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  • Welcome to Sigma Algo
    • How to Use This Guide
  • Getting Started
    • Getting Started
    • Account Management
    • Community and Support
    • FAQs
  • Trading 101: Fundamentals
    • Understanding the Markets
    • Basic Trading Concepts
    • Technical Analysis
    • Fundamental Analysis
    • Risk Management
    • Trading Psychology
    • Building a Trading Plan
    • Forex 101
    • Futures 101
    • Crypto 101
  • What Are Prop Firms?
    • Business Model of Prop Firms
    • Differences Between Futures Prop Firms and Forex Prop Firms
    • Examples of Prop Firms
    • Pros and Cons of Trading with Prop Firms
    • How to Choose a Prop Firm
    • Conclusion
  • Futures Prop Firms List
    • MyFundedFutures.com
    • Topstep
    • Apex Trader Funding
    • TickTickTrader
    • Take Profit Trader
    • Belunox
    • Overview of Firms
      • Comparison Table
      • Account Options and Pricing
      • Pros and Cons
      • Detailed Comparison
      • Conclusion
  • Algorithmic Trading with Sigma Algo
    • The Sigma Algo Edge
    • Getting Started with Sigma Algo's Algorithmic Trading
    • Sigma Algo Toolkits
      • MM Sigma Algo
      • Sigma Sessions Breakout v2
      • Sigma Renko Band Indicator
      • Sigma Renko MACD Indicator
      • Sigma Renko MACD Overlay Indicator
      • Sigma Renko Suite
      • Sigma Renko Suite Bot Version
      • SIGMA Heikin Ashi Dragon V2
      • Don V3
      • Sigma Sensei Ichimoku
      • Sigma Sniper
    • How to Use Sigma Algo Tools
  • Sigma Base Hits Strategy
    • Sigma Base Hits Strategy Simplified
    • Examples with Contract Details
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  1. Trading 101: Fundamentals

Forex 101

Introduction to Forex Trading

The Foreign Exchange Market (Forex or FX) is a global decentralized marketplace for trading national currencies against one another. It is the largest and most liquid financial market in the world, with an average daily trading volume exceeding $6 trillion.

How the Forex Market Works

  • Currency Pairs: In Forex trading, currencies are traded in pairs (e.g., EUR/USD). The first currency is the base currency, and the second is the quote currency.

  • Exchange Rates: The exchange rate represents how much of the quote currency is needed to purchase one unit of the base currency.

  • Bid and Ask Prices:

    • Bid Price: The price at which the market is willing to buy the base currency.

    • Ask Price: The price at which the market is willing to sell the base currency.

    • Spread: The difference between the bid and ask price, representing the transaction cost.

Key Concepts in Forex Trading

  • Leverage and Margin:

    • Leverage: Allows traders to control larger positions with a smaller amount of capital. For example, 100:1 leverage means you can control $100,000 with $1,000.

    • Margin: The minimum amount required to open a leveraged position.

    • ⚠️ Warning: While leverage can amplify profits, it also magnifies losses. Use it cautiously.

  • Pip and Lot Sizes:

    • Pip: The smallest price move in a currency pair, typically the fourth decimal place (0.0001).

    • Lot Sizes: Standardized units for trading currency pairs.

      • Standard Lot: 100,000 units of the base currency.

      • Mini Lot: 10,000 units.

      • Micro Lot: 1,000 units.

  • Market Participants:

    • Retail Traders: Individual traders participating through brokers.

    • Banks and Financial Institutions: Major players providing liquidity.

    • Central Banks: Influence currency values through monetary policy.

Forex Market Sessions

The Forex market operates 24 hours a day during weekdays due to overlapping time zones:

  • Sydney Session: Begins at 10 PM GMT.

  • Tokyo Session: Overlaps with Sydney, providing increased liquidity.

  • London Session: Opens at 8 AM GMT; one of the most active sessions.

  • New York Session: Overlaps with London, leading to high trading volumes.

Fundamental Analysis in Forex

  • Economic Indicators:

    • Interest Rates: Central bank rate decisions can strengthen or weaken a currency.

    • Inflation Data: Consumer Price Index (CPI) affects purchasing power.

    • Employment Figures: Non-Farm Payrolls (NFP) in the U.S. can cause significant volatility.

  • Geopolitical Events: Elections, trade agreements, and political instability can impact currency values.

Technical Analysis in Forex

  • Popular Indicators:

    • Moving Averages: Identify trend directions.

    • Bollinger Bands: Measure market volatility.

    • Fibonacci Retracements: Identify potential support and resistance levels.

  • Chart Patterns:

    • Head and Shoulders: Indicates potential trend reversals.

    • Double Tops and Bottoms: Signal possible price reversals.

Advantages of Forex Trading

  • High Liquidity: Easy to enter and exit positions.

  • Low Transaction Costs: Tight spreads reduce costs.

  • Flexible Trading Hours: Trade at any time during the week.

  • Leverage Opportunities: Control large positions with less capital.

Risks in Forex Trading

  • Market Volatility: Rapid price movements can lead to significant losses.

  • Leverage Risks: Amplifies both profits and losses.

  • Counterparty Risk: The risk that the other party in a transaction may default.

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Last updated 5 months ago