What is Forex?
Forex (FX) is a word combination of “foreign currency and
exchange”.Foreign exchange is the
process of one currency to another while the forex market is the global
marketplace for exchanging national currencies.
It is the world’s largest and most
liquid asset market due to the worldwide reach of trade, commerce, and
finance.
For instance, EUR/GBP is the currency pair for trading the euro against
the British pound.
How to start trading forex?
1. Learn about forex
You need
to fully understand first what forex really is before you start trading. There
are a lot of online courses available for beginners that would teach you every
thing that you need to know.
2.
Develop a trading strategy
Once you
fully understood the concepts and how the market works, you now need to develop
your trading strategy. It will help you to set broad guidelines for your
trading journey. A good strategy should be developed based on the reality of
your situation and finances, taking into account the amount of cash that you
are willing to give up and the amount of risk that you can tolerate without
getting burned out.
3.
Set up a
brokerage account
In order
to trade, you will be needing a forex trading account. For beginners, it would
be a good move to set up a micro forex trading account with low capital
requirements. It has variable trading limits, allowing brokers to limit their
trades to amount as low as 1,000 units of a currency.
4.
Select a currency pair
Most new
traders are starting out by trading the most commonly offered currency pairs,
including EUR/USD, EUR/CHF, and AUD/JPY.
5.
Read the quote
When
trading forex, you will always buy once currency and sell the other at the same
time.
For
instance, a quote for EUR/GBP may look like this:
EUR/GBP
Amount:
SELL BUY
0.85150 0.85200
In this
pair, EUR is called the base currency and USD is known as the quote or terms.
The first
rate (0.85150) is the price at which you can sell the currency duo, and the
second rate (0.85200) is the price at which you can buy it.
The
difference between the first and second rate called the spread or pips. It is
the amount that brokerage charges to the trader for making the trade, and it
varies among dealers.
6.
Pick your position
BUY: With
a buy position, a trader believes that the value of the base currency would
increase against the quote currency.
For
example, in buying EUR/GBP, an investor thinks that the price of the euro will
strengthen (bullish) against the pound (bearish).
SELL:
With a sell position, a trader believes that the value of the base currency
would decline in comparison to the quote.
For
instance, in selling EUR/GBP,
a market participant thinks that the price of the euro will weaken (bearish) in
comparison to the pound (bullish).
Entering
a buy position:
The
current price for EUR/GBP is 0.85060/120. For a buy position, the entered price
would be 0.850120.
For
instance, a trader would look at his position later in the day. Now, the
EUR/GBP is at 0.853320/340. This means that the trade has gained 32 pips. If
the trader closed his position at the current sell price of 0.853320, he would
take a profit.
Entering
a sell position
At this
point, since a trader is making a selling position, he entered at the price of 0.85060.
Later in
the day, the price of EUR/GBP turned to 0.85332/340. It means that a trader has
lost 272 pips. Once the position was closed at the buy price of 0.85340, the
trader lost and would not take a profit.