The basics of forex trading
It is not a secret to anyone that trading foreign exchange on the forex market brings a lot of money. This information is actively distributed through the Internet, appearing in various print media and advertising networks. Therefore, having received such fragmentary and incomplete information, many people are trying to get to the bottom of this information and to understand the basics of trading at Forex. Let us try to make this task a little easier and today we will talk about what this trading platform is and how one can earn money on it.
The Basic Principle of Forex Trading
Forex is a market and the main objective of its participants is to make profitable transactions. The commodity here is quite specific - it is money. Namely, money, the value of which is constantly changing, is a commodity that must be bought as cheaply as possible and sold at a higher price.
This principle of Forex trading - buy cheap and sell dear - is the basis of trading activity of every trader, working in this trading platform.
But to better understand how the trading on this market, you should get acquainted with it.
Forex - What is it?
As we mentioned above Forex (FOReign EXchange Market) is a large scale international market where the goods are money. This market is where exchange rates are created, which are later used for changing currencies.
The Forex market is unique because it is not strictly tied to a particular marketplace. Forex trading is done via the Internet and occurs 24 hours a day, seven days a week.
Hundreds of banks are connected to the Forex network, which enables them to make transactions related to currency exchange, both on their own initiative, as well as on the initiative of their clients.
The Forex market is comparable to a huge currency exchanger, which is constantly buying and selling one currency for another. And if you know or guess how the price of a certain currency will change, you can make good profit.
Naturally, no one knows the exact direction of the exchange rate, but in the short term it can be predicted, using various analytical and technical tools.
How does Forex trading work?
1. Each currency used in trading is denoted by a three-letter code. For instance, US Dollar is denoted as USD, GBP as GBR, EUR as EUR and so on. Accordingly, a currency pair consisting of, for example, EUR and USD would be denoted by EUR/USD. The currency which stands on the left is usually referred to as the base currency (EUR). The currency on the right is referred to as the quoted currency (USD). 2.
2. any currency pair can be either bought or sold. However, it is not really the currency pair that is being sold, but rather the base currency of the pair. At the same time you are buying the quoted currency. For example, if you decide to sell the EUR/USD pair, you are actually selling EUR, and buying USD. And if the pair decreases, then naturally the EUR will become cheaper, and the USD will become more expensive. You can make money on this.
3. The two prices used in Forex trading are the "Bid" price, which is the selling price, and the "Ask" price, which is the buying price. The difference between these prices is called the spread. This is nothing else but the broker's commission.
4. the volume in each trade executed in this market is measured in lots. The standard volume of currency sold or bought on the Forex market is 100,000 units of the base currency. But a trader does not need to have a lot of money to make a trade. Now there is such a thing as margin trading. A broker provides a leverage to any trader. For example, if leverage is 1:100, on trader's account the amount of money will be 100 times less, than the amount of transaction. It is also possible to trade with fractional lots. Beginners should not rush to open positions with big volumes.
To master this knowledge and to fully understand how trading operates in Forex let us have a look at one small example:
Let us assume that at some point the EUR/USD exchange rate is 1.1790/1.1794 (bid/ask). You assume that after some time it will increase and reach 1.1840. Based on this assumption you decide to buy 0.1 lot of this asset. As a result it appears that you bought 10000 Euro and sold 10000x1.1794=11794 USD. In this case, you did not need to have 11794 USD in your trading account. With a broker's 1:100 leverage, you only had to have $117.94. Let's assume that you were right and your prediction was correct. By closing the deal at the "Bid" price of 1.1840, you are already selling 10,000 Euro and buying $11,840. The profit in this transaction amounted to 11840 - 11794 = $46.
In this article we have considered only basic concepts - the basics of Forex trading for beginners, which every trader should know. But in fact, to make profit on the currency market one has to learn a lot. Only diligence and systematic work can bring you good money when you start trading.