Forex Trading for Beginners 

Introduction: What is Forex?

The word ‘Forex’ comes from the ‘foreign exchange’ which means the conversion of one currency into another. Currency exchange is important to the functioning of the world economy. Why? because when products are manufactured in one country and then exported to another, the local currency must be converted prior to selling. However, the first step to online forex trading starts with understanding the basic terminologies of the Financial market.

To make this simple for you let’s take an example: 

The popular iPhone is put together with parts from at least 5 countries, and it is sold in at least 87 different countries. Since Apple keeps track of its profits and pays dividends in US dollars, it will take almost a hundred separate foreign exchange transactions just for this one product to pay suppliers and bring back profits. When you apply this idea to the entire international economy, you may start to grasp the scope of currency exchange.

According to the 2019 Triennial Survey of turnover in OTC FX markets:

• In April 2019, daily trading in FX markets increased to $6.6 trillion from $5.1 trillion three years prior. Trading in foreign exchange futures has expanded faster than spot trading, particularly in FX swaps.

• The US dollar continued to be the world’s most used currency, accounting for 88% of all trades. Trades involving the euro on one side increased to 32% of total trades. While the Japanese yen continued to be the third most commonly traded currency (on one side of 17% of all trades), its proportion of trades decreased by about 5 percentage points.

Currency distribution of OTC foreign exchange turnover

Reference: https://www.bis.org/statistics/rpfx19_fx.pdf#page=11

How to start Forex Trading as a beginner?

You might have gone through countless articles or this one would be your first. These basic terminologies set the perimeter of your knowledge domain. In time, as you progress through learning, implementing and expanding your skills, your out will depend upon pillars of how well you have understood the basics before starting so do not jump into trading in haste, take your time to learn and apply everything steadily and research for regulated forex trading broker. Remember, discipline and consistency is the key to successful trading. To set the pace, we are giving you a checklist of your first step towards learning forex trading as a beginner.

Types of Forex Trading Account

Now that you know the basics, it is important to understand the types of trading account and choose the one which suits your trading style. There are three or more types of account depending upon your broker:

• Standard Account
• ECN
• Pro-ECN
• Platinum

For beginners, the Standard account is good for them as they require less minimum deposit to start trading. Once you select your broker and register with it, you will go through the leverage that it offers as well as the margin. It enables you to control a currency Lots.

Understand what are trading “Lots”

Forex market trading is done in lots which comes in variety of sizes including: Standard, Mini. Micro and Nano.

Suppose you are getting access to a standard lot of currency which is $100,00 and if the leverage is 100:1 then it means that you would require a minimum capital of $1000.

Understand the double-edged sword called Leverage

Imagine that you possess $1000 and invest it into a currency pair, you decide to enter a buy transaction, also called going long. As you place the order the broker will give you a variety of leverage options. If you use a leverage level of 100:1, it means that your investment of $1000 is multiplied by 100 giving you total control of $100,000.  The subsequent profits and losses are calculated over this $100,000 which means you are exposed to higher profits and vice-versa.

[ Suggested read: What is forex trading and How does it work ]

Understand how currency is traded

Currencies are always traded in pairs. You buy one currency and sell another. The value of one currency can be taken as a reference and we can measure the value of other currencies on that reference.

Forex trading example!

We are taking two currencies here one is GBP- British Pound and another is USD-US dollar. Here is an important question to ask:

On the internet, we can see these currency pairs displayed as GBP/USD or GBPUSD or Cable. At the time of writing this article, the rate of GBP/USD is quoted as 1.1215. This means to buy one unit of GBP, you need $1.1189 USD. Here GBP is taken as a reference and in financial terms, the referenced currency is called Base currency and the currency we have associated with GBP i.e. USD is termed as the Quote currency, why? Because we require that much amount in order to purchase the base currency.

However, you must understand the bid and ask price which is closely related to the trade currency pair.

You will typically see a currency’s current price, Bid and Ask prices

GBP/USD= $1.1189

1.1188/1.1190

Pip: A pip represents a change in the exchange rate of a currency pair of one point in the fourth decimal place.

Spread: The difference between the Bid price and the Ask price. A small spread means high liquidity.

You must see both the ‘Bid ‘ and ‘Ask’ prices while trading Forex. When someone wants to sell a stock they will receive the Bid price, since, it is the highest price buyers are willing to offer for a currency pair. When someone wants to buy a stock they will receive the Ask price as it is the lowest price seller is willing to offer. These Bid-Ask pairs are updated in real-time.

Takeaway 

This is just the initial grooming for you to start forex trading journey. Soon, in our next article, we are going to explain all the scenarios, the software, and basic techniques for you to strengthen the fundamentals of trading.

Originally Published on WordPress
Source: https://capitalxtend992667378.wordpress.com/2022/10/10/forex-trading-for-beginners/