Forex Basics

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What is Forex trading?

Forex trading or currency exchange as it relates to individual retail investors and investors refers to the trading of international currencies against one another in a worldwide, decentralized financial market that operates throughout the day, apart from weekends.

How does one profit from Forex trading?

Apparently, buy low and sell high is the trick here! The prices of currencies in the foreign exchange market often fluctuate; that is, rise and fall. As such, the profit potential comes from these changes in currency prices.

Online trading cuts out the need for intermediaries (such as banks). And, yes, it can be a very rewarding experience. But like any other business, you must be properly prepared.

The most important preparation you must do for your trading business is get the proper training.

How does one start trading currencies?

If you wish to commence a career in Forex trading, you will have to register with a Forex brokerage firm and then deposit the amount you want to use in your trading account. Once you have completed the depositing process, you are ready to begin trading.

Since there are many trading arenas a person can choose to start trading in, making a proper choice through careful evaluation is necessary.

Advantages of online Forex trading:

Simplicity

Online Forex trading has low barriers to entry, making it easily accessible to all traders with internet access. Traders can access the market 24 hours a day, from their desktop and mobile device.

Flexibility

With online trading, you are not limited to one market. You can trade Forex, indices and commodities. It’s all available to you within the style of trading you choose to adopt.

Transparency

With online trading, there are no surprises. Since you have full control to monitor your trading status, you know how much you can lose and how much you can make.

Just Comfortable Trading

This let’s you trade with ease and in a relaxed mode, which is the way you should always be when trading money.

How are currencies traded in the Forex market?

In the currency market, currencies are traded in pairs. It is important to note that a currency pair is made up of the base currency and the quote currency or the counter currency.

For example, the quotation EUR/USD, EUR is the base currency whereas the USD is the quote currency.

The currency pair points out the amount of the quote currency needed to buy one unit of the base currency. As an example, if EUR/USD is trading at 1.3900, then it means that you’ll need 1.3900 dollars to purchase 1 euro.

Thus, the quote currency is what gives your profits or losses for each transaction you engage in while trading in the foreign exchange market.

So, what are pips?

Pips are the units of calculation used by Forex traders to calculate the profit or loss from the trades they make.

If you look at any currency quote starting from the left and count 4 places, then the 4th place is the pips value in a quote.

For example, when a currency pair moves from a value of 1.4022 to 1.4026, then it has moved by 4 pips. And, when a pip has a value of $10, then the profit is $40.

To calculate the value of pips, traders usually use the following pips formula:

The asking price for the currency trade

Divided by 1 pip

Multiplied by the value of the trade

The result of this gives the value of the number of pips gained or lost in a trade.

What is bidirectional trading?

In the foreign exchange market, there are always two currencies being traded. One currency is bought while the other is simultaneously being sold.

For one currency to rise in value, then the other currency must fall in value. As a result, either the base currency or the quote currency will always be rising in value, which means there is always the possibility to profit.

Just Comfortable Trading

If the base currency is falling in value, then it means that the quote currency is strengthening. Thus, bidirectional trading in the Forex market enables you to place trades regardless of the direction of the market.

Leverage

Leverage is a common practice in currency trading, and allows traders to greatly magnify the speed and impact of the trades they place. Leverage is what has transformed Forex from just another form of trading to a highly exciting but also highly volatile activity.

It is of essence to note that leverage is a double-edged sword. This means that you can magnify both the profits potential and loss potential of your trades.

For example, if a trader opens a trade with a margin of $50 and a leverage of 200 times, then it means that the actual trade value will be 50 x 200 or $10,000.

If the trader records a gain, the profit will be 200 times greater than it would otherwise have been. On the other hand, if the trader experiences a loss, then the loss will be 200 times more than it would otherwise have been.

Because leverage can have such a dramatic impact on your trading, it is very important to set clear limits and targets for your trades in order to reduce the risk of a meltdown in your account.

Trade model

Let’s say you want to open a trade on EUR/USD. You think the market will rise, and the EUR will strengthen, so you decide to buy the EUR/USD. The rate is 1.4000 and you are willing to invest $100 from your account.

You decide on a leverage of 100 times. Thus, the amount of the trade will be $10,000. Your margin is 1%, that means that if the value of the pair drops by 1% then you will lose your trade margin and your trade will be closed.

However, if the markets go in the direction you expected, then on a gain of 1% you will profit by $100. You can then close the deal and bank the $100 you earned and the $100 you invested.

 

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