When I started this blog, I skipped some of the ultra basics of Forex trading. But since there are many beginners now visiting my blog, I wanted to explain some of the most basic concepts.
If you’re just discovering the wonderful world of Forex trading online, then this is a post that you’ll want to take the time to read this.
Forex Trading Guide For Beginners – What is Forex and How Does it Work?
The Foreign Exchange (Forex) market is where banks, investors and speculators exchange one nation’s currency for another. The Forex has been around since the early 20th century, but it was not until well after the beginning of the computer revolution of the 1990’s where independent investors (like you and I) had access to invest small amounts of money in the Forex.
The Forex is like the stock market in one critical way (among others) – to make money in Forex trading you must buy low and sell high.
You may do this in two ways:
- In the stock market, the traditional way is to buy a position and sell it after it goes up in value. You can also do this with Forex trading online.
- The second way to make money with Forex trading is to sell-short a stock and then later try to buy it back at a lower price. In stock market investing there are severe restrictions and dangers to selling short. The beauty of the Forex market is that there is no distinction between buying and selling short. This is because all transactions are dual-faceted.
In general, there are plenty of reasons to prefer Forex trading over stocks trading, here are the 5 key reasons to choose Forex trading over stocks trading.
What Currencies are Traded in Forex?
Currencies are always traded in pairs.
For example, A typical pair is EUR/USD (Euro over US dollar).
The first currency is the base currency and the second currency is the counter currency or quote currency. You can read more about this in how to read and understand Forex quotes.
The first currency is the base. So you must view it as the amount of the second currency needed to buy one unit of the first currency. If you want to buy the currency pair you are actually buying the EURO and simultaneously selling the USD.
If you were going to sell the pair you would simply be selling the base currency (EURO) and buying the USD. Whether you are buying or selling the pair is just a matter of which one you are buying or selling.
An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought-back the equivalent amount to effectively close the position.
The good news is that you don’t have to remember which one to buy or sell, simply think of the whole pair as one item and you are buying or selling the whole pair.
When choosing your Forex pairs you should pay attention to 3 main parameters: spreads, trendiness and trading sessions – You can read more about this in how to pick the best Forex pairs to trade.
Pips in Forex Trading
Currency pairs are carried out to 4 significant digits. The change of the currency pair by one one-hundredth of a percent is called a pip. So if the currency was trading at 141.53 – a one-pip increase would be 141.54.
Similarly, an increase of one pip could also be 1.6138 to 1.6139. A fall of one pip would be a move from 1.2345 to 1.2344. This is just lingo, in the stock market a point is when the stock increases or decreases by $1.
You can read more about this in what is a pip in Forex?.
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