Everything you need to know about forex

What are the trading hours for the forex market?

The foreign exchange market is open 24 hours a day, beginning Monday at 5:00am local Sydney time (Australian Eastern Standard Time) until Friday at 5:00pm Eastern Standard Time.

Global market convention for all currency pairs is that the value date of open spot positions rolls to the next business day at 5:00 pm Eastern Standard Time. The exception to this is New Zealand Dollar pairs, as those value dates roll forward at 7:00 am Auckland time from Monday to Friday.

All of this means that the local time of the value date rollover fluctuates throughout the year, depending on the currency pair, counterparty location, and daylight savings time conventions.

What are the different forex products to trade?

The following forex products are available to trade at Saxo:

• FX spot (including precious metals)
• FX forwards and swaps
• FX options (vanilla)

If you’re not sure which forex product is right for you, let’s take a closer look to help you make the best choice for your goals.

• FX spot

  The FX spot market is used for immediate currency trades. The term "spot" refers to the settlement date of a foreign exchange transaction. For most currency pairs, this is two business days after the trade date (known as T + 2). At Saxo, FX spot trades do not settle. Instead, open positions held at the end of a trading day are rolled forward to the next available business day.

• FX forwards

  While the FX spot market is for immediate currency trades, the FX forward market is the market for trading currencies for delivery at some point in the future. It enables a trader to agree to a price today (the FX forward price) at which two currencies will be exchanged on a predetermined date in the future.

• FX options

  FX options give the buyer the right, but not the obligation, to trade currencies at a specified price on a specified date in the future. FX options can be used to express a view on the underlying market, whether as a directional play on a currency pair moving higher or lower, or as a speculation on future market volatility.

How does forex trading work?

Forex trading works like most transactions when you are buying one asset for another. The current price of a currency pair indicates how much of one currency is required to purchase one unit of another currency. The current price of currency pair X/Y will show you how much of currency Y it would take to purchase one unit of currency X.

In forex, currencies are abbreviated using ISO (International Organization for Standardization) codes. These are 3-letter codes and are used when denoting a currency pair. This allows traders to quickly identify the letters as part of what traders call a currency pair.

If a trader buys a currency pair, the expectation is that the price will rise, that the base currency is strengthening relative to the quoted currency. If a trader sells a currency pair, the expectation is that the price will fall, which would happen if the base currency weakens against the quoted currency.

It’s important to understand as much as you can about currency pairs if you want to successfully trade forex. So, let’s dig a little deeper into the most popular currency pairs you should get to know. Then we’ll help you learn more about how you can use these currency pairs to meet your goals.

What is a currency pair?

A forex currency pair is the most direct way you can trade currencies. As the name implies, it consists of two currencies, which together make a pair. When you choose a forex pair, you will see one currency listed before the other, e.g., EUR/USD. The first currency is known as the “base currency” and the second currency is known as the “quoted currency”. The price of a currency pair equates to how much of the quoted currency is needed to purchase one unit of the base currency.

Here, the currency on the left is the base currency (EUR) while the currency on the right is the quoted currency (USD). The quoted currency is also referred to as the variable currency.

The base currency is quoted first, and that currency is always the one in which the trade is conducted; i.e., a trader is either buying or selling the base currency. The variable currency is always the currency in which a profit or loss is expressed.

If the value of the above currency pair goes up or down, it means that the value of the US dollar is strengthening or weakening against the euro.

What are the major currency pairs?

One of the major differences between the forex market and equity market is the number of instruments that a trader can trade; the forex market has very few compared to the thousands of company stocks that are found in the equity markets.

There are around 180 different currency pairs that forex traders can generally choose to trade; however, the majority of market participants focus their efforts on trading just 8 different currency pairs known as the “majors”.

As a newcomer to forex trading, it’s often recommended to trade “major” forex pairs when starting. The main reason is that these pairs offer the most market liquidity. Liquidity is important. It means that many investors are trading the pair. This is good for you, as it will make it easier to buy and sell. It also means that in most cases, you’ll encounter smaller gaps between the prices you can buy and sell for.

More “minor” forex currency pairs may have bigger gaps between the two prices, which immediately brings with it increased market volatility. The volatility occurs due to the reduction in the number of active buyers and sellers in the market. Minor forex pairs have wider “spreads” in the buy and sell prices, as sellers aren’t prepared to lower the selling price, and buyers are equally reluctant to bid more.

It’s also worth noting that the bigger the gap between the buy and sell price, the more the price must move for your forex trade to be profitable.

What are spreads and pips in forex?

Spreads

The difference between the bid price and the offer price is called the spread. The width of the spread is dependent on many different factors, including but not limited to the underlying liquidity and volatility of the currency pair, time of day, and notional trade size, which is the actual amount of currency that you are buying or selling.

Pips

A pip stands for "percentage in point" and is used almost exclusively in forex trading. Most forex pairs are quoted in terms of pips. So instead of saying that the price in EUR/USD changed by 0.0010, a forex trader will say the EUR/USD price changed by 10 pips. Most currency pairs define a pip on the 4th decimal place, but, for example, currency pairs including the Japanese yen (JPY) will have pips denoted on the 2nd decimal place. Gold (XAU) also has pips denoted on the 2nd decimal place. Many crosses are quoted in deci-pips, meaning an extra decimal is added. It represents one-tenth of one pip, and this is the smallest amount that a price can move.

How does leverage and margin work with forex?

When you trade the forex markets, you may be offered leverage. We also know this as trading "on margin". Leverage means you only need to commit a small percentage of the overall trade value to open a position in the market. Let’s say that you were offered 5:1 leverage on a currency pair. This means you would only need to deposit 20% of the overall value of the trade to execute a long or short position in the market.

It's important to remember that leverage carries a significant risk in all forms of financial trading, not just forex trading. After all, this is a concept that sees you "borrow" capital from your broker to gain greater market exposure. As a beginner to the forex markets, it's a good idea to minimise your use of leverage wherever possible.

Many brokers will offer a 3.33% margin on the major forex currency pairs. This means you only must commit USD 3,300 to get exposure of USD 100,000 in the market. Although USD 3,300 may seem like a small amount to find, any losses will be incurred in line with the full value of your open position (USD 100,000). If you do feel the need to use forex leverage, use the lowest multipliers available while you learn the ropes.

Most brokers will provide a host of risk management tools designed to help forex traders use leverage in the most sustainable way possible. Stop-loss orders can be entered into the market, closing out your position if the price moves against your entry position and hits the maximum loss you are willing to accept on an individual trade.

At Saxo, margin requirements differ by currency pair and may be subject to change according to the underlying liquidity and volatility of the currency pair. This is why many liquid currency pairs (the majors) in most cases require a lower margin requirement. If at any time the margin required to maintain a position exceeds the funds available on an account, the client is at risk of a stop-out. A stop-out refers to what happens when your positions are immediately closed by your broker because your margin level falls to a level where your account can no longer support your open positions.

Clients will be notified when a margin call occurs (when equity on your account drops below the requirement) and they are required to reduce the size of open positions and/or deposit more funds (margin collateral) into the account. If no action is taken, the broker may close some—or all—of the open positions to reduce exposure to an acceptable level.

What are the advantages of trading forex?

Forex is traded over-the-counter (OTC) and one of the main advantages of trading forex is that the forex market is open 24 hours a day, 5 days a week, allowing you to potentially respond quickly to market movements and to trade on macro events if you wish.

Another advantage is that forex is the most liquid market in the world due to the vast number of OTC participants. This means that usually spreads are very tight, which reduces the cost of execution. This also means that the market is accessible during high volatility events.

What are the disadvantages of trading forex?

While some traders are attracted to forex because they gain access to the market during high volatility events, this tolerance for volatility is not necessarily beneficial if you do not understand how leverage works and have a cautious attitude towards both leverage and risk.

This is because the higher the level of leverage you use, the more sensitive you are to high volatility price changes, which can cause a risk of a position being closed down or stopped out. Before you begin trading forex products, it’s important to consider your tolerance for risk, your time horizon, and your goals.

Both volatility and leverage can be managed by hedging in different forex derivatives, as well as using resting orders. But if you do not have a high tolerance for risk, forex may not be the best product for you to trade.

If you’d like to learn more about how to hedge with forex, keep reading, and we will dive into that further below.

Are there risks with trading forex?

As with other products, there are risks associated with trading forex. Market risk and liquidity risk are two factors that need to be considered before you begin. Saxo offers tiered margin methodology as a mechanism to manage political and economic events that may lead to the market becoming volatile and changing rapidly. Saxo also offers a wide range of opportunities to manage portfolio risk in the form of resting orders (limit, stop, stop limit), as well as forwards, swaps, and options.

Why trade forex?

The average daily turnover of the forex market is over USD 7 trillion, compared to less than USD 300 billion for the equity market. There are several factors that make the forex market the largest financial market globally. There are a range of currency pairs, and traders have the flexibility to go long or short depending on the view.

The foreign exchange market is open 24 hours a day, five days a week, which gives the ability to execute trades at any time. High volatility also makes forex more interesting to trade because it could mean potentially large gains if the market moves in line with your views, but it also carries huge risk.

How to trade forex

As a forex trading novice, it can be hard to know where to begin with planning your trades in the market. Forex trading is considerably more speculative and riskier than investing. Forex traders enter the markets daily looking to extract short-term profits from the exchange, as opposed to building a long-term portfolio. As such, they rely on road-tested trading strategies that can be replicated daily when trends occur in the markets.

Take a look at the four following approaches many seasoned forex traders use today:

• Range trading

  Range trading involves trading a currency pair between two defined price levels. If you can spot that a currency pair is trading within a "range", you can buy low and sell high within this range. Our automated trade signals platform feature uses technology that can recognise potential patterns along with a probability of them happening. Stop-loss orders can also be used should the price break the trading range to mitigate your risk.

• Breakout trading

  Some forex traders crave market volatility. That’s because volatility brings price action and more opportunities to profit. Breakout trading strategies are therefore useful for when a currency pair breaks its previous trading range. If a pair’s price was to fall through its previous support level, some traders would open a short position with a stop-loss set at the previous support level.

• Momentum trading

  If you’d prefer to focus on the momentum of a trend as opposed to the trend itself, momentum trading strategies tick all the right boxes. Traded volumes and price action can help to determine whether the momentum is building on a currency price in either direction. Fundamental factors such as news reports and major economic events can also have a bearing on a currency’s market sentiment.

• News trading

  The ultimate form of fundamental analysis, news trading strategies, are useful if you can be confident in digesting and interpreting economic information fast. This gives you an edge in the market to execute long or short orders on a currency pair based on which way you think the market will react to a news story or announcement.

How does pricing work with forex?

Trading forex is the act of purchasing one currency and selling another or vice versa, like when you go on vacation to another country. A forex instrument (also known as a "cross") consists of 2 currencies. Whichever currency is quoted first (the base currency) is the one traded, i.e., a trader is either buying or selling the base currency. The variable currency is the currency that you are using to buy/sell the base currency and is also the currency in which the profit or loss is expressed.

Let’s say you have USD and you wish to buy EUR 10,000. EUR/USD is trading at 1.0500 (aka the exchange rate of USD to EUR). This means that EUR 1 will cost USD 1.0500. To purchase EUR 10,000, you will need USD 10,500.

If you conduct this trade on a trading account, you will buy 10,000 EUR/USD @ 1.0500. The direction of the trade always dictates what is traded in the base currency.

When trading forex in a speculative manner (where you aren’t necessarily hedging FX risk), you are "betting" on the value of one currency against another. Always keep in mind that some exchange rates are more stable than others, and many aspects contribute to changes in exchange rates, e.g., interest rates, geopolitical events. If the base currency (EUR) strengthens against the variable currency (USD), the currency pair moves higher (appreciates). If the variable currency (USD) strengthens against the base currency (EUR), the currency pair moves lower (depreciates).

Forex is quoted as a 2-way price. There is a price at which one can sell, called the bid price, and a price at which one can buy a respective cross, called the ask price. The difference between the bid and ask is called the spread. The size of the spread is dependent on the cross and liquidity.

The more liquidity there is in a cross, the tighter the spread tends to be. But volatility also plays a role. The more volatile a cross is, the wider the spread tends to be. The market maker supplying the prices needs to incorporate the risks of taking on a position. If a cross is volatile, then there is a larger risk that the market will move against the market maker and perhaps render a loss on the position. To protect against this, a market maker can increase the spread.

How does rollover work with forex?

With currencies being traded around the world every day, and trades often happening while half the world is asleep, it can be helpful to understand how a rollover in the forex markets works, especially when a position moves to the following date and a rollover fee incurs.

Rollover in forex happens when you keep a trade open overnight. Since currencies are traded in pairs, each one has an interest rate. If you hold a trade past a certain time (usually 5:00 pm New York time), you either earn or pay interest based on the difference between the two currencies' interest rates. For example, if you bought a currency with a higher interest rate against one with a lower rate, you might earn a small amount. If the reverse is true, you could be charged a fee. This daily interest adjustment is what we call a "rollover".

How to hedge with forex

While generating extra returns from direct forex exposure can be interesting, forex hedging of offshore assets in a portfolio may also make forex trading beneficial for many investors.

Diversification of portfolios across geographies has made forex hedging increasingly relevant for investors.

Let’s consider exposure to foreign equity. If the value of foreign equity rises in terms of a foreign currency, but the currency itself depreciates, this may mitigate the overall gains for the investor. Forex hedging seeks to reduce exposure to forex while retaining the exposure to the original asset denominated in an international currency.

In practice, this would mean selling the currency in which the equity exposure is denominated and buying your own currency. This can be done via spot or forwards, depending on the time horizon of your position.

What is a swap in forex?

A forex swap is a simultaneous purchase and sale, or vice versa, of one currency for another currency with two different value dates. This means that two parties agree upon a currency exchange on one day and simultaneously agree to unwind or reverse that transaction on a specified date in the future. More specifically, a forex swap includes two legs. It is a combination of either a spot and a forward position or two forward positions:

• In the first leg, a notional amount of currency is either bought or sold against another currency at a specified price on an initial date. The initial date is referred to as the near date.
• In the second leg, a notional amount of currency is then simultaneously bought or sold against the other currency at a specified price on a specified date in the future. The date in the future is referred to as the far date.

A forex swap effectively results in little exposure to fluctuations in the prevailing spot rate since, although the first leg opens spot market risk, the second leg immediately offsets it. A forex swap is commonly used for hedging exposure from currency risk or to modify (or "roll forward") the value date of an open foreign exchange position.

Let’s look closer at two trading examples:

Example 1: Hedging exposure from currency risk

A Swedish company is long EUR from sales in Europe but operates primarily in Sweden using SEK. The company needs to pay suppliers based in Germany, in EUR, in one month. To mitigate the currency risk, the company enters into a one-month swap, selling EUR and buying SEK at the spot price, while simultaneously buying EUR and selling SEK one month forward.

Example 2: Modifying the value date of an open position

A trader has an open short (sell) EUR/USD spot position. The trader would like to keep this position open for at least one month and does not want to roll the position forward each day. To modify the value date, the trader enters a one-month swap buying EUR and selling USD at the spot price, while simultaneously selling EUR and buying USD one month forward.

How to read charts/what are forex signals?

One of the most common ways forex traders monitor the forex markets and recognise trading opportunities is by using technical analysis.

Technical analysis is a visual approach using charts to study past price movements and volume to forecast possible future price actions. The goal of technical analysis is to utilise available price charts to view price action and pinpoint trends of support and resistance in the market. However, technical analysis deals with probabilities—never certainties. Information about the financial markets is reflected in the charts.

Technical analysis can be used to:

• Exit a trade: decide the exit strategy before entering a trade based on what a chart says.
• Ride a trend and reversal of trends. Trends are either up or down, and they do tend to change.
• To become an effective forex trader using technical analysis, it’s a good idea to familiarise yourself with the following three charts used in forex trading:

How to manage volatility in forex

Volatility in forex trading is a statistical measurement of the intensity of price movements over a period of time and is affected by a range of factors including interest rates, inflation, geopolitics, political stability, and market sentiment. While high volatility can bring immense opportunity, it also entails significant risks, and it is essential to consider the liquidity of a forex pair before trading.

Major pairs like EUR/USD or USD/JPY usually have more buyers and sellers, and therefore usually have more liquidity, which keeps the bid-ask spread tight. Lack of liquidity can make it difficult for traders to enter or exit trades quickly and at a fair price. Many strategies are used by traders to deal with volatility and liquidity risks, such as using stops and limits, staying watchful of news and events, selecting currency pairs with high liquidity, and keeping portfolios diversified.