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Introduction to Forex Trading for Beginners
This basic guide to forex trading for beginners is all you need to get started with trading forex.
Forex trading or FX trading is the process of converting/exchanging foreign currencies through the forex market. The FX market is the only market in the world where banks, institutions, companies, and individuals trade around 6.6 trillion currencies every day.
As an individual, you have often traded in the market without even knowing about it. i.e. Currency exchange at your bank/bureau de change center while traveling abroad, purchasing an item over the internet which was quoted outside your home currency, events that eventually leads to price fluctuation (Demand and Supply).
In the foreign exchange market, the market is open 24/5; Monday to Friday (except public holidays). FX trading is done over the counter – no physical cash is exchanged. Cash passes through your bank and broker into the foreign exchange market.
What is Forex Rate?
A foreign exchange rate is the rate at which a currency can be converted into another currency. Exchange rates always involve two currencies, and currencies are always traded in pairs on the foreign exchange market.
How is forex traded?
Forex pairs are made up of 2 different currencies that are traded against each other. Each currency is assigned a 3 letter code like a stock ticker. There are over 170 currencies in the world, which means there are multiple combinations to choose from. However, the most populous are traded often due to economic factors of the countries associated with such currencies i.e. (EUR/USD) which is the euro against the US dollar, USD/JPY which is the US dollar against the Japanese yen, GBP/USD which is the British pound against the US dollar, USD/PLN which is the US dollar against the Polish Zloty.
What are base and quote currencies?
The base currency is always on the left of the currency pair, and the quote is on the right. i.e. EUR/USD where EUR is the base currency and USD is the quote currency. The base is always 1, and the quote is equal to the quoted price of the pair – how much it cost to buy 1. i.e. EUR/USD = 1/1.07838.
When the exchange rate rises, it means the base currency value has increased relative to the quoted currency. In this case, EUR/USD will now be quoted 1/1.07938
A pip is the smallest possible price change within a currency pair e.g. forex pairs are usually quoted in 4 decimal places, a pip will be equal to 0.0001. If EUR/USD price moved from $1.07938 to $1.07948, it has moved a single pip. However certain exemption occurs when trading JPY pairs; JPY pairs are usually quoted in 3 decimal places i.e. USD/JPY = 1/139.379. Therefore an example of a single pip move USD/JPY will be from $139.379 to $139.479
The Forex market is traded by lot, which is a unit of currency. There are 100,000 units of currency in a lot, although there are also micro (1,000) and mini (10,000) lots.
Since a lot is equal to 100,000 units of currency, it will be expensive for traders to put up a lot of money to execute a trade. Therefore, traders trade by borrowing money from the broker which allows traders to trade in the forex market without the amount of money required to participate.
Since traders trade with money borrowed from a broker, which isn’t free, traders are required to put down some upfront deposit which is known as a margin
Since the forex market is based on the principle of demand and supply which influence prices. The exchange of any pair will be determined by the maximum amount that buyers are willing to pay for the pair(the bid) and the minimum amount sellers are required to sell (the ask). The difference between the ask and bid price is the bid-ask price.
This is the difference between the piece at which a currency is (the bid price) and the price at which you sell it (the ask price)
A bull market simply means one in which the currency prices rise. The rise might be due to factors such as positive news regarding the economy.
A bear market simply means one in which the currency prices fall. The fall might be due to dismal economic fundamentals, financial crisis, or natural disaster
Gapping is a term often used in technical analysis that refers to a space between candlestick charts. This often happens when there is a sharp move in a currency. Gaps can move higher or lower with little or no trades in between.
Take profit is an order given by a trader to the broker which is set on the broker’s trading platform to automatically close your position when the market reaches a certain level of profit. E.g. if you sell EUR/USD at 1.20 and it falls to 1.10 and rises back to 1.20, you might have placed a take profit at 1.10. If the price drops to 1.10, the take profit will be triggered, thereby locking your profit in before the market reverse.
A stop loss is an order given by a trader to the broker which is set on the broker’s trading platform to sell a currency when it reaches a certain price, in other to prevent further losses. E.g. if you bought EUR/USD at 1.20 and it falls to 1.10, you might have placed a stop loss at 1.18 in other to limit your losses. If the price drops to 1.18, the stop loss will be triggered, thereby limiting your losses.
Long Position (Buy)
A long position is a trade that buys a currency with the expectation that it will appreciate against the currency it is paired with. For example, if a trader believes EUR/USD is going to increase in value, they will open a long position on the EUR/USD pair. If the trade movies in favor of the trader’s speculation, the trader will close the trade thereby realizing profits.
Short Position (Sell)
A short position in forex is when a trader sells a currency with the anticipation that the value of the currency will fall. For example, if a trader believes the value of EUR/USD is going to decline, he may short EUR/USD. By doing this, the trader is buying the US dollar, with the hope of being able to buy back EUR at a lower price, thereby making a profit from the difference.
A forex broker provides access to trading platforms that can be used to buy and sell currencies. Forex brokers charge a fee, usually in the form of a spread or commission.
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