For a trader, one of the most important steps they need to do is acquire knowledge that will help them trade wisely. It’s also important to diversify your portfolio because if one asset falls, the profits from the rest will cover the losses. We, at CMTrading, believe that time can have a major influence on your trading so you need to consider it more closely.
While it’s often said that the forex market is always open, that doesn’t necessarily mean you can trade at any time of the day with a large amount of liquidity. The best time to trade is when the majority of the world’s traders are awake and preforming trades in the global financial capitals.
This means that there are three major sessions and a small Pacific Time zone when there is good market liquidity. These sessions, named either for the zones they represent (Europe, North America, Asia) or more colloquially the major trading cities within them (Tokyo, London and New York) mimic the times the major trading centers are online.
The Sydney Forex trading zone runs from 9:30 PM to 6:30 AM - GMT. During these hours the Pacific markets are the most active. This time zone is also the smallest and least liquid of the sessions.
This session is sometimes referred to as the Asian session, as Tokyo is the financial heart of the Asian markets. It runs from 11:30 PM to 8:30 AM - GMT.
This forex trading session runs from 8:00 AM to 4:30 PM - GMT daily. About 30% of forex transactions run daily align with this session, and London is widely regarded as the financial capital of the world.
This zone represents North American business. It runs from 12:30 PM to 21:30 PM - GMT daily
The highest liquidity in forex trading occurs during the crossover points of the London and New York sessions, so for a beginner trader this is the best time to trade. There is a noted lull in the liquidity of the markets between the close of the North American (NYC) session and the opening of the Asian markets again, simply due to the time zones and business activity within them. If you live in a time zone that overlaps strongly with any of these sessions, you should consider trading within that time for maximum convenience. In addition to that, you should concentrate on currency pairs that are most active during that time. You’ll notice that there’s a lot of overlap between most of the sessions, so you’ll always have access to a decent spread of transactions no matter what time you favor for trade.
Knowing the basics of the forex market, like what is the most active trading session, is a critical part of becoming a pro forex trader. CMTrading highly recommends taking the time to get familiar with the trading conditions around your favorite currency pairs.
As mentioned above, forex transactions can be made on the spot at a bank or even between two individuals. However, traders can now speculate on the fluctuation of currency exchange rates, much easier and faster, by trading CFDs (Contracts for Difference) online through a trading platform such as the MetaTrader 4.
CFDs are financial derivatives that mirror the price of an underlying asset and can be traded online. CFDs are highly advantageous for retail traders since they don’t require ownership of the asset and can be traded on margin, which will be explained below.
Simply put, if you have register for a trading account with a CFD broker, you will be able to speculate on the fluctuation of any financial asset such as currency pairs, stocks, commodities, or cryptocurrencies and generate profits as you would by actually buying and selling the asset itself.
So, for example, if you believe that the value of the euro would rise against the US dollar, you could open a buy position on the EUR/USD currency pair, which effectively means that you are selling US dollars in order to buy euros. If the exchange rate does move in your favour, then you would make a profit according to the exchange rate difference. Higher movements translate to higher potential profits, but the market rarely moves in the same direction for too long.
A CFD trade also offers you the opportunity to open your position for a fraction of the total value and this is possible thanks to the use of margin or leverage.
When you open a CFD position, only a percentage of your invested capital is reserved to sustain the trade. This is referred to as the margin requirement and it can vary depending on your broker and the underlying asset that you have chosen to trade.
In short, this can be considered as borrowing capital from your broker in order to increase the number of currency units you can trade and therefore increase your potential returns.
This is one of the main advantages of trading forex online with CFDs, however, using margin or leverage can backfire since it also magnifies potential losses if the exchange rate starts moving against you.
Trading currency pairs is what forex trading is all about. In our example above, where we examined the outcome of a trade between the euro and the US dollar, we mentioned opening a position in the EUR/USD pair. This is because currencies are traded in pairs.
In this case, the euro (EUR) is referred to as the base currency, and the US dollar (USD), which is referred to as the quote or counter currency. What we are interested in is how many units of the counter currency we can buy with one unit of the base currency – and this forms the exchange rate between the two currencies.
Using EUR/USD again, if this pair is currently trading at 1.18234, then one euro is worth 1.18234 US dollars.
If you did enter into a buy trade in this pair at 1.18234 and the rate went up by a few points to 1.18500, then that means one euro would be worth more dollars and this trade would end up being profitable.
On the other hand, if the exchange rate started dropping, you would start losing money until you closed the position. However, CFD trading also allows for opening sell positions, which enable traders to profit even when the exchange rates of currency pairs start dropping.
There are hundreds of currency pairs available for trading and while the actual number may vary depending on your broker, currency pairs are generally divided into three main categories: majors, minors and exotics.
The major pairs include the currencies of the largest and most developed economies such as the US dollar, the British pound, the Canadian dollar and the Australian dollar. Each major pair always have the US dollar as the base or counter currency, and they make up the lion’s share of the global forex trading volume. The high liquidity makes them the most affordable to trade as well. Some examples are the EUR/USD, GBP/USD, USD/CAD etc.
In contrast, the minor pairs stage major currencies between each other. Examples are the EUR/GBP, GBP/JPY and the EUR/CHF.
Lastly, the exotics are currency pairs that include the currencies of emerging economies such as the South African rand, the Polish zloty and the Mexican peso. Examples are the USD/ZAR, GBP/MXN and the USD/PLN.