Rookies may have an especially difficult time trading forex. However, this is not happening due to the complexity of this trading method, but mainly because of beginners’ unrealistic expectations.
When starting this journey, people need to realize this is not one of those get rich in a week scheme. Mainly because those do not exist and anybody claiming they do, is trying to scam you. The following paragraphs will cover some of the most basic aspects of forex trading, and some little extra information to make trading easier for rookies.
Forex – What Is It?
Forex, also known as FX, is the marketplace dedicated to currency trading. Most people trade currencies unknowingly, each time they leave to foreign countries. In its simplest form, Forex trading is when a person exchanges their local currency for a foreign one. Globally, over 5 billion USD are traded every day. In this landscape, we can identify speculators, corporations, banks, and governments.
When starting to trade currencies, your knowledge in terms of how the market is distributed matters a lot. This will allow you to trade more effectively and profitably.
The combined traded amounts of all participants create a market where these exchanges take place. No matter the trader’s size or buying power, everybody matters in this equation.
When currencies are traded, they are exchanged in pairs. As a result, the profits are determined by a currency’s value against the other. Maybe the most popular currency pair is the US dollar and the Euro. When a pair’s value increases, this means that the value of the first currency in the pair increases.
This is some information on Forex trading, in broad terms and simplistic definitions. But below, we will get into more details for you.
Currency pair liquidity
Currency pairs can be split into several categories: exotic currency pairs, minor currency pairs and major currency pairs. As you would have guessed, major currency pairs are those made up of the most frequently traded currencies. Below are some of them.
- EUR – the Euro
- USD – the US Dollar
- CHF – the Swiss Frank
- AUD – the Australian Dollar
- CAD – the Canadian Dollar
- NZD – the New Zealand Dollar
- GBP – the British Pound
- JPY – the Japanese Yen
All currency pairs made out of two of the above are major currencies, combined with the US dollar. Pairs made out of any of the currencies above that isn’t the US dollar are minor currency pairs.
Forex Quotes – What are these and how do they work?
Forex trading platforms have a “Bid” and “Ask” button. These are how currency prices are quoted.
The Bid price is the price at which traders can buy their currencies, while the Ask price is the price at which they can sell it. When buying currency pairs, professional traders hope their value will increase. This way, they’ll be able to sell it at a better price. When selling a currency pair, the opposite is happening. Traders hope their pairs will fall in value so they can profit from the difference.
Now, that you know what the ask and bid prices are, let’s see what the spread is. If you are a member of a forex trading forum, you are familiar with the term. If not, we will detail it for you, below.
In forex trading, the spread is the difference between the bid and ask price. To sell a pair at a profitable rate, the trader must sell it for a higher price than the price they bought it at. When trading major currency pairs, the spread doesn’t have to be big for the pair to become profitable. However, when trading minors, it has, if the trader wants to make a good profit.
CFD is the abbreviation for Contract for Difference and it designates the evolution of currency prices. Simply put, when a trader purchases a currency against another and then they sell it when the prices become more profitable, this is a CFD. Apart from offering traders enough profit opportunities, CFDs also offer an open door to a larger segment of the Forex trading market.
What is leverage and how does it work?
We mentioned above that forex CFDs can offer traders access to a wider market, but these can also increase the leverage they have. Simply put, CFDs allow traders to invest much more than they would have been able to, without CFDs. Smaller deposits translate into higher profits, which comes to the investor’s advantage.
These are some basic aspects of Forex trading, but also a small introduction to forex trading terminology. Make sure you get a good grasp of these terms before actually starting to trade. This will help you make the most of your time and financial resources, without losing important aspects from sight. Before starting to trade, we recommend joining a Forex trading forum. This will offer you more insights into the matter.