You probably have heard about Forex trading and now curious about it. It might happen when you have friends who have been successful in their Forex venture and you feel the urge to join and start earning something for a living. At first, Forex trading seems to be a complicated venture reserved for people who are familiar with matters related to accounting or finance. All the same, it is not hard to learn if you have a clear guide. For that reason, learn about trading FX with this best beginner’s guide to Forex trading.
What is Forex Trading?
Forex trading can be defined as a market where currencies are traded. Currencies are vital to most people around the world and need to be exchanged to ensure that business thrives. In a layman’s explanation, if you want to buy something from overseas, such as France, you have to exchange your American dollars into equivalent Euros based on the value of your merchandise.
One unique aspect of the international market is the fact that there is no central marketplace for the exchange to occur. Therefore, every trading is done electronically via computer networks between various traders located all over the world. This means that the market is active 24 hours, and the prices can change regularly.
The weight of the trading parties depends on how much a single party can manage. This can range from billions of dollars from hedge funds to a few thousand that are traded by individuals.
Also, you need to know is that the currencies are traded in pairs, depending on the transaction that one intends to do. For instance, if a trader wants to transact dollars into euros, the currency pair denomination would be USD/EUR. Therefore, when the value of the pair increases, the value of US dollars has strengthened against the Euro.
What are the Types of Currency Pairs in FX Trading
Apart from the USD and EUR, several currencies are traded in the forex market. These currencies are as follows:
- JPY for Japanese Yen
- GBP for the British pound
- CHF for the Swiss franc
- CAD for Canadian Dollar
- AUD for Australian Dollar
- NZD for the New Zealand Dollar
There are specific types of currency pairs that are common in the Forex market. These kinds of currencies are referred to as the first currency pair. These currencies include the GBP/USD, EUR/USD, and the USD/JPY. This means that they must involve US dollars in buying or selling.
On the other hand, there are varying types of currency pairs that are considered minor pairs. These pairs include the EUR/GBP, EUR/CHF, AUD/NZD, and other pairs that do not involve the US dollar.
Finally, there are those currencies pairs that are referred to as exotic currencies. These include the Hong Kong Dollar (HKD), South African Rand (ZAR), Norwegian Krone (NOK), and the Thai Baht (TBH). In an exotic pair, there must be one primary currency and one exotic currency such as the USD/ZAR pair.
What are the Common Terms Used in Forex Trading?
Now that you know a couple of things about Forex trading, it is time to learn standard terms used in Forex Trading. These terms are as follows:
- PIP: Pip is the smallest price change that occurs in an exchange rate. The lowest pip is placed at the decimal of four since most currency pairs are priced to four decimal places. However, there is a common exception with the JPY, which is quoted at two decimal points.
- Base Currency: This is the first currency that is quoted in a currency pair. For instance, in a USD/EUR currency pair, the US dollar is the base currency.
- Quote Currency: This is the second currency that is quoted in a currency pair. In the USD/EUR example, the Euro is considered as the quote currency.
- Cross Currency Pair: This is a currency pair that does not involve the US dollar. This means the same as the minor currency pair, as explained above.
- Bid Price: The bid price that a Forex trader is a maximum price that a trader is willing to sell a currency pair.
- Ask Price: This is the price that a trader is willing to buy a currency pair.
- Spread: This is the difference between the bid and the ask price.
How do Forex Quotes Work?
In a typical Forex Trade, the bid and ask prices are usually quoted. When you purchase a currency, this is referred to as a long trade since there is hope that the value of the currency pair will increase. Therefore, if you sell it at a higher price, then you will be making a profit out of the trade.
If you are selling currency, the vice versa applies. In this case, you will be hoping that the currency pair will fall in value so that you can repurchase it at a lower price. This will help you make a profit out of the difference.
Therefore, if you want to trade a USD/EUR currency pair, it means that the value of one US dollar is equivalent to the value of the Euro. Therefore, if you buy the currency pair at an absolute value, you will hope it will increase to a specific value to make a profit. If you are selling it, it means that you hope that it loses its value and make a profit out of it.
Forex trading works in a specific platform that functions as the broker. Their policies, market liquidity, and the state of the country associated with the currency that is being traded define whether you will make a profit or not.
Tips for Forex Beginners
Any Forex trade beginner should take note of several aspects if they want to succeed in this undertaking. Here are a few tips to keep in mind.
Knowing the Market
It is vital to know the market at all costs. Therefore, take the time to acquaint with currency pairs and learn what affects them before you invest your capital.
Plan and Stick to the Plan
Planning is the success of any endeavor. Your Forex trading plans should consider your evaluation criteria, methodology, risk tolerance level, and so on. Once you have a concrete idea at hand, ensure that you stick to it until everything falls in place.
As the saying goes, practice makes perfect; you should be vigilant in learning about Forex trading through constant practice. There are risk-free Forex markets that you can test and nourish your trading skills before you venture into the real market. This will reduce the possibility of making losses, which can significantly disappoint you.
Know your Limits
Unfortunately, too much ambition can be a significant risk to your success. Therefore, you must establish your limits by knowing how much you are willing to trade and know the best time to trade, the level of leverage, and your needs to avoid making any losses.
The world of Forex trading has a lot to learn for a beginner. Even so, it is quite exciting and adventurous to someone who finds it easy to trade. However, this does not mean that there are no possibilities of disappointments. That’s why you need to be ready for the best outcomes and the worst as well.