Basics of Forex Trading for Beginners
In essence, the term “Forex” stands for Foreign Exchange that is a blend of two words, i.e., Foreign currency and Exchange. Forex is a global platform of converting one currency into another currency. In this market, the trading always occurs between the currencies of two different countries like EUR/USD, for example. To assist you in trading (buying and selling) foreign currency, there are firms known as Forex Brokers.
Forex Market is a global platform where foreign currencies are being traded. The financial firms are the main participants of this market. This Forex market assists in international trading and investment. For example, a person from the USA wants to buy some leather goods from Italy he has to pay the Italian firm in euros (EUR). This means the USA importer has paid an equivalent amount of money of USD in EUR based on supply and demand. The exchange rates don’t remain constant; they fluctuate continuously based on which currency is stronger at that moment.
There is no central place for trading in this international market for foreign exchange; instead, the transactions are conducted via the over-the-counter (OTC) concept. This means computer networks are being used for the Exchange of foreign currency, and there is no physical place for trading. They accommodate the trading of all other major currencies; GBP/USD, EUR/USD, USD/CHF, and USD/JPY and the remaining G10 currencies.
Forex trading is one of the largest markets in the world, with the average daily trading of 5 trillion. Primarily, the Forex broker assists you to open the Forex account and then you can open a trade by purchasing a pair of currencies, and close the deal by selling the same pair. For example, you might hear about China is devaluating its currency to increase foreign investment in its country. So you can exchange your Chinese Yuan with other country’s currency like USD. If the trend of devaluation continues, you will earn more profit. For such a broad market, it is much easier to find a buyer when you want to sell and a seller when you want to buy the currencies. But above all, You need to choose the best brokers for you from brokers available in the market. Do your own research and go through forex broker reviews to know more about forex brokers.
A transaction always occur between the currencies of two different countries. Here, one is the BUY, another is the SELL, and the difference between them is known as SPREAD.
Categories of Forex Pairs
Major Pairs are the most traded pairs, and all contain USD on one side. For example, EUR/USD, GBP/USD, USD/JPN, etc.
Minor or cross Pairs are those that do not contain USD. The three major non-USD currencies which are on one side of the trading are GBP, EUR, and JPN. For example, EUR/CAD, EUR/JPN, AUD/JPN, GBP/NZD, etc.
Exotic Pairs are those where a major currency is being traded against one from an emerging or small economy. For example, USD/PLN, GBP/MXN, EUR/CZK, etc.
Regional pairs are classified by region. For example, EUR/NOK, AUD/NZD, AUD/SGD, etc.
In forex trading, liquidity implies the ability of a currency pair to be bought and sold without any substantial change in the exchange rates. When you can easily buy and sell with a significant amount of trading for your currency pair, then it is said to be a high level of liquidity.
Forex spread is the difference between the ask price and the bid price of a currency pair. Ask price is the price at which currency is sold, and the bid price is the price at which the currency is bought. Greater the spread, greater will be the profit and the loss depending if the ask price is greater or less than the bid price.
Forex Contracts for Difference (CFDs) are the agreements between the brokers and the investors in which they agree to transfer the exchange between the exit price and the entry price of a currency in foreign exchange. CFDs are flexible and offer a large number of contracts in different currencies.
Leverage is a kind of a loan provided by the broker to the client or investor. Traders use this borrowed capital to invest in the market, assuming that the profit would be higher than the payable interest. To earn more profit, the high leverage provided by the Forex traders draws a lot of people’s attention as compared to other trading instruments.
With the potential of such leverage comes the danger, i.e., the risk of losing money. The lack of understanding of this concept and without any comprehensive research, it might lead you to the threat of losing your money. But if you are well aware of the concept and spend adequate time on research, then it can provide you with a very powerful tool to build profits.
The most commonly used leverage amount is 100:1. In this case, if you want to buy a stock worth 100 dollars, then you have to front up 1 dollar only to enter into trading.