Forex Trading Basics for beginners
Linguistically speaking, the word “Forex” is a blend word, the result of combining the two words “foreign” and “exchange.”
Forex is an investment opportunity whereby you can make money online by trading one or more foreign currencies for another at an agreed exchange price in the online over-the-counter (OTC) Forex trading market (Fx trading).
The Fx trading market is like any other market where goods are traded except that Fx involves only trading foreign currencies. Foreign currency exchange is the most traded market in the world even more than stock markets, The Forex market is turning over an average of $5.3 trillion each and every day.
The FX trading market involves free-floating currencies (or those not supported by any specific material like silver or gold), which are treated like goods in the Fx trading market. You can buy Euro dollars by paying Australian dollars or you can buy the Japanese Yen by paying U.S. dollars, etc.
Profits and losses in the online Forex market are based on fluctuations in the values of different currencies, with the two most widely traded currencies being the U.S. dollar and the Euro (kings of currencies). The Japanese Yen, Canadian Dollar, Australian Dollar and New Zealand Dollar are also popular for currency exchanges.
In order to participate in the Fx market, a trader must first open a currency trading account with a broker. In order to trade $100,000 worth of currency with a margin of 1%, a trader only has to deposit $1,000 into his or her account. The amount of leverage provided is usually 1:50, 1:100 or 1:200 or more, depending on the broker and the amount the investor is trading.
The trading of foreign currencies online is a leveraged product, which means that you are only required to deposit a small percentage of the full value of your account funds to place an Fx trade. Leverage is basically a loan that is provided to a trader by the Fx broker who is handling an Fx account. The leverage that is achievable in the Forex market is one of the highest obtainable by investors.
Foriegn Exchange Pricing
All Forex trading is quoted in terms of one currency versus another. Each currency pair has a “base” currency and a “counter” currency. The base currency is the one appearing on the left of the currency pair and the counter currency appears on the right. For example, in “EUR/USD,” the EUR is the “base” currency and the USD is the “counter” currency.
The word “pip” is an acronym for “price interest point” or “point in percentage.” A pip measures the amount of fluctuation in the exchange rate for a currency pair. For currency pairs displayed with four decimal places, one pip is equal to 0.0001.
Most currency pairs are quoted to five decimal points, with the change from the 4th decimal in price commonly being referred to as a “pip.” For example, if the price of the EUR/USD currency pair moved from 1.33800 to 1.33920, it is said to have climbed by 12 pips (92-80=12).
Simply stated, a pip is what we in the Fx market consider a “point” for calculating profits and losses.
The difference between the bid and asking price of a currency is referred to as the “spread.” For example, for EUR/USD dealing at 1.33800/1.33808, the spread is 0.8 pips or 0.00008. The exceptions to this are the JPY pairs, which are quoted with just two decimal places. For example, a USD/JPY price of 97.41/97.44 displays a 3 pip spreads.”
Forex Trading Basics beginners
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