WHAT IS FOREX TRADING

A beginners guide 2022

Forex is one of the most traded markets in the world and is also known as foreign exchange or currency trading. In forex trading, traders hope to generate a profit by speculating on the value of one currency compared to another. This is why currencies are always traded in pairs-the value of one unit of currency doesn’t change unless it’s compared to another currency.

The Buy or Sell action you take to enter a trade always applies to the base currency. The opposite action automatically applies to the quote currency. So if you buy the EUR/USD, this means you’re buying euros and selling US dollars. If you sell the EUR/USD, you’re selling euros and buying the US dollars. In the forex market, one currency is always strengthening against another (BULLISH) and therefore one currency is always weakening against another (BEARISH). Because of this, you have an equal opportunity to buy or sell to enter the market.

PIPS…LOTS & LEVERAGE

What is a Lot?

Ā A lot is actually a very simple concept. It is a ‘bundle’ of units within your trade. In other words, it’s the size of the trade you are making. In forex, a lot is a standard unit of measurement. At most forex dealers one standard lot usually equals 100,000 worth of currency. Let’s make an example with half a dozen of eggs(always bought in six). Now you can purchase as many of those half dozen eggs as you want, but you can’t split the pack. That’s how lots work only in forex trading. The half dozen is the bundle of currency allotted to the trade. Typically, the smallest lot you can trade is the ‘micro lot’, which represents 1000 units of currency. Small lots of 100 do exist but are not typical. Then there are mini lots at 10 000 and the standard lot of 100 000. You can trade any size you want, as long as it is a multiple of the relevance of the chosen lot size. The bigger the lot size, the bigger the winning potential. This means you will gain more, but it does increase risk too. This means that a lot of getting the ‘right’ trade size will come down to how you balance your lots to best increase gains while minimizing unacceptable risks. This will come down to the risk you find acceptable, calculated as a percentage, the pip cost, and the stop point you set.

Five Decimal Price

In forex, currency pairs display their prices with four decimal points. A few such as the Japanese Yen, display two decimal places.No matter what currency pair you trading, the last large number behind the decimal always represents a pip, the main unit price that can change for the currency pair. As you trade you’ll track your profits or losses in pips. If you see a smaller number behind the pip-this called a ”fractional pip”’ and offers more precise pricing. Sometimes the fractional pip will be a 0-that is, there will be no fraction of a pip being quoted at that time. One unit of movement represents one pip. That may seem small and you may be wondering how forex can be worthwhile if all you’re speculating on is a small fraction of a currency. Since forex is traded in large volumes, called lots, these fractions of a cent can add up very quickly. Quite simply, the higher volume you trade the more each pip will be valued.

What is Leverage?

Leverage results from using borrowed capital as a funding source when investing to expand the firm’s asset base and generate returns on risk capital. One of the benefits of this market is the ability to trade on leverage. You don’t need $10,000 in your account to trade EUR/USD. Currency pairs can have a leverage ratio of up to 50:1.This means you can control a large position of $10,000 with a small account of $250. Many traders find the leverage that most forex dealers offer very appealing. Nonetheless, you should know to trade this way can also be risky. It can produce substantial profits as easily as it can cause substantial losses.
LEVERAGE RATIO:
1:1
50:1
800:1

PIPS…LOTS & LEVERAGE WORKS TOGETHER

Let’s say that you bought 10.000 EUR/USD on 50:1 as we discussed in the previous example on leverage. You purchased at 1.3000o then closed the trade by selling at 1.3020o. This means you’ve earned 20 pips.

0.0001 x US$10,000 =US$1 per pip
For your 20 pip trade, you would have earned US$20

Not all of the pips you’ll earn will be worth US$1.The value of a pip depends on the lot size of your trade, how many lots you’re trading, the currency pair, and your account currency. You can manually calculate this or use online pip calculators to learn the value of pip before you trade.

Now that you know a little more about forex, we’ll take a closer look at how to make your first trade

SELECT A CURRENCY PAIR

The nature of forex trading is to exchange the value of one currency for another. In other words, you will always buy one currency while selling another at the same time. Because of this, you will always trade a pair of currencies. Most new traders start out by trading the most commonly offered pairs of major currencies, but you can trade any currency as long as you have enough money in your account.

ANALYZE THE MARKET

Research and analysis should be the foundation for your trading endeavors. Without these, you’re operating largely on emotion. This doesn’t typically end well. When you first start researching you’ll find a wide wealth of forex resources-which may seem overwhelming at first. As you research a particular currency, you’ll find valuable resources that stand out from the rest. You should regularly look at current and historical charts, monitor the news for economic announcements, consult indicators and perform other analysis activities.

CHOOSE YOUR POSITION

If you’ve traded stocks, bonds, or other financial products, you know that you can usually only speculate on one direction of the market-up. Forex trading is a little different because you are buying one currency while selling another at the same time. You can speculate on up & down movement in the market.

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99 thoughts on “WHAT IS FOREX TRADING”

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