Forex trading is often considered faster and more volatile, given its higher leverage, than more mainstream asset classes such as stocks, which can provide you with a higher risk-return environment. This increased speed, however, might require a more hands-on approach.
TradingView offers advanced charting capabilities and other strategic resources as well as access to multiple asset classes – including stocks and forex – all in a single platform. After learning how to get started with TradingView, you can explore forex to see if this unique asset is worth adding to your portfolio.
What is Forex?
Forex is short for foreign exchange – a marketplace for the exchange rate between two currencies. In the same way that people speculate on the future of companies like Apple by buying or selling AAPL shares, you can put your opinions of how, say, the British pound will perform relative to the US dollar into practice with a long or short position in GBP/USD.
There are two key attributes, however, that are specific to the forex world:
1. Forex Trades in Pairs
When buying or selling a certain region’s currency, you do so with an opposing view of another currency. For example, a bullish sentiment on British pounds can translate into a buy order for GBP relative to USD (US dollars), EUR (euros), JPY (Japanese yen), and so on whereby you have theoretically sold the second part of the pair, or the quote currency.
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2. Forex Trades with Leverage
Forex markets often trade with relatively small margin requirements that can translate to high amounts of leverage; that is, the amount of money required to access a market like GBP/USD is only a fraction of the total amount of exposure. For example, trading $10,000 worth of GBP/USD might only cost $350, which can greatly magnify potential returns as well as losses.
Trading Forex vs Stocks
There are some key similarities and differences between forex and stock markets that might be viewed as pros or cons depending on your goals, and they include:
Similarity – Price Action is the Foundation
Forex is no different than most other highly traded asset classes in that the individual markets can be reduced to a price that moves up and down. Similar to opportunities seen in stocks, bullish traders seek to profit from forex pairs appreciating in price while bearish traders look for the opposite.
For example, traders thinking pound prices should move higher against the dollar can buy GBP/USD and profit from an upward trajectory or take losses from its descent.
Historical GBP/USD Prices (Daily Closes over Last Year)
Source: TradingView (10/18/22)
Difference – Leverage can make Forex Faster
Since forex markets can cost as little as a few bucks per $100 in exposure compared to stocks that often demand $50 or $100 for the same position, they can come across as being more volatile. Positive and negative returns can build much more quickly in forex than in stocks due to this fact, which often incentivizes traders to hold forex positions for shorter amounts of time.
This key difference creates a more technical environment for forex trading where people utilize charts, analysis, and specific order types to keep up with a potentially faster marketplace.
How to Place Forex Orders
After identifying the forex pair you intend to trade, you can search for the symbol. For example, if you wanted to trade euro-dollar (EUR/USD), then you could type ‘EUR’ into the search bar, find the pair with the source that matches your forex broker (found at the right side of the page), and click that market.
Source: TradingView (10/18/22)
Once you’ve arrived at the page with your pair’s prices and chart, opening and closing a forex position is only a few clicks away.
How to Open a Forex Position
Opening a position in a forex market equates to clicking either the offer – the lowest available buy price – for those looking to buy or the bid – the highest available sell price – for those looking to sell. This is a similar process for most asset classes across most popular trading platforms.
Historical EUR/USD Prices (Daily Closes over Last Year)
Source: TradingView (10/18/22)
After clicking the appropriate price, entering the intended size of your trade, and sending it off, your forex position is now open.
How to Close a Forex Position
Closing a forex position can be boiled down to sending the opposite order to your opening position. For example, if you bought 1 lot of EUR/USD by clicking the offer, then you can close 1 lot of EUR/USD by clicking the bid. More sophisticated closing options can include setting take profit and stop loss orders as you enter a position, but this simpler, more analog approach is a solid place to start.
Strategies for Trading Forex
Now that you have the foundations of forex trading, you can start to strategize around markets using technical and/or fundamental approaches to speculating on a forex pair’s price.
Technical Analysis for Forex
Technical analysis is essentially the study of a market’s price using numerical methods and historical data. For example, computing moving averages to speculate on when to buy EUR/USD based on those averages crossing has little to do with the economies of the underlying regions and almost everything to do with stats around the forex pair’s past prices.
Historical EUR/USD Prices with Moving Averages (Daily Closes over Last Year)
Source: TradingView (10/18/22)
Tools for trading based on technical analysis can be found in a platform’s indicators section on their charts.
Fundamental Analysis for Forex
Fundamental analysis can take many shapes including geopolitical news, employment data, and regional elections, but a good place to start with fundamental analysis on forex can be found in interest rates.
The theoretical thought process goes that higher interest rates in region A relative to region B might draw more demand for region A’s currency in order to invest in their bonds that have higher rates. Thusly, many traders monitor central bank activities and speculate based on their findings. For example, if the US’s Fed projects to increase interest rates faster than Europe’s European Central Bank, then US dollars might appreciate relative to euros making short positions in EUR/USD potentially profitable.
Understanding technical and fundamental analysis is only the tip of the forex strategy iceberg. You can always dive deeper into the TradingView platform.
