Forex is an acronym for foreign exchange, the forex market is a worldwide money trading platform FX or currency trading, is also a decentralized global market where all the world’s currencies trade. The forex market is the largest, most liquid market, liquid in the sense that it is an ever changing market. If you are looking for the right business to invest just a dollar and reap a 100 dollar in just one day then the forex market can come to you aid. I must point out that it is as easy to make a 100 dollar from just 1 dollar in forex as it is to lose several dollars in a bid to get a 100 in forex trading. For the beginners there are certain basics you must understand before setting out into forex trading.
Before you get ready to deposit your funds and start trading there are some important points you must understand, each of which are outlined below.
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Forex Brokers : In order to start trading forex, you will need to trade with the help of a forex broker. There are many forex brokers out there today who allow you to open a forex trading account for as little as $5(1500 naira). The forex broker is the one who facilitates your buy and sell orders and also allows you to research into the markets (also known as technical or fundamental analysis) to help you make more informed decision and of course allows you deposit more funds or withdraw your profits when you want to. In reality i never went through a broker so don’t get carried away with the 1500 naira fee the broker is going to charge.
Trading Platform: You need a trading platform from which you can place your trades, which are then sent to the broker for settlement. Also, a trading platform is essential for you to conduct your technical analysis and also to see the current market prices. Most retail brokers offer the MT4 (short for MetaTrader 4) trading platform, which is free of cost. You can also open a demo trading account and practice trading with virtual money to gain the experience required before trading with real money. This is very important for beginners i recommend you use INSTAFOREX.
Now assuming you have created a demo account using any of the trading platforms you will be coming across various terms which might be new to you, understanding them is key to making profit in forex trading some of these include;
Currency Pair; currencies in forex are often in pairs the first two letter of a currency tells the country of origin of the currency while the last letter tells the name of the currency. e.g USD stands for the united states dollar.
What is a pip? :Pip is a measure of change in a currency pair’s value and is the 5th decimal. For example, if EUR-USD changes from 1.31428 to 1.31429, the change is denoted as 1Pip (1.31428 – 1.31429 = 0.00001). When you trade, the more pips you make, the more profit you have. e.g Buying EUR-USD at 1.31428 and selling (or closing your trade) at 1.31528 would give you 100Pips in profit.
Reading quotes: Forex quotes are presented in a Bid and Ask price (both of which vary by a few pips and from one broker to another). The Bid price is the price at which you can buy and the Ask price is the price as which you can sell. So, a EUR-USD quote would look like this 1.31428(Bid)/1.31420(Ask).
What is a Spread? : Spread is nothing but the difference between the Bid and Ask price. So in the above example, for 1.31428/1.31420, the spread would be 8 Pips.
What is a Leverage? : Leverage is the amount by which you can request your broker to magnify (or increase) your trade value. Leverage is often quoted in ratios such as 1:50, which means that when trading on a 1:50 leverage, your $100 is magnified to $50000. Leverage is a big topic in itself and it is recommended to read this article to learn more. Leverage is important both in terms of making profits as well as managing risks and therefore, your trades.
What is a Lot?: A lot is a unit by which you place your trade. In financial terms, a lot is also referred to as a contract. There are preset lots (or contract sizes) that you can trade. For example a standard lot is nothing but 100,000 units (known as 1 lot).
Reading charts: The ability to understand and read the charts is very essential to trading. Depending on your approach, you can choose between a line, bar or candlestick charts.
Placing Orders (How to buy and sell): In forex trading, it is possible to either buy or sell any currency pair. Most trading platforms, give you this option. You Buy when you think that price will go up and you sell when you think that price will fall. There is a common terminology used in forex trading, which is Buy Low, Sell High; which is an important point to remember.
Order Types: Besides buy and sell, another point to remember the types of orders. There are two basic order types: Market orders and pending orders. When you click on ‘Buy’ or ‘Sell’ you are basically buying (or selling) at the current market price. A limit order on the other hand tells the broker that you want to buy or sell only at a particular price.
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