Are you an inspiring trader trying to wrap your head around the idea of Forex trading? Well, at the beginning of your trading career it might be a little confusing on how it works. People who jump-start at the trading career without adequate knowledge usually leave empty handed and disappointed. Before you rush and do anything here is a description of Forex trading and how it works.
What is forex trading ?
The Forex is a foreign exchange market that acts as a global currency market. The concept of Forex trading involves selling currency to buy another. The currencies are quoted regarding pairs that showcase which currency is going to be sold or purchased. The individual currencies are listed in their three letter codes that usually stand for the letters of the country. An example of a currency pair would be USD/CHF that involves the conversion of the US dollar with the Swiss Franc.
Quote currency and Base Currency
The primary currency that listed within the Forex pair is referred as the base currency. The other is the quote currency. The price of the Forex pair is described as how much a unit of base currency amounts the quote currency.
Therefore, in our example, the USD is our base currency while the CHF is our quote currency. If the USD/CHF is trading at 1.24576, then a dollar is worth 1.24576 Franc. When the dollar rises against the franc, then the dollar will become more deserving than the Franc making the pairs price to increase in value.
How does forex trading work ?
Like various forms of speculation, Forex trading involves buying one currency at a particular price and later on selling it at a higher rate to gain a profit.
The currency value is usually measured by how much another currency can buy it. This is referred as the price quote. There are two prices for a price quote- the ask and bid. The bid is used in selling and the amount of buying.
Trading is done concerning the exchange rates. Exchange rates usually fluctuate due to factors such as industrial production, geopolitical events or inflation. The rates may change rapidly, at times it only takes a second to switch from one value to another. Practically, there’s a lot of action going on through 24 hours of a day. The health of a countries economy determines the currency exchange rates. When the Eurozone economy is better than US, then the Euro will increase against the dollar.
The spread refers to the difference between the sell and buy prices of a particular Forex pair. Like most financial markets, when you look forward toward opening your forex position you are going to be presented with two different prices- the buy and sell. When opening a long position, your trading will take place at the buy price while the short position is at the selling price. The sell price is a bit below the market price while the buy price is above.
The movement involved in the decrease or increase of the Forex pair is measured in pips. One pip is equal to a digit movement of the currency pair in its fourth decimal place. However, an exception is placed in this rule when quote currency is in a smaller denomination. In such a situation, the movement into a second decimal place is referred as a single pip.
How about when you don’t want to commit a lot of capital? Leverage gives you the opportunity to get an exposure of larger currency amounts without having to commit high capital. As we had explained, a single pip has minimal movement. Forex pairs are very volatile and have minimal increments. Therefore, a trader should take advantage of utilizing leverage or trade large batches.
Trading with leverage sounds like an excellent idea. It gives you an opportunity to trade with much more money than you have in the account. You can increase the chances of making more significant amounts of money; however, it also increases the risk of losses.
If you are looking forward towards succeeding in Forex trading, you should ensure that you tackle your emotions. Keep up a strict trading plan and journal that will assist in tracking your progress.