Forex trading is a business whose name is familiar to all yet, very few people understands its root/foundation for proper blooming.
This article will take you through the fundamentals of forex trade, exposing the necessary process in getting you started without much fears around your neck. The term ‘Trading Forex’, simply means/refers to trading foreign exchange on the currency market. Of course it can be a thrilling hobby and at the same time a great source of income. Putting forward a clear perspective, the securities market trades about $22.4 billion per day, while the forex market trades about $5 trillion per day. That’s how big this market is with multiple ways of trading online.
Knowing The Basics Of Forex Trading
1. Forex Terminology:
As one venturing into forex trading, you should acquaint yourself with its terminologies as quick as possible, for they widen your understanding of the business. Below are some tips to work you through.
a. The type of currency you are spending or getting rid of, is the base currency. The currency you are purchasing is called quote currency. In forex trading, you sell one currency to purchase another.
b. The exchange rate tells you how much you have to spend in quote currency to purchase base currency.
c. A long position means that you want to buy the base currency and sell the quote currency.
d. A short position means that you want to buy quote currency and sell base currency.
e. The bid price is the price at which your broker is willing to buy base currency in exchange for quote currency. It is the best price you are willing to sell your quote currency on the market.
f. The ask price or the offer price, is the price at which your broker will sell base currency in exchange for quote currency. It is the available price at which you are willing to buy from the market. g. A spread is the difference between the bid price and the ask price.
2. Reading Of Forex Quote
This is not much of a big deal, on the display sheet, you’ll see two numbers on a forex quote; the bid price on the left and the ask price on the right. You know the difference already.
3. Deciding Which Currency To Buy and Sell
You will agree with me that in the business world, you can’t do without making firm decisions at particular times. So it applies here. You have to roll the ball off your court for your favour. a. Make predictions about the economy; If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, then you probably want to sell dollars in exchange for a currency from a country where the economy is strong. b. Look at a country’s trading position. If a country has many goods that are in demand, then the country will likely export many goods to make money. This trading advantage will boost the country’s economy, thus boosting the value of its currency. c. Consider Politics; If a country is having an election, then the country’s currency will appreciate if the winner of the election has a fiscally responsible agenda. Also, if the government of a country loosens regulations for economic growth, the currency is likely to increase in value. d. Read economic reports regularly; Reports on a country’s GDP, for instance, or report about other economic factors like employment and inflation, will have an effect on the value of the country’s currency.
4. Learning How To Calculate Profits
An extreme care in knowing how to calculate profits can save you lots of errors. a. A pip measures the change in value between two currencies. Usually, one pip equals 0.0001 of a change in value. For example, if your EUR/USD trade moves from 1.546 to 1.547, your currency value has increased by ten pips. b.Multiply the number of pips that your account has changed by the exchange rate. This calculation will tell you how much your account has increased or decreased in value.
After making up your mind on venturing into forex trading, there’re few little steps to get you formally down the lane. These steps includes;
1. Make a little tour of research on different brokerages. : You could get some assistance from someone who has been in the industry for ten years or more.
2. Request information about opening an account : You can open a personal account or choose a managed account and probably execute your own trade. Note, with a managed account, your broker will execute trades for you.
3. Fill out the appropriate paper work : You can ask for the paper work by mail or download. Usually in PDF file format. Make sure to check the cost of transferring cash from your bank account into your brokerage account. Note, the fees will cut into your profits.
4. Activate your account : Usually if your startup was online, the broker will send you an email containing a link to activate your account. Click the link and follow the instructions to get started with trading.
5. Analyzing the market :Now fully involved with the forex trading market, you can try several different methods in analyzing, which includes the technical analysis(that which involves reviewing charts or historical data to predict how the currency will move based on past events), fundamental analysis (involves looking at the country’s economic fundamentals), sentiment analysis(which is largely subjective).
6. Determine your margin : Depending on your broker’s policies, you can invest a little bit of money but still make big trades.
7. Place your order :You can place different kinds of orders be it market order(executing your buy/sell at the current market rate), limit order(executing a trade at a specific price) or stop order(choice to buy currency above the current market price).
8. Watchout for profit and loss :Getting emotional here won’t help. Above all the forex market is volatile and you will see a lot of ups and downs. What matters is to continue doing your research and sticking with your strategy.