A Beginner’s Guide to the Basics of Forex Trading

A Beginner’s Guide to the Basics of Forex Trading

The term “forex” which translates to foreign exchange, pertains to the purchase of one currency in exchange for another. Foreign exchange is the most liquid market there is because in addition to common people, government, corporations and even countries take part in it. When you set out on a travel adventure and exchange the dollars you have for liras, pounds or dinars, you are engaging in the global foreign exchange market.

At a given point of time, depending upon the demand for a currency pair, its price will either be increased or decreased in comparison to other competing currencies. With the core feature in mind, given below are a few things you should keep in mind about the foreign exchange market so that you can take your first step towards this market and start making money as millions of other people do.

How do forex quotes work?

When you are thinking about trading a currency, you see an ask price and a bid price. the bid price represents the amount in which you can purchase a currency, whereas the ask price denotes the price in which you will be able to sell the currency. In an instance in which you are buying a currency, it means that you are hoping for the price of the currency to rise so that when it does, you can sell it and make profit. However, when you sell a currency then the hope is that you will make a profit on the difference.

How liquid are different currency pairs?

Since traders make a profit on the difference of prices between two currency pairs, a very valid question that you may ask here is how much can you expect a currency to move at any point of time? This is directly dependent upon how liquid a particular currency is. The liquidity of a currency is depicted by how much it is exchanged globally. If the currency can be easily bought or sold any time then that is one of the factors that contributes to its consistently changing value. The most liquid currencies are the ones that have the highest supply and demand generated by banks, travelers, forex traders. Since the US dollar is quite commonly exchanged, it is one of the most liquid currencies in the world. In addition to that, the currency pair EUR/USD is the most liquid, with an average movement of 90-120 pips every day. Additionally, AUD/NZD shows an average movement of 50-60 pips each day, whereas the USD/HKD pair only moves about 32 pips daily. A pip basically represents 0.0001. So, if the AUD/NZD pair were to move from 2.1113 to 2.1114, it would depict a one pip change. For rookie traders, it is easier to start off by trading major currencies as these currency pairs offer quite a lot of learning opportunities for them. Seasoned traders, however delve into exotic currencies as well, just because they have the know how of operating in it. Specialized knowledge of exotic currency pairs especially helps traders in making a profit on their trade. Novices shouldn’t however initiate their trade by starting with exotic currencies as the risk would be too high for them.

Currency pairs primer

Before dipping your toes in the foreign exchange waters, you need to familiarize yourself with currency pairs primer and what their significance is.

  • A rule of thumb for the forex market is that currencies will be traded in pairs every time. If you want to trade Turkish liras for US dollars then this is a currency pair. Each forex transaction requires you to trade one currency for the other. This happens, so that the trader can see the price of one currency in comparison to the other. This sets a clear picture in the mind of the trader, that what he’ll be receiving for the amount of a particular currency he gives up. For example, the CAD/USD tells you what would the Canadian dollar cost you in US dollars.
  • In the foreign exchange market, there are specific symbols used in order to denote some currencies, such as CAD is used to represent Canadian dollars, whereas the Bahraini dinar is symbolized by BHD. So, the currency pair of Canadian dollars and Bahraini dinars is going to be symbolized by CAD/BHD. Apart from that, other currency symbols which are traded commonly include: Australian dollar=AUD, British pound=GBP, Swiss franc=CHF, Canadian dollar=CAD, New Zealand dollar=NZD, and Japanese yen=JPY
  • Every currency pair will have a market price on which the trade will be made. The market price refers to the amount of second currency it will take in order for the trader to acquire the first currency. So, for example if the price of CAD/AUD is 1.05938, then this means that it takes 1.05938 of Australian dollars to acquire one Canadian dollar.

What is forex spread?

The spread, in forex trading refers to the difference between the bid and ask price of currency pairs. For example, let’s assume that the bid price of AUD/NZD is 1.7788 and the ask price is 1.7789 then the spread of these two currencies will be 0.0001. For a trader to make profit, it is crucial for the currency pair to cross to spread, otherwise there won’t be a profit incurred on the trade. In currencies with a bigger spread, one currency needs to make a big move in order for the trader to make a profit.

Final words:

Forex trading has gained massive prominence in the last decade. The reason being how easy it is to enter the market. However, many forex traders have to leave the market because they don’t do their research prior to making traders and get carried away on a wave of optimism which probes them to make unreasonable decisions that brings them face to face with losses. Sometimes the loss is so high that a major portion of their investment is lost. Disappointed with their losses some traders never return to make another trade in the forex market. Therefore, if you want to become a trader and a successful one at that, then you need to know the basics of forex trading. There are somethings a trader can do to shirk away from big losses and one of the techniques is to rely on the best forex trading software. The software coupled with its AI can help you wonderfully in the initial and later stages of your journey.

 

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