A Guide To Understanding The Concept Of Forex Trading

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A Guide To Understanding The Concept Of Forex Trading  A Guide To Understanding The Concept Of Forex Trading A Guide To Understanding The Concept Of Forex Trading A Guide To Understanding The Concept Of Forex Trading
A Guide To Understanding The Concept Of Forex Trading

Forex trading is a very rewarding market to get into and it is advised that traders new to forex trading trade a mini account for a lengthy amount of time.

Trading a mini account is a low cost entry to the forex market, as only about $300 is required to open an account.

You can still make decent profits while you become more knowledgeable in trading.

Forex contains the trading of currencies. It is the largest financial market in the world and has an estimated daily turnover of about 4-5 trillion dollars. This turnover is larger than all the worlds’ stock market on any given day.

The forex market does not have a fixed exchange. The forex market is considered an over-the-counter (OTC) market. The forex market is absolutely electronic and trades are fulfilled over the phone or on the Internet.

Until a decade ago the forex market was the preserve of large financial institutions. Now an ever-increasing amount of individual traders thanks to the arrival of the Internet and an increasing amount of online forex brokers are trading forex.

Currencies are at all times traded in pairs. A common pair would be EUR/USD (Euro over US dollars). The first currency is the base. The second currency is the counter currency. The pair can be seen, as the amount of the secondary currency that is needed to buy 1 unit of the first currency. If you were to buy the above mentioned pair you would buy Euro and at the same time selling US dollars. If the pair was sold the opposite would happen you would sell the Euro and buy the US dollar.

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This might sound little unclear however simply think of the pair as one item and you are buying or selling one item. If you believe the Euro will move up against the US dollar you buy the EUR/USD pair. If you think the EUR will drop against the US dollar you sell the EUR/USD pair.

When you notice forex quotes you will identify two numbers. If we use the EUR/USD as a sample you might see 1.2350/1.2355 the first number 1.2350 is the bid price and is the price traders are prepared to buy euros against the US dollar. The second number 1.2355 is the offer price and is the price traders are willing to sell the EURO against the US dollar.

The difference between the bid and the offer price is called the spread. The spread for the major currencies is usually 3 to 5 pips.

The most common augmentation of currencies is the pip. If the EUR/USD moves from 1.2350 to 1.2351 that is one pip. A pip is the last decimal point of quotation. Most of the currencies quoted to 4 decimal points.

The exception is the Yen, which is quoted to 2 decimal points e.g. 139.41. The term pip is just forex language so if a forex trader says the EURO has gone up 20 pips against the US dollar add 20 points to decimal part of EUR/USD pair.

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Forex is usually traded in loads also referred to as contracts. The standard size for a lot is $100,000. In the last few a mini lot size of 10,000 dollars has been introduced and this has become increasing popular.

Forex trading is leveraged with most forex brokers offering 1% margins. This means you can control one standard lot of $100000 with $1000. Normally you would need a minimum of $2500 to open a standard size forex account.

A basic or mini account can be opened with about $300 with most forex brokers. To trade a one mini lot you need a margin of $100, which in turn controls $10000. If the currency moves up 1%, and if you traded one mini lot of $10000 you would make $100 dollars or 100% of your original margin.

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Forex trading is a very rewarding market to get into and it is advised that traders new to forex trading trade a mini account for a lengthy amount of time. Trading a mini account is a low cost entry to the forex market, as only about $300 is required to open an account. You can still make decent profits while you become more knowledgeable in trading.

Forex trading is becoming popular these days because it can be traded in amounts a lot smaller than other financial products.

Disclaimer

This information is for Learning purposes only. We are indeed not financial mentors. It should not be considered legal or financial advice. You should consult with a financial advisor or other professional to find out what may be the finest for your individual needs and risk tolerance.

Please do your own research.