Forex is a very interesting part of finance and investing that anybody could get involved in. It takes a little bit of knowledge and understanding, but none of this information is inaccessible. It is all about knowing where to look. Or, as About.com would say:
If you are a beginner in forex trading, this is the place to start.
Some of the things you need to learn about include understanding what Forex is, why Forex trading is a good idea, how you can read a Forex quote, and many of the other jargon that you will come across in the world of currency trading.
First things First
You should always start with the basics and take the time to learn about them. You may read something and think it all makes sense and you fully grasp it, but it is best to decide to read everything again, or look up some more information before you actually give it a go. Remember that Forex trading is real, even if you do get to practice with demo accounts through some Forex platforms. So, make sure you really understand the basics first.
Trading the Foreign Exchange market involves a high degree of risk, including the risk of losing money. Any investment in foreign exchange should involve only risk capital and you should never trade with money that you cannot afford to lose.
How Does Forex Trading Work
Once you have come to understand the most important part of trading – the fact that you can lose all of your money – you are ready to really begin. Being realistic about the risk and only investing money that you can afford to lose, although you may not want to, is the best place to start. However, that doesn’t really teach you anything about the process of the trade itself. So, what exactly is the Forex market?
Currency trading is a 24-hour market that is only closed from Friday evening to Sunday evening, but the 24-hour trading sessions are misleading. There are three sessions that include the European, Asian and United States trading sessions. Although there is some overlap in the sessions, the main currencies in each market are traded mostly during those market hours. This means that certain currency pairs will have more volume during certain sessions. Traders who stay with pairs based on the dollar will find the most volume in the U.S. trading session.
The thing with Forex trading is that it all revolves around strategies. Strategies are tried and tested ways of moving money about on the Forex market, in the hope that you end up with more money than what you started with at the end of the day. Once you are a really advanced trader, you could think about developing your own strategies. However, most of them have already been tried and it is generally a better idea to stay on top of developments in existing strategies instead. Essentially, it is all about DEAL (description, entry and exit signals, application and leverage).
A positive result in the 4 items of the checklist is no guarantee the strategy will be profitable…nobody knows what the market is going to give in the next minute, let alone the next day, week or month. Therefore, the objective of the 4 point checklist is to properly identify and implement a forex automated strategy by utilizing appropriate leverage and performance expectations which results in higher probability trading.
One of the terms you will hear flying about quite regularly is “leverage”. Understanding the various terminologies with Forex trading is very important, because you won’t have time to look up what everything means once you are busy trading. The term leverage is probably one of the most important ones you will learn in this world, so make sure you get to grips with that one.
One key aspect of forex trading is the leverage involved. Many forex dealers offer 100:1* leverage, some dealers offer leverage as high as 400:1 (please note: The maximum leverage allowed in the US is 50:1). What this means is that for every dollar you put in you are actually controlling $100 dollars worth of currency. Currency pairs are traded in lots and the lots allow for you to take leveraged positions to speculate on the value of various currency pairs. There are typically 3 types of lots; standard lots, mini lots and micro lots.
Another one of those hugely important terms you will come across is pips.
A pip is the minimum incremental move a currency pair can make. Pip stands for price interest point. A move in the EUR/USD from 1.2545 to 1.2560 equals 15 pips. And a move in the USD/JPY from 112.05 to 113.10 equals 105 pips.
This means it is the pip that will tell you just how much you can earn if you’re lucky – or how much you can lose if you’re out of luck of course.
Bids and Ask Spreads
Last but not least, there are the bids and ask spreads. Once you have understood strategies, leverage, pips and bids and ask spreads, you should be ready to give it a go.
It is common for any currency pair to be quoted with both a bid and an ask price. The former, which is always a lower price than the ask, is the price at which a broker is ready and willing to buy, which is the price at which the trader should sell. The ask price, on the other hand, is the price at which the broker is ready and willing to sell, meaning the trader should jump at that price and buy.
You are now as ready as you will ever be to start trading on the Forex market. Make sure you take time to really learn. Most Forex trading platforms allow you to engage in dummy trades so you can learn what it is all about and you should try those out. Also make sure you take the time to learn about the various platforms.