Basic Forex Principles - Terminology

To learn more about Foreign Exchange trading and the basic knowledge that is required, you need to look at some of the terminology that is used in Forex trading. The basis for all trades is the fact that the prices of currency are always listed in pairs. The British Pound and the US Dollar would be portrayed as GBP/USD – 1.7500. What this means is that to buy the base currency (in this case the British Pound) you would need to pay $1.75 of the quote currency (in this case the US Dollar). Remember the “base” currency is always listed first and the “quote” currency is listed second.

It is possible to trade most currencies in the world but the most frequently traded currencies are:

The US Dollar is the most traded currency and accounts for 86% of all trades, this is followed by the Euro at 37% and the Japanese Yen at 16.5%. Forex symbols are three characters long in which the first two letters identify the country and the third identifies the currency.

The Basic Premise of Forex Trading

The basic aim to a Foreign Exchange trade is the trader’s expectation that one currency will weaken or strengthen in relation to another. In the earlier example we saw a price of 1/1.7500 between the GBP and the USD. What a trader will do is either buy or sell GBPs or USDs based upon his expectation of what the currencies will do in the future, but remember with the speed and ease at which you can make trades, the word future can mean from mere minutes to days or longer.

If the trader thinks that the American economy is weakening, the logic is therefore the USD will weaken against the GBP he would sell USDs and buy GBPs. If correct and the USD does weaken, he can sell his GBPs back into USDs for more than he paid for them and realise a profit!
 
Forex trading is really no more complicated than this. What can be complicated, though, is the analysis to try to determine which way the currencies will go.

Forex Market Hours

Forex trades can be made at almost any time day or night. There are just a few gaps over the weekend between market openings, but other than that it’s an open market. This is just one of the advantages that Forex trading has over other forms of trading. You have more control over when you can trade and since the Forex market can be so volatile, being able to make trades whenever you want is extremely important.

The Forex market can be broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and the New York session. Below are tables of the open and close times for each session:

You can see that in between each session, there is a period of time where two sessions are open at the same time. From 3:00-4:00 am EDT, the Tokyo session and London session overlap, and from 8:00-12:00 am EDT, the London session and the New York session overlap.

So, when should one trade and why?

The best time to trade is when the markets are active and have the biggest volumes of trade, usually this is when the sessions overlap and two markets are open at the same time.

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