The foreign currency exchange market has emerged as one of the fastest-growing globally in the last decade. Supple and inexpensive, foreign exchange trading, or forex, appeals to a wide range of traders.
A Brief History of Forex
Forex trading dates back to the times of barter and trade. Unfortunately, throughout the past, it was available only to the rich individuals, banks and later large corporations.
In the late 1990s, the advent of the internet and modern technology enabled individual traders to connect with forex dealers, and trade online.
Today, forex trading continues to climb up the volume and popularity ladder. While the stock market and the bond market have billions of pounds in daily volume, the forex market has a daily volume of over $4 trillion. Evidently, the forex market offers traders great prospects of buying or selling for potential profit at any desired time.
Traders are often heard referring to foreign exchange trading by different names. These illustrate both the market and the process of trading one currency against another. Here, we’ll refer to foreign exchange as forex.
You’ll observe here that forex may offer active traders significant benefits as compared to other trading products.
It’s a known fact that currencies of different countries vary and so does their exchange rates. Viz., one British pound may be valued at more or less than the U.S. dollar or the euro. If you’re lucky, the country you’re traveling in may have a weaker currency, so the conversion of your pound will give you more money.
In forex, traders avail of this difference by trading currency pairs; they buy one currency, say GBP while simultaneously selling another, for instance USD. As currency values change in response to news and other events throughout the day, traders seek to trade currency pairs to benefit from market movements.
Understanding a Currency Pair: A currency pair is composed of the two currencies; you buy one and sell another. The former is the base currency, and the latter is the quote or terms currency.
The last number behind the decimal in a currency pair quote such as EUR/USD 1.3359 represents a pip. It is the smallest unit price that can change for the pair.
The difference between the buy and sell prices. (1.3041 – 1.3038 = 0.0003)
Making Your First Trade
Having understood forex, let’s observe how to make your first trade. Let’s say that you opened an account with Accurate Investment Brokers. You wish to trade the pairing of the euro and U.S. dollar (EUR/USD), but before you venture, you decide to ponder further.
How to read a Forex Quote?
When you monitor this currency pair, you see the forex quote is listed as:
To summarize, let’s put this quote together. The first currency listed in a quote, the euro (EUR), is the base currency and the second, the U.S. dollar (USD), is the quote or terms currency. The first rate…
(1.3038) is the price at which you can sell the currency pair. The second rate (1.3041) is the price at which you can buy the currency pair. The difference between the first and second rate is called the spread. This is the dealer price for entering the trade.
Choosing a Position
Normally, when you trade stocks, you can only contemplate on one position: whether the value of your stock will rise. Forex trading is a little dissimilar. On buying a currency, you must sell another currency in exchange.
That implies you can choose:
A buy position or “to go long.” This means you enter the market anticipating that the price of the base currency will rise compared to the quote currency. You would buy EUR/USD anticipating that the price of the euro will rise over the U.S. dollar.
Because of your belief, you decide to “go long” with the EUR/USD. Your account has a leverage ratio of 100:1. Thus you control $100 worth of currency for every $1 you use to trade. You consider buying one lot (100,000 units) of EUR/USD for $1000. Since you are buying, your trade is entered at the quote currency price of 1.3041. Now, let’s assume that later in the day, you study the charts. The EUR/USD is now at 1.3069/1.3072. Your trade has gained 28 pips. You decide to close your position and take a profit. Your trade is closed at the base currency price of 1.3069.
Calculate Your Earning
EUR: +100,000
USD: -130,410
(100,000 x 1.3041)
EUR: -100,000
USD: +130,690
(100,000 x 1.3069)
Profit $280
(130,690 – 130,410)
A sell position or “to go short.” This means you enter the market anticipating that the price of the base currency will go down compared to the quote currency. You would sell EUR/USD because you believe the price of the euro will fall compared to the U.S. dollar.
Let’s go back and look at that picture again. Say instead of expecting that the euro will rise, you believe it will drop. So you decide to “go short” and sell one lot (100,000 units) of EUR/USD for £1000. Since you are selling, your trade is entered at the base currency price of 1.3038. Similarly, you look at the charts later in the day and notice that the EUR/USD is now at 1.3069/1.3072. Your trade has lost 34 pips. You decide to close your position and take your losses. Your trade is closed at the quote currency price of 1.3072.
Calculate Your Earning
EUR: -100,000
USD: +130,380
(100,000 x 1.3038)
EUR: +100,000
USD: -130,720
(100,000 x 1.3072)
LOSS $340
(130,720 – 130,380)
1. High Volume So Traders don’t Get Cornered: Since the forex market is a multi-trillion pound market, its enormity provides extreme liquidity, so no single body or group can twist values, corner the market or create mayhem for traders. This way, the only major influence on a certain currency is the market’s demand for it.
2. Execute Immediate Trades: Another advantage of high volume and liquidity is that, in normal circumstances, you can buy and sell your trades at your will. You can even use features like those in Accurate Investment Brokers trading platform that automatically terminates a trade when it hits a particular point.
3. Find Profit Potential in rising or Falling Markets: With stocks or bonds, traders can only benefit when the market is escalating. In contrast, forex traders may buy (go long) or sell (go short) currency pairs. That way, they may profit from both rising and falling markets as well as short-term intraday movements.
4. Trade 24-hours a day, 5.5 days per Week: With most financial tools, your capacity to trade usually ends when the U.S. financial markets close. In forex, the market opens in Sydney, Australia and continues globally as the business day begins in each financial centre. That way, you have the liberty to respond to currency variations caused by economic, social and political events as they occur, rather than waiting for the market to open.
5. Leverage Your Trades: You may recall that currency activities in forex are measured in pips. Because these are so minute, you would normally need to trade large volumes of a particular currency in order to see any significant profit or loss. Fortunately, forex is traded with a degree of leverage, typically 100:1 or 400:1. Remember, with a 100:1 leverage, you control $100 worth of currency for every $1 you use to trade.
6. Fewer Fees: Forex trading eradicates a long list of fees found in other markets: commission fees, clearing fees, exchange fees, government fees, platform fees and charting fees. To trade forex, traders simply need to pay for the spread, which will differ by dealer and currency pair.
Basic Forex Terms you Should Know :
• Ask Price: Also called the “buy” or “offer” price, it is the price at which you can buy a currency pair.
• Bid Price: Also called the “sell” price, it is the price at which you can sell a currency pair.
• Leverage: The ability to employ a small amount of money to control a large amount.
• Liquidity: The ability to buy or sell an instrument (such as a currency pair), based on market volume.
• Long buying a currency pair: Often referred to as “going long” or “taking a long position.”
• Lot: Refers to the number of units of a particular currency pair that you can trade at one time. Most forex dealers possess a minimum lot size of 100,000, but some will offer smaller.
• Margin: The security deposit a forex dealer entails you to keep in your account to support your open position(s).
• Major & Minor Currencies: The most popular and most heavily traded currency pairs are called “the majors.” They are EUR/CHF, EUR/JPY, EUR/USD, GBP/EUR, GBP/USD, USD/AUD, USD/CAD, USD/CHF and USD/JPY. Minor currencies, (those from emerging countries), tend to be a higher risk to trade.
• Pip: The last number behind the decimal in a currency pair quote such as EUR/USD 1.3038 represents a pip. It is the smallest unit that a price can change for the pair.
• Short Selling: a currency pair. Often referred to as “going short” or “taking a short position.”
• Spread: The spread is the difference between the bid and the ask prices, in pips. For example, if the EUR/USD has a bid price of 1.3038 and an ask price of 1.3041, the spread is 3 pips (1.3041 – 1.3038 = .0003, or 3 pips).