Forex trading is the act of buying one currency while selling another at an agreed price. It is also the process of speculating on currency prices to make a potential profit. In this article, I am going to share with you the basics of Forex trading and how to get started.
Just like the conventional buying and selling of goods at prices the buyers and sellers agree to, forex trading works in the same way. But, unlike an offline market that is restricted to a certain location and few people who live around it, the forex trading market is the most heavily traded market in the world. Millions of people, thousands of businesses, and even countries participate in it. The market is open 24 hours a day and it is open five days a week (except synthetic indices which is open 24/7)
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To be honest, trading forex is not easy. If you are unfamiliar with the forex market or have insufficient trading capital you will keep losing even when the market is favorable.
But, if you are an unusually skilled currency trader and you have a good understanding of how forex trading works, you will find forex trading easy and simple.
You don’t know anything about forex trading? Don’t be discouraged. This article is for you.
The Basics Of Forex Trading
Before you get started on forex trading or embark on your first trade, you must know terminologies associated with forex trading.
These terms associated with it are the basics associated with forex trading.
The fores market uses symbol to designate currency pairs:
For Instance Euro = EUR, US dollar = USD, British Pound = GPD, etc
Currency Pairs
Currencies are always traded in pairs. Example EUR/USD. Traders buy and sell based on their assumption of price changes.
The price for a currency pair is how much of the quote currency one can exchange for the base currency. In the example EUR/USD, EUR is the base currency while USD is the quote currency. Therefore the EUR/USD price simply shows how many U.S. dollars (USD) it takes to buy one euro (EUR).
If the price of the EUR/USD currency pair is 1.4689. Then it means that it will cost 1.4689 U.S. dollars to buy one euro.
To find out how many euros it would cost to buy one U.S. dollar, you will have to flip the pair to USD/EUR and divide 1 by 1.4689. In this case, the result is 0.6807. Meaning that it would costs 0.6807 euros to buy one USD if 1.4689 is the market price.
0.6807 is known as the spread which is the cost of trading.
Also the price of the currency pair constantly changes as transactions occurs around the world and as the clock ticks.
You also have to learn about the bid price and the ask price. The bid price is the value in which a trader is prepared to sell a currency. The bid price which is found on the left of a quote and in red color constantly gets updated.
The ask price is the value at which a trader accepts to buy a currency. It is always in blue and it is found on the right.
Market Pricing;
The first thing to understand about the market pricing is how a pip works. A pip which means Point in Percentage is used to indicate the fourth decimal place in a currency pair, or the second decimal place when JPY is in the pair.
For example; The price of the EUR/USD moves from 1.4800 to 1.4850. It means a 50 pip move. So if one bought the pair at 1.4800 and sold it at 1.4850, he or she is going to make a 50-pip profit.
Profit made on the above theoretical trade will depend on how much of the currency you had purchased. If you bought 1,000 units in USD (called a micro lot) each pip is worth $0.10, so you would calculate your profit as (50 pips x $0.10) = $5 for a 50 pip gain.
The Pip value is how much each pip is worth.
Getting Started On Forex Trading
Getting Started on forex trading is very simple.
- You would have to connect your device which should be a smartphone, tablet, or computer to the Internet.
The internet connection must be reliable because a drop in the connection while you are trading could result in undesirable losses for you.
- The next thing to do is to find an online forex broker that suits your choice or requirement and one that accepts you too.
Your location does not matter while you are making a choice. You have to also make sure that your broker operates in a well-regulated jurisdiction and is guided by a renowned regulator such as the UK’s financial conduct authority(FCA).
- You are now ready to open your trading account and fund it.
You can find your account through bank wire transfers, debit card payment, or through transfers from electronic payment providers like PayPal or Skrill.
- Obtain a forex trading platform.
The platform you choose must have your broker’s support or you can go with that provided by your broker as some forex brokers offer a proprietary platform. An example of a third-party platform you can use is MetaTrader 4 or 5 (MT4/ MT5).
- By all means start trading.
Yes, if you followed the steps listed above then you are ready to trade now.
But, if you are still not sure of your forex trading knowledge, you can open a demo account to test your knowledge of the market before going live.