Learn How to Trade Forex
Forex or Foreign exchange is a portmanteau of the exchange of foreign currency. It is the conversion of one currency into another. Forex or Foreign exchange trading is a worldwide open market for exchanging currency. Because of the increased global influence of trade, commerce, and finance, forex markets are said to be the largest and most providing liquid asset markets in the globe. Foreign exchange doesn�t has any central market place. Therefore, it is conducted electronically over-the-counter (OTC). This means that all transactions are carried out through computer networks between traders. Foreign exchange has been an actively traded market around the globe due to its low risk. This is attracting investors to indulge in trading. But for this one has to first learn how to trade before one jumps into the actual act.
The following are the step used in forex trading.
� Choosing a currency pair
Pick and settle at one currency that you want to pair, and there are over 65 currency pairs to select, pick one opportunity that is right for you. Fundamental tools and city index technical can assist you in spotting the currency opportunity to match your trading design. It is recommended that you take your time to evaluate the amount of volatility required with the currency pair to manage your risk.
� Decide on the type of forex trade
Deciding on the type of forex trading means that you have to understand how each and one of them operate. There are at least three types of forex with city spread betting (CFD). Each type has its stake size: In CDF, you are required to sell pounds against point movement. Trading is done by trading some CFDs in the unit of the base currency.
� Decide to buy or sell
After picking a market, you are required to know the current price it is trading at, which is done by bringing up an order ticket on the platform. Forex currency is quoted in terms of one type of money against the other. Every pair has a base and quote currency. The base currency is on the left side of the currency pair, while the quote currency is on the right side. Purchase a currency if the base currency strengthens against the quote currency or the quote currency will weaken against the base currency; it raises the profit.
� Adding orders
An order is a request to automatically trade in the future when prices rise to a level fixed by you. You can make use of stop and limit orders lock in any profits and minimize risks when your advantage comes in when your target is attained.
� Closing your trade
When you close your trade, your net open profit and loss will be noticed and reflected in the balance account.
Foreign exchange trade has made foreign exchange easy for people, such as business organizations and corporate. It�s effortless to do transactions with the forex because you need a computer and internet connection. This article contains the steps that will guide you in doing your transactions today.
These are a few simple steps to follow before you begin to trade:
1. Trading platform: This is the first step in the foreign exchange trade to make a trading platform
2. Open the chart: Select a pair of currency and then open the chart. Furthermore, select a time frame.
3. Indicators: Few indicators need to be added to the chart, as these will help in decision making.
4. Placement of order: Prepare to place the order
5. Stop loss and grab profit levels: Now set your stop loss and take your profit levels. Setting up of stop losses will prevent losses if the market doesn�t move according to your preferred direction. Setting the take for profit will ensure that the trade exists in profit as expected.
6. Order confirmation: Submit the order and wait for your confirmation number because this may be required for reference.
7. Waiting period: Now this is the toughest part for traders as they just can�t get off their screens.
8. Completion: Trade has been completed and results are notified.
How to make money trading forex?
There is a very simple phenomenon that is required here, the trader just has to buy a currency at a lower rate and sell at a higher rate. Once the rate of your currency increases the trader has to quickly decide whether to close the trade with this gain or not. The gain is the profit or money that one makes while trading forex. But to increase the profit one has to invest a reasonable amount of capital in the forex market. One can�t imagine making huge profits by investing the small value of money like 500$ or 1000$.
Know when to buy or sell currency pairs
To master the technique of trading forex one must know when to buy and when to sell a particular currency pair to make gain/profit in a trade. For this, you need to have a keen eye on the table of quotation on foreign Exchange. On the table one can find two rates of each currency pair: one is the rate to buy and the other is rate to sell. The buying price is always higher in comparison to the selling price. In this regard, the sell rate is called �Bid� and the buy rate is called �Ask�. The best time to trade is during the late U.S, Asian or early European trading sessions- essentially 2 PM to 6 PM Eastern Time (New York).
What is lot in Forex?
Lot is the number of currency units you will buy or sell. Earlier spot forex was only traded in specific amounts which are defined as lots.
There are four commonly known sizes of lots:
1. Standard lot: This is equivalent to 100000 units of the base currency in a foreign exchange trade.
2. Mini lot: This is equivalent to 10000 units of the base currency in a foreign exchange trade.
3. Micro lot: This is equivalent to 1000units of the base currency in a foreign exchange trade.
Basics terms of forex trading
Before the journey begins to forex trade, it is important to be aware of the basic terminologies that one can encounter in the process to understand foreign exchange in depth. A few of them are listed below.
Major Minor currency pair
These are the two types of currencies that are widely traded in the forex. Major currency pair consists of the most frequently traded currencies across the globe. This is because they have massive liquidity and are easily available to trade virtually. When on the trader selects the major currency pairs to trade then they escape the brokerage charges too. The following are the major currency pairs:
� EUR/USD (EURO/US DOLLAR)USD/JPY (US DOLLAR/JAPENESE YEN)
� GBP/USD (BRITISH POUND/US DOLLAR)
� USD/CHF (US DOLLAR/SWISS FRANC)
� USD/CAD (US DOLLAR/CANADIAN DOLLAR)
� AUD/USD (AUSTRALIAN DOLLAR/US DOLLAR)
� NZD/USD (NEW ZEALAND DOLLAR/US DOLLAR)
One can easily notice from the above that U.S Dollar is a part of all the currency pairs as it is the world�s leading reserve currency and also involved in about 88% of currency trades taking place.
Minor currency pairs are the ones that do not include U.S Dollar in them. It is also called a cross-currency pair. Yen, Euro, and British pound are widely traded minor pairs. The following are the minor currency pairs:
� EUR/GBP (EURO/ BRITISH POUND)
� EUR/AUD (EURO/ AUSTRALIAN DOLLAR)
� GBP/JPY (BRITISH POUND/ JAPANESE YEN)
� CHF/JPY (SWISS FRANC/ JAPANESE YEN)
� NZD/JPY (NEW ZEALAND DOLLAR/ JAPANESE YEN)
� GBP/CAD (BRITISH POUND/ CANADIAN DOLLAR)
Base currency
In a currency pair, the first currency pair is called the base currency. The base currency is the currency against which the exchange rates are usually quoted. For example, USD/JPY is a currency pair. In this USD is the base currency.
Quote currency
The quote currency is the secondary currency in the currency pair. The quote currency is more commonly called as the �counter currency�. It is the secondary currency that is used to determine the value of the base currency.
There are two types of quote currencies:
� Direct quote- In this type, the quote currency is a foreign currency.
� Indirect currency- In this type, the quote currency is the domestic currency.
PIP
Pip is the fundamental unit used to measure while trading currencies. Pip is a standardized unit and also the smallest amount which can cause a currency quote to change. With the help of this unit, huge losses are being saved for investors. For example: If a pip was 10 basis points then one pip change would cause greater volatility in currency values.
Pipette
Various platforms of forex use pips as the smallest fraction that the currency pairs can move but the need for precise accuracy has now produced fractions of one pip which is called pipettes. A pipette is equal to 1/10th (one-tenth) of a pip and it represents a fraction of 1/100000 (one in hundred thousand).
Bid price
It is the highest or maximum price that the buyer's bids or wishes to pay for a currency. The term bid here simply means to ask.
Ask price
It is the minimum price at which a trader buys the currency pair.
Bid-Ask spread
Bid-Ask spread is the difference between the prices that the dealer will buy a currency pair at and then sell the currency pair. This difference between the buying and selling of a currency is the dealer's profit and this is called the Bid-Ask spread.
Quote convention
Quote convention in forex is based upon the two quotes that are there for any currency, the bid quote, and the ask. Both of them are expressed as the unit of the base transaction.
Transaction cost
Transaction cost generally means the expense that has been incurred while buying and selling a good or service. But here in a financial sense, the transaction cost includes brokers/banks commission for the role that they played. These are the differences between price the dealer paid for a security and the price the buyer pays for the same. This transaction cost is an essential criterion for investors as it will decide the key determinants of net returns.
Cross currency
Cross currency is a pair of currencies traded in the forex market which does not include the US dollar in it. And in the cross-currency transaction, it does not involve the US Dollar as the contract settlement currency. Cross-currency pairs can act as an excellent tool for traders.
Margin
Margin is one of the most important concepts to be understood while trading. A forex margin is a faith that one puts in a deposit that is needed to maintain open positions. It is not a fee or a transaction fee levied on the trader, instead of a portion of your account is set aside and assigned as a margin deposit. Margin is quite commonly expressed as a percentage of the full amount of the chosen position.
Leverage
Leverage in forex is the ratio of the trader�s funds to the size or the price of the broker�s credit. In simple words, leverage is a borrowed capital while trading in forex just to increase the returns in a deal. The leverage is usually much greater than the invested capital by several times. The size of leverage is not fixed at all; it all depends on trading conditions provided by a certain forex broker or bank.