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How to Trade Currency – Learn The Basics

September 19, 2016
By Peter Brown
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 Forex Trading – Learn the Basics

Forex is the biggest market with the largest liquidity, providing great opportunities for small and big traders to make profits comfortably. There is no central exchange and all trades are executed through banks and forex brokers. The foreign exchange market is global and decentralized. At any point of time, two currencies won’t have identical values and the currencies won’t maintain their relative values for a longer period of time. International markets are available 24 hours a day for five days a week. Forex allows you to generate a passive income or you can spend all your time to earn a six figure income simply by trading currencies.

Forex trading is for all

One of the biggest advantages of forex trading is that it is open to anyone. You may not be a financial expert, but you can still make money trading currencies. Only the exchange rate influences your trading decisions and you don’t have to worry about other factors. If you think that a currency is going to increase in value, you buy it. If a currency is predicted to fall, you sell it. With forex trading, you won’t be holding on to your currencies for too long. You can complete a trade quickly and move on to the next trade. The trade volume is huge compared to the stock market. You can get as much as 50 times of your investment as leverage, which allows you to take advantage of the smallest moves in the market.

Forex terminology basics

The forex market is considerably new and there are numerous technical terms. You don’t need to have a financial degree to understand the market jargon. You simply have to create a free account with a forex broker and start trading. However, before you start trading, you have to understand all the terms used throughout trading. Learning to trade currencies takes some time, but once you have completed the learning curve, you can start making a profit almost immediately on your first trade.

Currency pair

When you trade currencies, you have to always trade it in pairs. Forex trades are always represented as currency pairs. The eight major currencies traded are US dollars, Euros, Great British Pounds, Japanese Yen, Canadian dollars, Swiss Franc, Australian dollars and New Zealand dollars. There are a few standard currency pairs, but some brokers also allow you to trade unconventional currency pairs. In a currency pair, the currency you spend is called the base currency and the currency you buy is called the quote currency. The first currency in the pair is the base currency. For example, if the pair is quoted as EURUSD = 1.400, it means that you can buy one Euro for 1.400 US dollars.

Spread

WThe selling price of a currency is called the bid and the buying price is called the ask. The difference between the bid and the ask is called the spread. The exchange rate between the two currencies determine the bid and ask price. Forex brokers, however, provide a spread that is slightly different from the actual exchange rate. The brokers take their profit based on the spread offered. While trading currencies, you have to watch the spread to earn your profit. If the currency you hold has a higher value that the currency you wish to trade for, you will be able to make a profit.

Lot

Lot refers to the smallest available trade size with the broker. Many forex brokers allow you to trade lot sizes in 1000 units of currency. This means that you can trade currencies in increments of 1000s. There is usually no higher limit on the currency units you can trade.

Pip

Pip simply represents the smallest unit available on the forex market. The movement of exchange rates is represented as pips. One pip difference between two currencies only represents a small amount of money, but with leverage, even a one pip difference can make you a considerable profit.

Leverage

The glamor of forex market lies in the leverage that the market has to offer. Some brokers offer a leverage of 1:100, meaning that you can trade for $100 if you invest just $1. If you increase your capital investment, you can enjoy the benefits of the leverage. The large leverage increases your profit and loss significantly. A higher leverage allows you to control more money compared to what you actually have in your account.

Margin

Even though the forex brokers provide a huge leverage, they set a margin limit. The margin refers to the amount that you have to put aside to hold your position. It is comparable to a faith deposit. A margin is not a transaction cost or a fee, but you have to meet the margin requirement of the broker to trade currency pairs. When your account value falls before the margin with an open position, your broker will send you a margin call. You have to deposit more money in your account to keep the position open or close the position immediately.

Long and short position

In the forex market, you can go long and hold the currency hoping that its value will increase further. Some traders hold currencies for a week, trying to make it big with the rising value of the currency. In the forex market, a week is a very long time as the exchange rate changes every second. When you choose the short position to trade currencies, you will sell the terms currency if it strengthens against your basic currency.
When you open an account with a forex broker, you will essentially get an access account to use the forex software. Some brokers allow you to download the software to your computer while other brokers provide browser-based software. The Metatrader 4 platform is the most common forex platform with exhaustive trading options. The demo account is useful to learn how to trade forex without actually depositing any money. You should practice forex trading with your demo account until you are confident about your trading skills. You can use various other market analysis tools with your forex trading platform to improve your chances of winning a trade.