The ultimate guide to forex trading: Everything you need to know

Forex trading. Fix. FX.

How can just two words represent the kind of worldwide economic activity worth over six trillion American Dollars every day?

What is Forex trading and how does it work?

What are the factors that affect exchange rates?

How can you approach the FX sector with the knowledge, skills, and confidence you need to be successful? What are the most common Forex trading scams?

To see the answers to these questions, and many more besides, continue reading. Below you will find the Ultimate Guide to Forex Trading: Everything you need to know.

What is Forex trading?

Forex trading means the buying and selling of different countries’ currencies on the foreign exchange market. The word ‘Forex’ is a portmanteau (blended word) taken from the words FOReign EXchange. This sometimes gets shortened to FX which is often pronounced ‘Fix’ when said out loud.

How does Forex trading work?

Forex trading works pretty much the same way as making money by trading in stocks, shares, goods, or commodities. You buy one thing at one price, and then aim to sell it at a higher price later.

In the case of Forex trading, what you are buying is foreign currency.

These currencies are sold in pairs, and are given a code for that pairing. So for example, you have American dollar to British Pound Sterling being USD/GBP or Japanese Yen to Indian Rupee being JPY/INR or New Zealand dollar to Euro being NZD/EUR.

This means you will need one part of the pair to buy the other half. Each pair has a rate at which it’s bought and sold. For example, with CAD/CHF which is code for Canadian dollars and Swiss francs.

If the sell value of the CAD in CHF was 0.63 – one Canadian dollar would be worth 0.63 of a Swiss franc.

But if the buy value of CAD in CHF was 1.59 – one Swiss franc would be worth 1.59 Canadian dollars.

These are the exchange rates of the currencies.

Which currencies are most important?

Generally speaking, the more a currency is traded worldwide, the more important it is to the global economy. There are some disagreements about exact rankings, but most analysts would agree that the following is a good list of the most important global currencies.

By far and away the most important is the United States Dollar, known as USD. Approximately 44% of the Forex market trades involve USD. This is why USD is known as “the world’s reserve currency”. Explore our detailed analysis of why US dollar is forex’s biggest currency for a deeper understanding.

A distant second is Euros or EUR, with around 16% of all trades. Then it is Japanese Yen, or JPY with 8%. Next is British Pounds Sterling or GBP with 6%. After that, Australian dollars or AUD with 3%. Finally, Canadian dollars or CAD with 2%.

The most traded currency pairs will change on a day to day basis, but with global trends shifting slowly in such a big market, you can get a broad sense of the most important pairings.

These would be as follows:

• EUR/USD – Euro to United States Dollar
• USD/JPY – United States Dollar to Japanese Yen
• GBP/USD – British Pound Sterling to United States Dollar
• AUD/USD – Australian Dollar to United States Dollar
• USD/CAD – United States Dollars to Canadian Dollars

What controls exchange rates?

Exchange rates can be impacted by many different events, conditions, and factors. These are some important elements to understand whenever you are making an international financial transfer of any kind.

Here’s a quick summary of eight of the biggest factors:

Interest rates – Higher interest rates generally mean higher value currencies. That’s because the currency’s value will grow, as lenders can do so at higher rates, thus getting more returns.

Inflation levels – Higher inflation means a currency’s value will drop over time, making traders less interested, lowering a currency’s value on Forex trading markets.

Political and economic stability – When a country’s government isn’t pursuing wildly unpredictable policies, or the economy won’t suddenly shift, traders trust that a currency has strong value. The Forex trading market will shift as a result.

Government debt – Governments with too much debt, risk being unable to repay, known as default. Defaulting currencies drop in value, since government bond holders (people with an agreement where you loan money to a government in return for a certain interest return) will not get their money back.

Balance of payments – If a country has more money going out than it has coming in, the Forex trading market will interpret that country’s currency as being worth less.

Recession – If a country’s economy is shrinking, the Forex trading market will usually (but not always) interpret this as the currency being less valuable.

Trade terms – If a country changes its rules on trade, making it easier or harder to invest, that can change how people value the country’s currency.

Speculation – Forex traders may circulate ideas about a country’s future. They may think a certain resource will become more valuable, or that a certain government will stabilise or destabilise in the near future. These speculations drive people’s thoughts about currency value, which drives people to buy and sell in certain patterns, which changes exchange rates on Forex trading markets.

Who trades on the Forex markets?

Forex trading brokers and banks are two of the biggest Forex trading players, and there are many important differences between them.

What is the main difference between Forex brokers vs banks?

Banks are naturally more conservative, and are busy offering a much wider range of general financial products and services. Because of this, their calculations of the value of currencies lands mid-point between the buy and sell value of a currency. This is otherwise known as the mid-market range.

Banks do this because they rarely employ Forex trading specialists to help them, and they also end up overcharging customers with hidden fees and unseen markups.

Forex brokers are specialists who monitor the currency values and the situations that impact them very closely. This enables their clients to get the highest possible value out of their trading. They offer specialised services to provide expert insight and get people the most value for their money.

Either way you go, it’s important to choose a reputable Forex trading partner, because there are dangerous scams out there that you need to avoid.

What are the most common Forex trading scams?

There are many different Forex trading scams and shady schemes. Here’s five examples to watch out for:

Signal seller scams – Signal seller scams happen when someone offers a service where you pay for tips on when to buy and sell in certain currencies to make big profits. Most of the time, the signals are random and low quality, and won’t help you make money on the markets.

Robot traders – Robot Forex traders are automated trading programs that are supposed to execute high quality trades on behalf of customers. These programs use something called “curve fitting” which essentially means they assume that past market conditions will continue to be true again in the future. Real automated trading systems do exist, but poor quality fake ones will often demand fees up front, and then won’t be able to deliver what they promise.

Ponzi/pyramid schemes – This is a classic scheme that occurs in many other fields. People are asked to pay into a Forex trading scheme, and are then given returns later. Except the returns were funded not by real Forex trading activities, but by other investors who have put in money afterwards.

Pump-and-dump schemes – These schemes work by scammers lying about currency or other factors affecting the markets to make the value increase. False news or misleading information gets spread to trick people into buying. Once the price rises, the scammers sell their holdings, causing the price to crash and leaving others losing out.

Spoofing – This happens when large fake orders get placed to make it seem as though a currency is moving up or down in a certain way. These orders are cancelled at the last minute, to stop them going through.

How can you avoid Forex trading scams?

The best way to avoid these scams is to check that the people you are working with are definitely certified by an independent financial regulator. You can also verify independent reviews, and use demo accounts to test a Forex broker out before deciding to commit.

Any time a supposed broker is pressuring you, or offering substantial bonuses, that is a strong sign they are not as authoritative or credible as they want you to believe.

One thing not to worry about is if money moves slowly between countries. Foreign exchange money movements can take time, and that has to be considered carefully when you make these kinds of arrangements.

How long do international bank transfers take?

This can vary massively. It all depends on a number of different factors but here’s a quick summary:

Payment methods – Whether it’s credit card, debit card, wire transfer, or other means of money movement. All of these can affect how quickly money moves internationally.

Time zones – Different countries’ banking infrastructures operate on different timetables. Time zones add another layer of complication.

Origin/destination country – Which countries you are moving money from and to will always affect how long things take.

Fraud prevention arrangements – International banking needs rigorous fraud protections. Some countries are more strict than others.

Bank holidays and weekends – Some banks close their operations on certain days for certain reasons. This will naturally slow things down.

Mistaken information – Human error is unavoidable. Simply putting in the wrong number in the wrong box can cause a problem that stops a transfer in its tracks.

To keep things moving quickly, make sure you have all the following information:

• Full name and address of the recipient’s bank account details.
• Recipient’s account number.
• Recipient’s IBAN (International Bank Account Number).
• BIC code/SWIFT code of the recipient’s bank.

Why should Halo be my Forex broker?

Whether you are trading daily or making a one-off currency transfer, Halo offers better exchange rates and always trades at the right time, giving you more for your money.

Personalised Service – At Halo Financial, our clients are more than numbers. You will receive a dedicated Currency Consultant who will provide you with real-time analysis of the direction of currency flows, minimising your currency risk.

Keeping you informed and updated – Halo Financial keeps you updated on Forex market movements. Whether you want daily currency insights or phone calls informing you on market movements, you will always be in control.

Friendly, professional, and jargon-free advice – Halo Financial understands Forex markets. Our currency specialists give you expert analysis, so you get the benefits of dedicated expertise and market data to set you up to make informed choices.

Find out more about how Halo Financial could help you save time and money on your international currency transfers, please do not hesitate to give us a call on 020 4527 1842 or fill in our enquiry form.