Forex is a short abbreviation for foreign exchange. It refers to the process of buying and selling of different currencies on a money market. Forex is perhaps the most traded market since virtually the entire business world, including governments take part in it. The other reason for is popularity is the ease with individuals can start the business without having to invest a huge capital. Remember that forex trading basics is where currencies trade in pairs. For example, if you are in need of dollars in exchange for euros, you will essentially be participating in the foreign exchange market. The demand for world currencies will significantly affect the value of the currency in question. Here are some of the basics you need to know before you begin trading in forex.
The exchange of currency is where you express the value of a currency relative to the other currency involved. Before you enter your first trade, it’s important to learn about currency pairs and what they signify. Therefore, a currency that is stronger over the other will have a higher demand.
A forex market is a platform where symbols are used to denote specific currency pairs. For example, the U.S dollar is symbolized as USD while the euro is denoted by EUR. Each trading pair has its own price depending on the market forces. The price shows how much of a currency is needed to exchange for the other. If the price of the EUR/USD is given as 1.356, it implies that one would need 1.356 U.S. dollars to acquire one euro. In the same way the value of the euro in respect to a dollar is found by dividing 1 by 1.356. This means that it will cost 0.7374 euros to buy 1 U.S. dollar. The price of a pair of currencies keeps fluctuating as time goes by.
Forex Trading Basics-Market Pricing
Learning how to trade forex requires one to understand some of the terminology used in describing the price of a pair of currency and how to determine your returns. By doing so you will be on your way to making it in your first trade. Ordinarily, a majority of the currencies will move 50-100 point in Percentages (pips) or more in a day depending on the prevailing market situations. It is used to signify the fourth decimal place in any given currency pair. Where a Japanese Yen is involved, it may be the second decimal in the pair. If the price of a euro climbs from 1.3500 to 1.3550 it means a 50 pip move. This means a trade will make a 50-pip profit on the sale of the euro.
The profit realized on the above hypothetical trade will heavily depend on the price you bought the currency. For example, if you bought 1,000 units in a dollar (usually called the micro lot), each pip will be valued as $0.10. Ideally, you will determine your profit as 50×0.10=$5. On the other hand, if you bought 10,000 units (mini lot) then a pip will be worth $1 and as such your profit will be $50. The value of each pip is called the pip value.
As a matter of fact, the first currency on the pair in usually the standard against which a forex price is determined. If for example the price is on an upward trend on a EUR/USD pair, it simply means the euro is growing stronger relative to the dollar and the converse is always true.
One of the surest ways of learning how to trade forex is taking time to comprehend price movements in real time while placing some dummy trades with a paper trading account. This way you will be able to know the ins and out of the practice without having to take any risk. There are both online and offline mobile-based apps that allow you to open and run a paper trading account that work almost the same way live trading does. You can also find online simulators that can help you practice day trading and improving your trading strategy. Learning all of the above Forex Trading Basics will help you drive your business and make sound trading decisions.