The foreign exchange market, commonly referred to as the “Forex”, “FX”, or “currency” market is the single largest global financial market in the world which trades at an average daily volume of $6.6 trillion, and is where currencies are exchanged for one another. The exchange of currencies for goods and services has been around for hundreds of years, with people trading things like gold coins for food or land. However, in the modern FX market that we know and love, currencies actually float in value against each other – which we’ll dive into and explain next.
The Birth of The Modern Foreign Currency Exchange Markets
The shift from a fixed exchange rate to a floating exchange rate marked a drastic change in the way the currency markets operate back in 1971, when the United States’ 37th President, Richard Nixon, pulled the plug from the Bretton Woods Agreement. By announcing that the United States would no longer accept gold in exchange for U.S. Dollars, this meant the U.S. Dollar was no longer backed by gold, and that they had left the “gold standard”. This effectively removed the U.S. Dollar’s peg to the value of gold which in turn devalued the U.S Dollar relative to the value of gold. The peg was removed because Nixon was concerned that there wouldn’t be an adequate supply of U.S. gold to cover the total number of U.S. dollars in active circulation. This substantially changed the way the currency exchange system works as it no longer used gold as a universal standard.
Currencies Provide Convenience (Liquidity)
So what does this all have to do with the modern Forex market and how it operates today? The FX market is unlike any other market because it is essentially woven into the very fabric of our day-to-day lives, and gives us the ability to exchange our fiat currency for goods, materials, services, and more. Unlike stocks and equities, the currency asset class is not as commonly used as a long-term investment vehicle, but instead is used as a tool for paying someone for goods or services. It’s simply more convenient to exchange a currency for another one to pay for something than it is to barter for goods and/or services. Currencies or cash are considered the most liquid asset because you can most easily exchange them for something else of value with the least amount of effort. You wouldn’t pay for groceries with jerry cans full of fuel at your local supermarket, but without currencies, you might be forced to!
It could be argued that currencies may not have intrinsic value, but they undoubtedly have utilitarian value.
Most people are familiar with the FX market when they travel to foreign countries, or exchange currencies at an airport exchange before visiting a country with a different base currency, but the FX market spans way beyond that. Between multinational corporations exchanging currencies for one another to pay for raw materials from a supplier in another country with a different base currency (importers and exporters), or governments making large transactions trading currencies with one another through central banks and large financial institutions, the forex market is literally everywhere.
What Is Forex Trading?
The Two Ways of Profiting From Forex Trading
Forex trading may seem confusing to those who are brand new to it but it’s quite simple. Traders who trade the FX markets typically make money in one of two ways:
1. Holding and profiting off of Foreign currency swaps (swapping the interest or principle of a loan between two different currencies). This is more so for longer-term swing/position trades.
2. Trading and profiting off of the change in the prices of a currency pair. (This is far more common for traders who day trade and swing trade in the forex market).
At Phantom Trading, we fall into category 2, with our community and team members profiting off of the rise or decline of a currency pair’s value from an intraday perspective (meaning we get in and out of a trade within the same trading day). In some cases, we may inadvertently earn or even lose money on swaps on open trades or positions we may have in the FX market if we decide to hold them for longer than a day.
If this all sounds confusing – don’t worry, we’ll be covering how to read FX currency quotes as well as the different currency pairings later in this article.
How Currencies Are Different From Stocks & Equities
Forex Is Long and Short Position Friendly (Buy & Sell)
In a technical sense, currencies are quite different from stocks, bonds and equities because they tend to oscillate (range in price), whereas things like stocks and even index funds and ETFs tend to appreciate (grow in value) over the long term, meaning they’re long biased. As a part of this key difference, you may notice that FX traders tend to take long and short positions (buys and sells) in the currency markets more frequently than in the stock market because there are no additional fees or rules when taking a short-selling position (selling a base currency against its quote currency in a pair). Remember, shorting a currency pair is just like buying the quote currency against the base currency of the pair.
Currency Pairs Oscillate, Stocks & Equities Rise
As mentioned earlier, the primary reason why FX pairs oscillate is that currencies have a relative floating value against one another. Every currency is connected through each of its pairings and this is sometimes the reason we’ll see a currency pair trend up, trend down or range for months or even years at a time. Understanding the fundamental difference between each asset class will help you better understand why certain asset classes move the way they do in comparison to others. If you’re interested in learning more about this topic, check out our in-depth article on what makes markets move.
Advantages of Trading the FX Markets
Markets Are Open 24-Hours / 5 Days Per Week
The fact that the FX Markets are open 24 hours per day, 5 days a week is one of the biggest advantages to the asset class. Since currencies are traded with one another globally, they are traded pretty much all the time except for on weekends. That means whether you’re located in the Americas, Europe, or even Asia / Australia, you’ll be able to trade at least one of the many high-volume sessions that happen throughout each trading day.
Multiple High Volume Sessions To Trade
This leads us to the next point, there are multiple trading sessions per day that have high volume, and thus, high volatility. Perfect trading conditions for catching moves in the market, intraday.
Asia Session
Starting with the Asia session which starts from around 22:00 UTC and ends around 08:00 UTC, there typically isn’t a ton of volume in the market unless you’re trading a Yen or Aussie pair but there is still enough volume to sometimes scalp before the next session. This session is best suited for those who live in Asia, Australia, or those who are based in the Americas and want to scalp at night before heading to bed.
London Session
After Asia session comes the London session which starts at 08:00 UTC and ends at 17:00 UTC and is extremely popular among fx traders, especially those located in the UK or Eurozone because of its huge jump in volume and volatility. This is one of our favorite trading sessions for this very reason. Typically we’ll see the Asia session consolidate then a jump in volatility at 06:00 UTC (Frankfurt Open), then usually an even bigger move that happens on the major and even minor pairs at 08:00 UTC (London Open).
New York Session
Finally, we have New York session, which starts at 13:00 UTC and ends at 22:00UTC (which is 8:00 AM EST to 5:00 PM EST). and roughly coincides with the U.S. Stock market open, and close. Much like London session, NY session is commonly traded by both those who live in Europe/The United Kingdom, and by those who are based in the Americas as it’s their primary session. This session is considered high volume because of the overlap between London and NY session and typically sees high volatility on any given day on most of the major pairs, minor pairs, and indices as well as CFDs that cover financial instruments that are commonly traded in the U.S. Stock market.
No Need For Stock Scanners
Another huge benefit of trading the fx markets is that you don’t need to scan for new stocks to cryptocurrencies (if you’re used to trading anything other than blue-chip stocks or cryptos). This for me personally was a huge benefit because when I used to trade stocks I often found myself searching and searching for hot stocks to trade every day. The complexity of configuring a scanner and then figuring out how to trade a new instrument is completely cut out of the equation. At Phantom Trading, we typically only trade only 1 to 3 pairs at once, or on the high end, up to 6 on any given day. What we recommend for most traders that are new to trading forex is that they stick to only 1 to 2 major pairs of their choice so they can learn how the pair(s) move without having another variable to worry about. Remember, by cutting down on your variables you’ll make it easier to find actual consistency in the market.
Position Sizing and Risk Management Is Easier
Believe it or not, in our experience, position sizing in the forex is actually arguably easier to calculate fixed risk per trade using a position size calculator in MT4/MT5/C-Trader than it is in most stock trading and cryptocurrency platforms. When I first made the switch to forex from trading stocks, I originally found calculating lot sizes extremely confusing, but once I found a proper position size calculator I found defining my risk (fixed percent risk per trade) was way easier than manually calculating how many shares of a stock I needed to buy at a certain price to risk 1% of my trading account. If you manually calculate lot sizes as a forex trader, then yes I’d argue it’s more confusing considering you need quite a lot of leverage to take advantage of the relatively small changes in price between two currencies in a pair, but with a calculator, it makes entering trades a breeze.
More Variety in Forex Brokers
Last but not least, there are a huge variety of brokers to choose from when trading forex. This one truthfully is a double-edged sword because while there are a ton of good quality brokers and prop firms in the industry that will accept almost anyone from around the world, there are also a lot of shady brokers and even prop firms that are unregulated and will undoubtedly scam you out of your hard-earned money. Again, that’s not to say there aren’t a ton of really good trustworthy brokers who are regulated by different governing bodies, but you should always do your research on a broker before making a deposit.
Disadvantages of Trading the FX Markets
A Slightly Steeper Learning Curve
Learning how to trade forex can sometimes have a bit of a steeper learning curve when compared to trading stocks because of the nature of the market and the fact that you can just as easily take short positions as long positions (as we previously mentioned). While forex pairs normally have cleaner, less gappy price action, it’s not as easy as just buying X amount of shares at X price and selling in profit. You need to calculate how many standard lots (100,000 currency units) to get into the market while not over-risking or over-leveraging your account, and you need to get used to trading price action that at times likes to whipsaw. The truth of the matter is that you could argue any one market is easier to trade than the other, but I speak from personal experience and I’ve always found the stock market more approachable and easier to trade than forex.
Price Action Is More Heavily Manipulated In The Forex Market
There is no argument that every major market in the world is manipulated in some way, shape, or form, but the FX market is no exception. With the advent of algorithmic trading, large players in any market whether it’s an institution or a crypto whale will push prices around to manipulate participants in the market into taking unfavorable positions to fulfill their agenda. Lucky enough for you if you’re reading this article, and you want to learn how to trade the FX market, Phantom Trading specializes in teaching how to trade supply and demand in a way that works in a heavily manipulated market. Rather than getting manipulated into taking positions that will end in losing more often than not, we focus on recognizing manipulation and “hitching our wagon” to the moves that institutions are behind.
Unlike trading stocks or cryptocurrencies, the forex market does not have an accurate volume profile or any type of depth-of-market (DOM). If you’re used to trading with these tools in other markets you can forget about it when trading forex. Considering the FX market is the most liquid market in the world, it also means that it is extremely decentralized, meaning any volume data you may have access to through your broker just isn’t accurate.
Less Variety of Trading Platforms & Software
If you’ve traded in other markets you’ve probably noticed there is a good number of platforms both through web applications and standalone software for Mac or PC. With forex there are essentially two major trading platforms that dominate the market. MT4/MT5 and C-Trader. While this isn’t a big deal, the most commonly used software for FX, MT4 is quite antiquated. My personal experience was that I originally found MT4 clunky and difficult to configure but it eventually grows on you. On the other hand, if you’re trading stocks or crypto there are many more options to choose from which makes it easier to get started, but in a way is a double edge sword because it can cause confusion. Whether you’re trading from a bank app, TD Ameritrade’s Think or Swim, TC2000, or trading cryptocurrencies directly off of a crypto exchange’s website, the barrier to entry is lower.
Why People Trade The Forex Market
Prop Firm Funding Opportunities
This one I can speak about from experience. As a trader with over 5 years of experience in the stock and currency markets, this is what has always drawn me to trade forex, indices, and commodities like gold and oil. The number of legitimate prop firms that have launched and proved themselves trustworthy has skyrocketed in the last 2 years alone. FTMO will always arguably be the gold standard for trustworthiness considering they’ve been around for years, but newer players in the market like My Forex Funds offer even more competitive things like a smaller profit target for challenge accounts and more legroom for overall drawdown, it’s hard not to want to do them all and load up on prop firm funding.
Low Spreads And Few Gaps In Price Action
Another major reason why people trade the forex market is that if you choose a good quality broker or prop firm to trade with, you can expect to get extremely low spreads (difference between the bid and ask price). Unlike the stock market, the forex market is extremely liquid meaning that unless you try to enter an extremely large position size (in the millions), you won’t be bidding price up or pushing price around like you may with a low volume and market cap stock or cryptocurrency.
Another major benefit of trading the forex market is that most of the major and even minor pairs print very clean price action, meaning that there are few gaps between the candles even on the lower time frames. This simply makes it easier to read price action so you can conduct your chart analysis more effectively. Forex, on the surface, may seem intimidating to those who are more familiar with the stock market or crypto markets, but once you get familiar with currencies, it’s actually just as easy.
Low Barrier of Entry To Getting Started
This brings me to the next point. Getting into trading forex arguably has the lowest barrier to entry of any of the major markets people trade today. Anyone in almost any country around the world can fairly easily open a trading account with a brokerage and get access to trading the major, minor and exotic fx pairs in a matter of a couple of days with access to high leverage and sometimes even access to CFDs (contract for difference) instruments for trading commodities, indices and more.
Compare this to the crypto markets which technically have almost no regulation in most countries at the time of writing this, and also require a bit of technical knowledge to get started. Then we have the stock market, which isn’t necessarily available to just anyone, and if you’re located in the U.S. as a U.S. citizen you’ll have to comply with strict regulations plus you’ll have to follow the pattern day trading rule if on a margin account (unless you fund it with a minimum of $25,000).
As far as learning how to trade goes, every market has a ton of free trading resources and paid courses, but that doesn’t necessarily mean they’re good. In my personal experience, there are some decent retail strategies out there for trading the stock market, but when it comes to learning how to trade forex there are some very good courses out there that are taught by actual traders who trade real capital.
The truth of the matter is, there are a lot of fake traders in the trading education space, no matter what the market – who make money off of selling courses and don’t trade real money, but here at Phantom we have a team of real traders who are funded both through prop-firms and with private investors.
How To Trade The Forex Markets Profitably
Retail Trading Strategies
The first and most common way that people get into trading forex is through retail trading strategies. Technically Phantom Trading and other similar supply and demand based trading courses could be considered retail trading strategies at this point, but we consider using support and resistance, fibonacci levels, basic retail chart, and candle patterns like ascending and descending triangles, breakouts, cups and handles, and head and shoulders retail trading strategies. Again, nothing wrong with trading these strategies because they can and do work if you can find your edge using them.
Trading Fundamentals & News
This type of trading is a bit more nebulous if you ask us. Much like you would do research on a publicly-traded company on the stock market or read the white paper on a cryptocurrency/token in the crypto markets, trading fundamentals involve paying attention to and forming trade ideas around macro-economics and geopolitical events that are happening, plus high impact news like NFP (Non-Farm Payroll), central bank rate decisions, and even things like seasonality when trading certain commodities, like natural gas or oil in the energy sector.
Supply & Demand Concepts (Phantom Trading)
Finally, we have supply and demand which is the method the team at Phantom has settled on and refined to a high degree after pretty well trying everything. Again, we aren’t claiming that our way of trading is the absolute best, it’s hard to argue what strategy would be the “best”. Trading supply and demand concepts is not the easiest and in some cases, it could be argued a ten-year veteran who trades Fibonacci levels could even produce a better expectancy than a novice S&D trader. The truth about trading the way we trade at Phantom Trading is that it has a steeper learning curve than other retail strategies, but also a higher overall profit potential.
What people don’t know is that when you’re first learning and implementing this strategy you will have a low strike rate. The same can be said for retail strategies, but trading S&D is simply less forgiving. Having personally traded both retail and supply and demand concepts, I’ve obviously settled for S&D, but as I’ll explain in greater detail later, it was no walk in the park to get to the level I’m trading at, and I still have a ways to go to get better! We at Phantom Trading always believe there is room to improve something in your trading whether it’s your technical analysis skills or trading psychology.
Ready To Join Phantom Trading?
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Robert Castillo – Currency & Commodities Trader, Financial Analyst, Writer & Editor. Robert is a funded trader based out of Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading he enjoys producing music, mixed martial arts, and riding his motorcycle in the summer.
