What is Forex Trading?
Forex is an abbreviation for foreign exchange. It also goes by the name of Fx trading. Forex is the process of changing a currency into another. Why? For a variety of reasons. It could be international trade, tourism, or commerce. The forex market averages over $5.1 trillion in daily trades.
Forex for beginners is overwhelming at first, but with these basics, you will conquer the foreign currency exchange.
Forex Trading Basics: Definition of Terms
- Spot Forex: Is the physical buying and selling of currency. It involves trading currency over-the-counter on the interbank market. Here is more information about Spot Forex Trading.
- Pip: It is the base unit of a currency pair. One pip is worth 0.0001 units of the quoted price (in non-JPY currencies). When the price of the EUR/USD moves from 1.16274 to 1.16284, the difference is one pip.
- Spread: The difference between the buying price and selling prices of currency pairs is the spread. Common currency pairs have lower spreads compared to unpopular equivalents.
- Margin: Refers to the amount that you retain in your account once you open a position.
- Leverage: It is the capital that your broker provides to boost the volumes of your trades.
Forex Trading Education for Beginners
Price and Quote
Once you log on to an Fx trading platform, you will notice the Ask and Bid prices. When you are looking to acquire a specific currency pair, you will buy it at the Ask price. When you are looking to sell a currency pair, you do so at the bid price.
1- Long Trades
When you open a position hopping that value will increase over time, you are in a long trade. “Going long” is buying a currency pair at a price to sell it at a higher price. Below is an example of a long trade:
2- Short Trades
This is opening a position with the prediction that the value will drop. You sell the asset at a price. When the value decreases, you buy it back at a lower price. Below is an example of a short trade:
Charting tools help forex traders to study prices. The MetaTrader platform offers three types of charts. These include line charts, bar charts, and candlestick charts.
Line Charts connect the closing prices of specific timeframes. Line charts depict price trends.
OHLC bar charts a bar for every time period. This type of bar chart shows Open, High, Low and Closing (OHLC) values.
Candlesticks: These visual elements offer the same amount of information as OHLC barcharts. However, candlesticks are more visually appealing.
All transactions in the forex market involve the simultaneous purchase of two currencies. We refer to these currencies as currency pairs. A currency pair includes a base currency and a quote currency. In the EUR/USD currency pair, the EUR is the base currency while the USD is the quote currency.
The diagram below shows the EUR/USD currency pair.
What currencies should I trade? The right pair will depend on your strategy, volatility of the market, and spreads. Lean more about currency trading, read this article about the best currency pairs to trade in forex.
What Is A Forex Broker?
A forex broker is a firm that provides traders with the access to buy and sell foreign currencies and cryptocurrencies. A forex broker acts as the intermediary between the trader and the interbank system. Transactions in the forex market are always based on two pairs of currencies. As a trader, you are either buying or selling.
There are many forex brokers in the market today. Popular examples of forex brokers include Oasis Trade and 500.Trade, Over the years, forex brokers have improved their services to suit a wide variety of traders. Different brokers offer different platforms, account types, and tariffs. You must weigh your options before choosing the right broker for you. Check out some of our broker reviews.
How Do Brokers Make Money?
Many brokers are marching on the path to zero fees. This trend begs the question, how do brokers make money? One of the ways brokers make money is through Bid and Ask spreads. Brokers also make money by charging additional fees for transactions, or special services.
In this trading strategy, the trader is looking for profits from minimal changes within the market. To become a scalp trader, you need to have the ability to track minimal changes. This strategy requires a sentry state of mind and the diligence to work.
Scalp traders need to set tight stop losses to mitigate risks. You must also have the ability to set up and track several trades simultaneously. This trading strategy works best for the full-time trader. To learn more about Scalping, check out this article.
2- Position Trading
Market pullbacks are common in the forex market. Position trading involves holding positions for long periods. Despite pullbacks in the market, a position trader will hold on to an asset. To adopt this strategy, you need to master your emotions. You must learn how to overcome panic. Position trades may take days, months, or even years.
To learn more about position trading, check out this article.
3- Momentum Trading
Momentum trading is buying and selling financial instruments based on news events and stories. It involves buying winners and selling losers. Momentum traders rely on news stories and technical analysis.
The momentum trader is not worried about a precise point of entry or exit. Instead, the trader wants to know the strength of a particular trend.
To learn more about momentum trading, check out this article.
Pros and Cons of Trading Forex
- The forex market is one of the largest financial markets in the world. It offers the most liquidity.
- You can trade in the forex market 24 hours a day over five weekdays.
- Brokers allow traders high amounts of leverage. High leverage can also mean a higher risk of loss.
- Forex trading is taxing and the learning curve is steep. You need a lot of practice before you can make consistent profits.
Are You Ready to Step Up to the Plate?
The foreign exchange markets can be overwhelming to beginners, but they also provide the opportunity to make untold profits. There are lots of brokerages in the market that can help you find your feet in the markets. With educational resources and demo accounts, you can learn and practice as you build your confidence.
At MyTrade, we care about the welfare of our readers. With the articles below, you can learn how to move in the forex markets: