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When you are a beginner in forex trading, it can be wise to equip yourself with as much knowledge and understanding of what the forex market is, how the forex market works and how to trade forex online.
Forex Market Introduction
The forex market is by far the most popular of all financial markets and the largest in terms of daily trading volume compared to other markets. There is over $6.8 trillion in daily turnover, providing plenty of liquidity, flexibility and potential trading opportunities. Forex is short for “foreign exchange” which is the exchange of one country’s currency for the currency of another. The world is vast global market where countries exchange goods and services which are commonly paid for in different currencies. At least, for now, there is no single universal currency, and as such one must be exchanged for another when such international trades occur. However, we are increasingly seeing innovative payment solutions such as Cryptocurrency being introduced. Yet, they are nowhere near the level of traditional currencies.
The international exchanges of various currencies happen at rates which are called “exchange rates”. These rates are continuously fluctuating in value, thereby presenting opportunities to speculate on the varying prices via forex trading. Advancements in technology have also made it possible to speculate on these constant fluctuations via the internet, using a computer, laptop or mobile devices such as smartphones. All you need is a forex trading platform and forex broker to process your trades.
Online Forex Trading
When trading forex online, you are not exchanging one currency for another physically. You do not have to physically see or touch the currencies as all of the trading is conducted online. Instead, you are just trying to anticipate the price fluctuations as mentioned above. Thus, in reality, you are actually trading the frequent changes in the price of forex quotes. Whilst these price variations can present opportunities for successful trades, they are equally risky as you can lose all of your capital speculating on them.
Basic Forex Trading Terms
As a beginner in forex trading, there are some common terminologies that you should try to be familiar with, and these include:
In the forex market, one currency is exchanged for another and currencies are put together in pairs. Thus, you can see currency pairs such as the GBP/USD. In this instance, the GBP is being exchanged for the USD, or vice-versa. There are endless such currency pairings in the forex market, but some of the most popular forex currency pairs are EUR/USD, GBP/USD, USD/JPY, amongst others. These are known as “major currency pairs”. The first currency in forex pairs is known as the Base Currency, whilst the second currency is referred to as the Quote Currency.
Not to be confuses with the Quote Currency, this is the market price of the currency pair. If you try and think of a currency exchange transaction just like any other buy/sell transaction that you would conduct in the market. The market price of a currency pair will usually consist of 2 figures: the bid price and the ask price. So, for instance, when you see a EUR/USD quote, you see something like 1.3200/1.3202. Here, 1.3200 is the bid price, and 1.3202 is the ask price.
- Bid Price: This is also known as the selling price. Therefore, the bid price is the price at which you can sell the base currency. In the EUR/USD example above, you could sell the EUR at 1.3200 USD.
- Ask Price: This is also known as the offer/buying price. Therefore, the ask price is the price at which you can buy the base currency. In the above example, you can buy the EUR at 1.3202.
The spread is the difference in pips between the bid price and the ask price. In the above example, you can see that the bid price is 1.3200 whilst the ask price is 1.3202. There is a difference between them of 2-pips which is the spread. The spread is what forex brokers charge for each trade. Some will also include a commission on top of the spread. Generally speaking, the lower the brokers spreads and commissions, the more you could save on trading costs in the long term. Some scalping strategies actually require tight spreads.
A pip is the price change that can occur in an exchange rate. For instance, if the EUR/USD exchange rate is 1.3200, and it moves to 1.3201, we have a 1-pip move. If the price changes to 1.3499, we also have a 1-pip move, just in the opposite direction.
Forex is usually traded in position sizes that are called lots or contracts. In forex, one standard contract is equal to 100,000 units of a currency. A mini lot has 10,000 units while a micro lot has 1,000 currency units. The minimum contract size that is available to trade can depend on the forex broker.
Margin is the minimum amount that is needed to be able to open a trade or maintain an ongoing one. There is “used margin,” which is the amount of margin used to maintain open trades, and “free margin” which is available to open new ones. Traders needs to be careful to not use up all their margin as this can lead to a margin call and loss of capital.
Physical forex trading requires large sums of money up front, creating a high barrier of entry to many aspiring traders. However, with online forex trading, this high barrier has been lowered with what is called leverage. In a nutshell, leverage involves your broker allowing you to trade with a position size larger than you would usually have been able to without leverage. E.g. If you had an account balance of $1,000 and 1:5 leverage, you could trade a position size of $5,000. Whilst this can increase position size, it can also amplify potential losses. Thus, it is very important to have a clear understanding of what leverage is, how it works and the significant risks involved before trading online.
The demo account is a type of trading account provided by most brokers, which is funded with virtual money that allows you to practice trading online without the risks. Beginners can use a forex demo account to practice various trading strategies and familiarise themselves with trading platforms. As a beginner, you may wish to trade with a demo account for a considerable amount of time, at least till you are confident, consistent and trading successfully.
Forex Trading Education
Learning to trade the forex market can seem like a daunting experience at first, but it is very important. For instance, lack of forex education is considered to be one of the primary reasons why the majority of new trader’s encounter losses and give up. However, there are a huge amount of educational materials available online, including forex trading courses, videos, eBooks and more. Some are paid while others are freely available across blogs, forums and directly from forex brokers. You can learn in a way that suits your style and schedule, but it is important that you go through the learning process in order to familiarise yourself with how forex trading works in order to prepare yourself before trading online.
The Forex Broker is your connection to the world of forex trading online. The broker provides you with a trading platform from which you can analyse and place trades in the forex market. There is a plethora of forex brokers out there. Some are considered better than others, but many factors can help you select a broker that meets your specific needs. I would personally want the broker to be regulated by reputable financial authorities; other factors worth considering include tight spreads, low commissions, rapid trade execution speeds, user-friendly trading platforms, free trading tools, educational resources, account funding options, trading instruments and excellent customer service.
Forex trading can be an enjoyable although there will always be risks involved, especially if a trader does not educate themselves.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.