t have to choose between the two approaches. Many forex traders mix both fundamental and technical analysis into their decision making process.

These type of traders look for the trading opportunities where both technical and fundamental analysis agree each other. If technicals and fundamentals indicate contrasting predictions for the future price movement of the particular currency, they tend to be hesitant on triggering the trade order.

What is the FOMC? What Does FOMC Do?

Regardless of whether you are a finance professional or an induvial trader/investor, if you are in finance world, you have heard ‘FOMC’ tons of times. Perhaps every day. But what exactly is the FOMC? What does the FOMC do?  If you are a forex trader, you certainly have to understand the answers to these questions in order to be able to become a successful trader. Especially, if you are into the fundamental part of the forex analysis.

Short for Federal Open Market Committee, FOMC is the policymaking branch of the Federal Reserve System. FOMC makes monetary policy decisions such as interest rates, quantitative easing programs. There are 12 members in FOMC of which 7 are board of directors and remaining 5 are presidents of the regional Federal Reserve Banks. There are 12 Federal Reserve Banks in the system and heads of those banks take seat in FOMC by an annual rotating basis. With one exception; New York Fed. Since a big portion of open market operations are conducted by New York Fed, its president has a permanent seat in Federal Open Market Committee. Another caveat is that heads of every regional 12 Federal Reserve Bank attend FOMC meetings however only 5 of them have voting rights on monetary policy decisions.

Federal Reserve System - FOMC Meeting

FOMC Meeting Calendar – 2018

FOMC schedules one meeting in about every six weeks which roughly equates to eight meetings a year. The committee may also hold unscheduled emergency meetings just like how they did at the peak of Great Financial Crisis in the fall of 2008. FOMC releases a monetary policy statement that includes the decisions made in the meeting and economic assessment of the committee at the end of every meeting. Following the every other meeting (four times a year), FOMC Chair holds a press conference to offer committee’s economic projections for next two years and additional information about monetary policy prospects.

Date Federal Funds Rate Statement
Past FOMC Meetings
June 14, 2017 1,25 Read
July 26, 2017 1,25 Read
September 20, 2017  1,25 Read
 November 1, 2017 1,25 Read
December 13, 2017 1,50 Read
January 31, 2018 1,50 Read
March 21, 2018 1,75 Read
  Next FOMC Meetings
Expectation
May 2, 2018 1,75
How to Use Technical Analysis in Forex Trading

In the past, fundamental analysis used to dominate forex market. Until mid-1980s, when there was no sophisticated trading tools and platforms, investors was primarily trading based on the fundamental factors. However, following advancement of new technologies, technical analysis in forex market has become more popular. More traders joined to the ranks of technical approach by utilizing chart patterns and indicators more frequently. Thus the impact of technical analysis on the forex market has increased remarkably and if you want to become a profitable forex trader, you have to get to learn technical analysis.

Technical analysis concentrates on the study of price action. This type of market analysis use historical data to predict the direction of prices movements. The main premise of technical analysis is that all necessary information to forecast future price action is already reflected on the price chart. Therefore, studying price movements and price chart is all that is required to make high probability trading decisions.

Technical Analysis in Forex Market

Since majority of the long term trends are generated by fundamental factors such as GDP, interest rates and politics, technical analysis could prove very useful when utilized for short term to medium term trades. It complies well with the forex market because majority of short term price movements are driven by human emotions and market sentiment.

Forex Trading - Human Emotions

The most important tool in technical analysis is price charts. Technical traders use price charts to detect trends and patterns so that they can find profitable trade opportunities. In addition, technical analysis tools such as chart patterns, Fibonacci levels, Moving Averages, RSI, Stochastic, candlestick patterns and Bollinger Bands are used by forex traders to get further information about direction of the trend, overbought and oversold levels, support and resistance levels.

One of the biggest benefits of using technical analysis is that it provides traders an understanding about the psychology and sentiment of the market participants. Humans tend to leave clues about their emotions on the price chart and technical analysis is the best tool so far to identify them. Even though, the market participants may change over time, human emotions and human reaction to certain events doesn’t change. Technical approach is used to exploit this fact.

Assumptions of Technical Analysis

There are three assumptions which the technical analysis is based on.

Market Discounts Everything

This assumption probably composes the most important pillar of technical analysis. Unless a trader fully understands and acknowledges this basic premise, he / she won’t succeed at using technical analysis to predict future price moves in the forex market. The technical traders believe that any fundamental factor that can have impact on the price such as political instability, economic releases, interest rates, etc. are already manifested in the price on chart. Therefore analyzing price movements is all that a trader needs.

This argument, which is called Efficient Market Hypothesis, nullifies the claim that technical analysis is only based on price action and doesn’t reflect fundamental factors. The technical traders presume that price chart contains the effects of fundamentals on the supply and demand for the related currency.

Forex Trading - Technical Analysis

Prices Move in Trends

The concept of trend is crucial for the technical analysis. The technical trader believes that price of an asset moves in short, medium or long term trends and main purpose of charting the price movements of an asset is to recognize a trend. A trader profits if he / she is on the right side of the trend and loses if he / she is on the wrong side. Most of the tools that technical analysis employs aim to identify current trends and predict future trends.

History Tends to Repeat Itself

Since majority of trades on exchange market is transacted by humans, it is essential to study human psychology in order to become a profitable forex trader. When you look at a price chart, you are very much likely to see some patterns that repeat itself. This repetitive feature of price action is associated with traders’ emotions like excitement, dismay, anxiety and fervor.

These emotions has been around for thousands of years and not likely to disappear in near future. Technical traders utilize chart patterns which are formed as a result of the human emotions and attempt to predict future trends to make profit in the forex market.  In very simple words, technical traders believe in the notion that future relies on the study of the past.

How to Use Fundamental Analysis to Make Profitable Trades in Forex

Foreign exchange market offers great opportunities for significant profit while you are sitting on your desk and sipping your coffee. Sounds so easy, right? Wrong! More than 90% of forex traders lose their investment and most of them do it within the first few months. Remaining 10% earns good enough and most of the traders in this category are able to make living solely on trading forex. So how do they do it? Simple. They forecast the price of the pair that they invested accurately and there are two major methods to predict the market direction; fundamental analysis and technical analysis.

Fundamental analysis is a method for predicting price movements by studying macroeconomic indicators such as unemployment rate, GDP growth, inflation and central bank interest rate policies. The logic behind fundamental analysis is that if a country’s economic outlook is positive, the currency shall appreciate. On the contrary, if a country’s economic indicators show weakening, the relevant currency shall depreciate. Fundamental traders use this information to determine the trend of the currency and attempt to profit by being on the right side of the trend.

Forex Fundamental Analysis

For instance, if the US economy is gaining momentum, GDP growth is accelerating and Federal Reserve is poised to raise interest rates, the US dollar will increase in value versus other currencies. A strong economy and higher interest rates are going to draw more foreign investment. Since foreign investors need US dollars in order to invest in the US, they will need to convert their local currency to US dollars. Eventually, this will lead to increased demand for US dollars and thus US dollar to appreciate.

Major Macroeconomic Data That Affect Forex Market

Inflation

Rate of prices of goods and service increase over a certain period of time. It is usually measured monthly and yearly. Central banks base their monetary policy on inflation outlook. If inflation goes above target, central banks tend to increase interest rates to control money supply.

Gross Domestic Product (GDP)

GDP is the most important indicator for an economy that shows its overall health and performance. It is released quarterly and yearly. It measures aggregate value of goods and services produced and consumed by a country. When the growth rate of GDP picks up, the currency tends to appreciate and vice versa.

Employment Indicators

Unemployment rate, participation rate, employment and wage growth are among the most important employment indicators. It has a positive impact on the currency when unemployment rate is low, employment and wage growth is strong.

Trade Balance

Difference between imports and exports of goods and services determines trade balance of a country. If a country’s exports surpass imports, it results in trade surplus and trade deficit arises if imports are bigger than exports. A trade surplus is a positive sign for the health of an economy and supports the currency.

Forex Fundamental Analysis - International Trader

Interest Rates

Central banks monitor the economic indicators mentioned above for the purpose to measure overall health of the economy and determine the interest rate policy. If central banks conclude that the overall economic health is weak, they usually gravitate towards lowering interest rates to give it a boost. Lower interest rate leads to lower return for investors and thus will discourage them to invest or withdraw their investments thus bringing a pressure on the currency.

Geopolitical Events

Wars

A war or a truce fundamentally influences the value of the currencies of the countries at war and contingent upon what nations are fighting, the whole forex market could get jittery. For example, don’t expect a significant impact on global risk sentiment if two small African nations begin to fight. Their currencies would get hurt for sure but you would not see sell-off at USD, EUR or JPY. On the other hand, if two big economies such as Russia and the US get into a real war, expect a huge volatility in almost every currency pair.

Elections

An unexpected early election or unfavorable election results can significantly disturb the value of the currency. For example, if an anti EU political party gets more votes than expected, or as a worse scenario, gets enough votes to set up government, Euro tends to depreciate.

Forex Fundamental Analysis - Elections

Power Changes

A  country that experiences sudden change of power such as a coup d’etat or a hard regime shift will scare off global investors and the currency will lose value versus other currencies.

Natural Disasters

When a country becomes victim of a natural disaster such as earthquake, tsunami or floods, that country’s currency may appreciate in the short term due to the need to repatriate funds from overseas for disaster recovery. This is what we saw right after the earthquake and tsunami in Japan 2011. However, the currency could suffer in the long term if the natural disaster leaves a substantial negative shock on that country’s economy.

Some fundamental factors have long term impact and some others have short term impact on currencies. For example, interest rate policies usually create long term trends for the currency that traders can benefit for months whereas international trade figures may influence the currency for only few hours. But regardless of being short term or long term trader, having fundamental analysis in your toolkit is necessary to improve your trading abilities and decision process.

Some Tips to Reduce Risk When Trading Forex

As anyone can see, Forex is a world of its own, with unique trading techniques, trends, jargon and more. Currency trading is very competitive, and it may take a while to find what forex trading strategies are best for you. These forex trading tips can lead you in the right direction.

First of all, you must use your margin carefully to keep your profits secure. Using margin correctly can have a significant impact on your profits. If margin is used carelessly, however, you can lose more than any potential gains. You should only trade on margin when you are very confident about your position. Use margin only when the risk is minimal.

If managed forex accounts are your preferred choice, make sure you exercise caution by investigating the various brokers before you decide on a forex broker. If you are a new trader, try to choose one who trades well and has done so for about five years.

Foreign Exchange Market is Complex

Don’t think that you’re going to go into Forex trading without any knowledge or experience and immediately see the profits rolling in. The foreign exchange market is infinitely complex. Experts in the field continue to study it even as they make real trades. Most even still conduct demo trading. You are unlikely to come across the perfect trading strategy without first taking the time to learn the system. Do your research and stick to what works.

Foreign Exchange Market

It can be tempting to let forex trading robots (Expert Avdisors) do all your trading for you and not have any input. This could unfortunately lead to very significant losses for you. The opposite is actually the best thing to do. Sticking to a set plan will help to control your urges.

Importance of Stop Loss

Be sure to protect your account with stop loss orders. A stop loss order provides security, much like insurance to your account. Without a stop loss order, any unexpected big move in the foreign exchange market can cost you a lot of money. Put the stop loss order in place to protect your investments.

There is no position so lucrative that moving your stop point is a good idea. Set your stop point prior to trading, and let nothing change it. You should consider a stop point immovable as you may start to react emotionally and irrationally and consider changing it. This is a straight way to lose money.

There is no scarcity of Forex information on the internet. You will be well prepared for trading if you know enough information. Seeking advice from others who are experienced traders (just like me :)), can really help you to become successful.

Information is Bliss

At nearly all hours, news on Forex trading can be easily found. Twitter, forums, blogs and the news all have useful information. Information is crucial because when talking about money, you do not want to be left out on what is happening.

Progress and knowledge come in small steps. It is important to be patient and step into the trading market slowly.

Work on tweaking your critical thinking abilities so that data and charts can become a valuable resource. Critical information comes from places that you may not anticipate; coordinate data from any place that is available to you.

Have a Plan

Design a plan for your forex trading. Short cuts may make some money in the short term, but over time they will end up causing problems. To really become a hit you should take time to find out what you are going to do. Develop a plan so you don’t sink.

Keep a notebook on your person when you travel. Use it to scribble notes and information that you learn about the market. This can also be used to measure your progress. Your journal will become a valuable tool, as you can look back to ensure that your information is still accurate.

Before you dive headfirst into forex trading, learn the forex market through a demo or practice account. You should only use a demo account until you are sure you are ready.

Greed is Your Enemy

Check your greed and weaknesses at the door when it comes to trading Forex. Only trade in areas that you truly know about. Before you make any decisions on entering a particular trade, evaluate whether the information you have at hand justifies execution. Enter the market slowly and guardedly.

In the world of forex, there are many techniques that you have at your disposal to make better trades. The world of forex has a little something for everyone, but what works for one person may not for another. Hopefully, these tips have given you a starting point for your own strategy.

Forex Trading Terminology

In order to be able to profit from market moves and become successful at forex trading, certain forex terms has to be understood. Otherwise an investor would not be able to interpret if a specific economic data, monetary policy event or speech by a central bank member is going to be positive or negative for a currency.

Economic Releases

Employment, growth and inflation are the macroeconomic terms that you are going to encounter on daily basis during your forex trading journey. Since central bank monetary policies are revolving around natural rate of employment, inflation target and economic growth, markets are rattled very often by release of those three economic indicators or by the comments and speeches from central bankers on these three indicators. However, looking at weekly economic calendar, one cannot see term ‘inflation’. Rather the terminology on an economic calendar that refers to inflation is Consumer Price Index (CPI). Likewise, GDP refers to economic growth; unemployment rate, earnings and unemployment claims relate to employment.

Country Specific Terms for Inflation and Employment

Different countries could express certain economic terms in different ways as some central banks give more weight to certain economic indicators compared to others. For example, in the United States, there are four important sets of data on employment which are Non-Farm Employment Change, Unemployment Rate, Average Hourly Earnings and Unemployment Claims of which first three indicators are released bimonthly and the last one is out on Thursday of every week.

Forex Terminology - Unemployment Rate

On inflation, there are three sets of critical monthly data from the United States; PCE Price Index, CPI and PPI. PCE refers to Personal Consumption Expenditures and Federal Reserve Bank uses PCE Price Index for inflation targeting. Fed conducts monetary policy to bring PCE Price Index at or around 2.00 per cent. CPI is Consumer Price Index which involves different basket of consumer goods with different weights compared to PCE Price Index. Last but not least, PPI is Producer Price Index which is considered as a cost indicator that is incurred by producers and will be passed on to consumers in the future.

On the other hand, three important sets of employment data are released from the United Kingdom; Unemployment Rate, Average Earnings Index and Claimant Count Change. Average Earnings Index is equivalent to earnings indicator from the US but differs in a significant way; it is calculated as three month moving average while the US’s Average Hourly Earnings indicator represents monthly change in hourly earnings that businesses pay for labor.

Claimant Count represents number of applicants for unemployment benefits over a month and equals to the Unemployment Claims from the US however as you might have already realized with a major difference; Claimant Count is monthly basis while Unemployment Claims are published every week.

Even though all those economic indicators are pertaining to the same phenomenon, they are expressed using different terminology. A trader must be able to distinguish the difference and know the specific currency that will be affected when those economic data are released. Besides, knowing what an economic indicator actually represents and the importance of the indicator for a central bank would enable traders to predict the magnitude of the influence on the related currency.

Forex Trading Jargon

Trading has its own special vocabulary just like other disciplines such as Computer Science, Sociology, etc… has its own. Following expressions are used by both market participants and central bankers very frequently and understanding their meaning will improve your financial literacy and make you a more profitable trader.

Long and Short

When a trader buys a currency pair or another financial instrument with the expectation that value of the pair is going to raise that trader is called being long. For example, when you buy EUR/USD, you are long EUR/USD. Contrarily, being short indicates that the trader sold the pair with the intention of profiting in the case price of the pair falls.

Bullish and Bearish

A trader who predicts that a pair’s value will go up over time and buys the pair, (or takes long position), is said to be bullish. Contrarily, a trader who predicts that a pair’s value will decline and sells the pair (or takes short position) is said to be bearish. For example, one can have a bullish view on USD and buy USD versus another currency. On the other hand, when a trader has a bearish view on USD, he/she is expected to sell USD.

Hawkish and Dovish

A central bank or member of a central bank is said to have a hawkish monetary policy stance, if she / he touts risks of high inflation and supports hiking rates. On the other hand, a central bank or a member is called to be dovish, if he/she is more worried about weak economic growth and supports lowering interest rates.

Nicknames for Pairs and Currencies

Some pairs and currencies may be called different than their informal names on media, internet and books of which the most popular ones are being as following;
USD = Greenback
EUR/USD = Fiber
GBP/USD = Cable
AUD = Aussie
CAD = Loonie
NZD = Kiwi

Central Banks

Fed = Federal Reserve Bank
FOMC = Federal Open Market Committee, monetary policy-setting body within Federal Reserve Bank
ECB = European Central Bank
BoE = Bank of England
MPC = Monetary Policy Committee of Bank of England
BoJ = Bank of Japan
SNB = Swiss National Bank
RBA = Reserve Bank of Australia
RBNZ = Reserve Bank of New Zealand
PBoC = People’s Bank of China
Buba = Bundesbank

Don’t be surprised if a high profile market analyst says on TV that he/she is bullish on Greenback because of the hawkish policy stance of Fed or she / he recommends short position on Cable due to a weaker than expected employment report from the United Kingdom.

What are the Best Currency Pairs to Trade?

What does trading in the foreign exchange market mean? Well, it actually means trading in currency pairs. Thus, it is very important for investors to understand the currency pairs clearly before getting started with trading in the foreign exchange market. Without understanding what a currency pair is; the purpose behind the pairing of currencies; the working of these pairs, the best currency pairs to trade and the factors that cause the movement of currency pairs, it is not possible for anyone to be successful in the volatile market of forex.

In reality, the entire foreign exchange or Forex market is grouped in currency pairs which fluctuate 24/5 since the market is closed on the weekends. Though it is said that the currency pairs fluctuate 24/5, it is actually a formal notion. Several important economic, as well as political events, occur on the Saturdays and Sundays which affect the currency pairs directly. Thus, when the market reopens on Monday, the currencies may show a gap in their values.

Classifying the Currency Pairs

The first classification of currency pairs can be made by differentiating the major currency pairs from the crosses. So, what is a major? A major is a basically a currency pair which has the US Dollar as one of its components. The main examples of the major currency pairs are GBP/USD, EUR/USD, USD/CHF, AUD/USD, USD/JPY, USDCAD and NZD/USD. So, it is now easy to understand what a cross is following the very same reasoning. Of course, a currency pair that does not have the US Dollar as one of its components is defined as a cross.

Consequently, one can understand that the currencies are paired with each other as well as with the US Dollar. Understanding this classification is essential as it helps the traders to grasp the concept that works behind the fundamentals of the forex market as well as the importance of the currency pairs.

Best Forex Pairs to Trade

According to the thumb rule, the major pairs are always much more important than the crosses. But why is it so? It is because of the fact that the US Dollar is being the world’s reserve currency and the most traded currency in terms of daily volume. As a result, the volatility that exists in trading a major is much more when compared to trading the crosses.

It is well known that the economy of the United States is hailed as the world’s largest economy. Hence, all the major economies around the world are compared with it which in turn provides this massive importance to the major pairs.

Let us take an example to understand this more clearly. Suppose; the Consumer Price Index (Inflation) or CPI is released in the countries of European Union which have Euro as their currency. And let us assume that the inflation comes in the Euro Zone at a lurching pace of 4.0% which is well above the target %2.0. As a result, it will create a huge buying spree for the EUR/USD pair since the higher rate of CPI implies that the central banks will hike their rates and that is what matters actually when it comes to trading the currencies.

Nevertheless, let’s assume that another important event happens on North American Session concerning the US Economy on the very same day. Consider that the Federal Open Market Committee (FOMC) releases a statement that fosters future increase in their rates. Well, it is understandable that this will create a completely reverse effect on the gains achieved on EUR/USD pair due to the inflation in the Euro Zone. Incidentally, the pair will hit by a big sell-off. This is why the major pairs are so volatile.

The difference in between the bid price and ask price or the spread is always smaller in case of major pairs than the crosses. As an example, on an Electronic Communications Network (ECN) account, the spread of the EUR/USD pair can go below 0.2 pips.

However, it is very rare to see the spread of the AUD/NZD to go lower than 2.0 pips. Though the crosses are very less volatile compared to the majors, a difference must be made for the crosses since some of them (AUD/NZD, AUD/CAD…) moves very slowly whereas few (EUR/AUD, GBP/CHF, GBP/JPY…) moves even faster than the majors.

Making Profit in Forex Market

Like we mentioned before, there are two prices associated with a currency pair. The first is the bid price and second is ask price. The bid price is the one that is always shown on the left whereas the ask price is always displayed on right. Now, it is crucial to understand that the buying of a pair is always done on the basis of ask price; however, the pair is sold at the bid price. Consider that the EUR/USD pair is bought at 1.1750 but the price goes up to 1.1760 after the pair is bought. In that case, profit will be made since the price goes up after the pair was bought.

As stated before, the difference between the bid and ask price is called the spread. As a matter of fact, the currency pairs with low spreads are always much more attractive than the ones with higher spreads because it takes lesser time and distance to even out the spread cost. That is also the reason why the brokers with lower but more stable spreads are favored over others.

Why does a Currency Pair Move?

It is always essential to know why a currency pair moves and the condition that catalysts this movement in order to anticipate the movements in advance while trading. For this reason, a trader must know the economic calendar in advance to foresee the moves that a pair is making. Nonetheless, a currency pair does not only move due to the economic events. As a matter of fact, it can also move based on the law of supply and demand. If a pair has a large number of buyers, naturally its price will be increased. The opposite may also happen if there are large numbers of sellers.

What Makes a Currency Pair to Move

To understand the right time to buy or sell a pair, the traders take the help of technical analysis. It helps to understand the prop in a falling trend as well as defiance in a rising trend. Furthermore, the analysis also foretells the prices on the right side on the basis of the chart patterns that are projected on the left side.

Historical analysis can also be made with the help of trading theories and variety of data available with respect to different time frames. As per the thumb rule, the greater the availability of information; more accurate is the prediction of the currency pair.

To conclude, it must be understood that the importance of the currency pairs is calculated on the basis of the speed of their movements and the distance that they travel and major currency pairs such as EUR/USD, GBP/USD, USD/JPY and USD/CHF are broadly considered as the best currency pairs to trade

.

What is the Spread in Forex? Why is It Important?

It is super essential to fully grasp the importance of spread in forex trading since it has a significant impact on whether you are going to be a profitable forex trader or not. In very simple terms, spread is the difference between bid and ask price.  Ask price is always higher than bid price and difference is banked by the broker as a profit. This is the fundamentals of money making for a broker.

When you go to the exchange office in your neighborhood, you will see way higher spreads compared to online forex brokers. Why? It is always pointed out as one of the greatest advantages of leveraged online forex and I would prefer to delve into this topic in another article.

As you have realized by now, forex brokers are not in the industry as saviors who bother to deal with all the mess in order to be able to render you all those awesome services such as leverage, mobile trading platforms, wide range of instruments so that you would be able to invest in currencies even on your phone and grow your capital. Forex brokers’ one and only purpose is to make money out of your trades and spread is the most basic way for them to fulfill this purpose.

What is the Spread in Forex

Wider the spread is charged, higher profit that the broker makes. You have guessed it right, guys. This extra profit for the broker by widening the spread is created at the expense of yours. So there is a zero-sum relationship between forex brokers and forex traders in terms of profit.

Why Does Spread Matter?

You are going to feel the pain on wider spreads stronger if you are an intraday trader or scalper where you are chasing few to several pips on your trades. Here is an example; let’s assume that you are scalper and your strategy is targeting only 5 to 10 pips. Now imagine that Broker A is charging 3 pips spread on EURUSD whereas Broker B is charging only 1 pips.

You are going to earn 2 pips higher on your every EURUSD trade if you trade with Broker B and that is equivalent to almost 50% of your total profit in the case that your take profit target is 5 pips. Thus you can improve profitability of your strategy as much as 50% by just switching from Broker A to Broker B.

Furthermore, spread is where those phony forex brokers generally try to manipulate the market conditions on their behalf. Widening spreads without the consent of the clients to gain more profit is the easiest and most common way of scamming traders in this industry. Spread is where you have to be over cautious for the sake of your capital and future earnings. You should monitor the difference between bid and ask price and compare it with what the broker advertised and offered you upon opening your account.

What is the Spread - MetaTrader

One easy way to monitor the spreads is by enabling Spread section on Market Watch window in MetaTrader platform. Make sure those spreads are what you were offered and charged when you open a new position.

Fixed spread could be considered as a solution against shady spread exercises. There are few forex brokers out there who offer fixed spreads which means that they guarantee that spreads won’t fluctuate at any moment. However, these type of brokers’ earning model poses another risk for profitable traders which I am going to talk about in another article.