Guide to Forex Trading
What You Need to Know
- Foreign Exchange trading is now the largest economic activity by volume on the planet.
- Forex markets trade 24 hours a day.
- Given the interconnected nature of the modern world, there are a huge number of factors that have to born in mind when considering how the value of a currency is likely to change.
- Before you start trading for real, most brokers will allow you to practice using a ‘dummy’ version of their trading platform.
- Having a thorough grasp of market terminology is vital to successful trading.
What Is It?
With anything up to $4trillion traded 24-hours every single day, forex (foreign exchange, aka FX) trading now comprises the largest economic activity by volume on the planet. And it’s growing, thanks entirely to the exponential burgeoning of the internet.
Until a few years ago, currency trading was restricted to banks on behalf of their clients. Gradually, these banks established their own proprietary desks to trade for their own accounts, later taken up by large multi-national corporations, hedge funds and high net worth individuals. This was in order to leverage the forex market as a means unto itself, rather than a means to an end.
These days, with barriers to entry almost completely removed, a thriving retail market aimed at individual, or self-directed, traders has quickly evolved. Thus, the moneymaking opportunities of forex trading are now easily accessible to practically everyone, allowing lesser capital and more competition in the FX marketplace.
However, if you are interested to jump into this exciting and potentially profitable arena, there are a few crucial factors to understand.
Essential To Know
Forex at its basic level is the buying and selling of currencies. This is mostly done using currency pairings, for example, US Dollar-Canadian Dollar (USDCAD), US Dollar-Japanese Yen (USDJPY), British Pound-Euro (GBPEUR) and so on). Thus, the profit is calculated by the differences of the currency values. In essence, you buy a currency at a lower rate and sell it when its rate goes up, or sell a currency at a higher rate and buy it if the rate decreases. As the currency values change constantly, you can gain profit if you do the buying and selling at the right timing.
Desirable To Know
As mentioned above, the forex markets trade 24 hours around the clock. Starting each day in Australia and ending in New York, the major centers are Sydney, Hong Kong, Singapore, Tokyo, Frankfurt, Paris, London and New York.
To be able to spot the right timing of trading currencies, it is important that you research and analyze the market for your advantage. And in today’s interconnected world, news events in one country can influence, or ‘weigh’, on the currency of another country. Understanding this will help you to spot trends of different currency values and identify a general direction that will guide you on what currency pair to trade and when to buy or sell it for greater profits. Of course, if the currency's value is increasing, buying that currency now and selling it later can gain you good profits.
As a result of the liquidity and ease with which a trader can enter or exit a trade, banks and or brokers offer large leverage, which means that even an occasional trader can control quite large positions with relatively little money of their own. Leverage in the range of 100:1 is not uncommon.
Of course, a trader must understand the use of leverage and the risks that leverage can impose on an account. Leverage has to be used judiciously and cautiously if it is to provide any benefits. A lack of understanding or wisdom in this regard can easily wipe out a trader's account.
How To Get Started
You can find an online broker that will provide you with the trading platform where you can trade. Most brokers offer a dummy account at first where you can practice trading safely. You will then be asked to create your account proper in which to deposit your investment, from which time you can start trading.
Keep in mind that thorough practice should be made in FX as the currency market is not just about making profit. In fact, due to the volatile nature of the market, you can also lose everything if you are not well-prepared!
Basic Forex Trading Terminology
- Ask (Offer): price of the offer, the price you buy for.
- Bid: price of the demand, the price you sell for.
- Broker: the market participating body which serves as the middleman between retail traders and larger commercial institutions.
- Cable: forex trader’s slang word GBP/USD currency pair.
- Carry Trade: holding a position with a positive overnight interest return in hope of gaining profits, without closing the position, just for the central banks interest rates difference.
- Flat (Square): neutral state when all your positions are closed.
- Fundamental Analysis: the analysis based only on news, economic indicators and global events.
- Hedging: maintaining a market position which secures the existing open positions in the opposite direction.
- Limit Order: order for a broker to buy the lot for fixed or lesser price or sell the lot for fixed or better price. Such price is called limit price.
- Liquidity: the measure of markets which describes relationship between the trading volume and the price change.
- Long: the position which is in a Buy direction. In Forex, the primary currency when bought is long and another is short.
- Loss: the loss from closing long position at lower rate than opening or short position with higher rate than opening, or if the profit from a position closing was lower than broker commission on it.
- Lot: definite amount of units or amount of money accepted for operations handling (usually it is a multiple of 100).
- Margin: money, the investor needs to keep this in a broker account to execute trades. It supplies the possible losses which may occur in margin trading.
- Open Position (Trade): position on buying (long) or selling (short) for a currency pair.
- Pivot Point: the primary support/resistance point calculated basing on the previous trend's High, Low and Close prices.
- Pip (Point): the last digit in the rate (e.g. for EUR/USD 1 point = 0.0001).
- Resistance: price level for which the intensive selling can lead to price increasing (up-trend).
- Scalping: a style of trading notable by many positions that are opened for extremely small and short-term profits.
- Spread: difference between ask and bid prices for a currency pair.
- Stop-Limit Order: an order to sell or buy a lot for a certain price or worse.
- Swap: overnight payment for holding your position. Since you are not physically receiving the currency you buy, your broker should pay you the interest rate difference between the two currencies of the pair. It can be negative or positive.
- Trend: direction of market which has been established with influence of different factors.
- Volatility: a statistical measure of the number of price changes for a given currency pair in a given period of time.
For more information or enlightenment into the world of Forex Trading, visit ForexSpace.com.
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