What is Forex Trading? A Beginner’s Guide

The foreign exchange market is what Forex stands for. Forex trading is also called FX trading, currency trading, and foreign exchange trading. All of these terms can be used interchangeably in the financial world. The global Forex market is not like a stock exchange like the New York Stock Exchange (NYSE). Instead, it is a decentralized market. Most foreign exchange deals happen over the counter or off-exchange. Stocks are traded on physical public exchanges, but Forex currencies don’t have a place where they are kept. Online Forex Trading is mostly conducted on the internet through a broker.

In the foreign exchange market, the biggest players are big banks, governments, large corporations, and hedge funds. These organizations have the power to make big changes in the forex market. These are also called institutional players in the market. But there are also quite a few people who trade on the market on their own. People like these are called the retail crowd.

A retail crowd is a varied group. This could be a consumer who wants to buy something from another country, a traveler who wants to go abroad, a company doing business in another country, or an investor or trader who wants to take advantage of price changes on the Forex market. Now that we know who the buyers and sellers are, let’s move on to how Forex trading works.

How Does Trading Work in Forex Industry?

Foreign Exchange Trading is the exchange of one currency for another. Typically, money is exchanged for a good or service. In stock trading, money is exchanged for firm shares. When we trade on the Forex market, we swap one currency unit for another currency unit. The United States Dollar (USD), the Euro (EUR), and the British Pound (GBP) are three of the most frequently traded currencies. The Japanese Yen (JPY), the Canadian Dollar (CAD), and the Australian Dollar are also prominent currencies (AUD).

Forex traders interact through a structured group of dealers and computer networks that serve as market makers for their own consumers. Orders are placed for currency pairs (or pairs of currency that you plan to swap). Different exchange rates are connected with certain currency pairs, which is where arbitrage comes in.

For instance, if the EUR/USD exchange rate is 1.1150, it indicates that 1 Euro can be obtained for every 1.1150 US dollars.

How to Profit from Forex Currency Trading?

Like in any business, you make money when you buy something for less and sell it for more. The same rules apply to trading FX. The difference is that you aren’t buying and selling physical goods, but rather currencies.

If one of these two things happens, you can make money trading currencies on the Forex market: If you bought or sold a currency pair and its value went up, you would have made money. If you sold or borrowed a currency pair and its value went down, you lost money.

The exchange rate is affected by a number of important factors. The monetary policy of the central bank, economic data, political events, and geopolitical risk events are all important, but in the end, it all comes down to price action.

How to Trade Forex for Beginners?

Understanding how currencies are quoted and what exchange rates signify is the fundamental building block of trading on the foreign exchange market. All currencies on the Forex market are quoted in pairs. Therefore, Forex trading requires the simultaneous purchase of one currency against the exchange of another currency.

Characteristics of the Foreign Exchange Market

The most important thing about the Foreign Exchange Market is that it’s open 24 hours a day, Monday through Friday, except for weekends. When you trade around the clock, you can trade from anywhere and not have to worry about time. This means that you can trade even after you get home from work.

Start-up capital for online forex trading can be as low as $100. In addition, the costs are far lower than other asset classes, such as stock trading. Liquidity is one of the most important characteristics of the foreign exchange market. This will provide stable exchange rates because its volume exceeds $6,6 trillion. Second, you can rapidly open and close transactions with no slippage.

Leverage is the most alluring aspect of foreign currency trading. Leverage allows you to trade with larger sums of money than your initial deposit. For instance, if your preferred forex broker offers a 1:50 leverage, you can control $50 on the FX market for every $1 in your account.

Basic Forex Market Terms

The first step in learning a new foreign language is mastering the alphabet. The Forex market, which has its own alphabet and vocabulary, is comparable. It is essential to master this new language in order to comprehend the industry.

1.Currency Pair

Forex prices are given in currency pairs, which match one currency unit against another. Each currency is also shortened to three letters.

For example, the currency pair EUR/USD is made up of the euro and the US dollar. The euro, which is the first currency in the system, is called the “base currency.” The second currency in the quotation system is the US Dollar, which is called the quote currency or counter currency.

2. The Rate of Exchange – The Quote

The exchange rate is the price at which one currency can be bought or sold for another. The price quote tells you how much of the quote currency you need to buy one unit of the base currency.

Since currencies are always quoted in pairs, the value of one currency is always given in relation to another. The supply and demand law tells us what the exchange rate is.

3. Pip

The smallest price change that a currency exchange rate can make is called a pip, which stands for Price Interest Point (or Percentage in Point). The last decimal of a Forex quote represents a pip.

For instance, if the EUR/USD exchange rate is 1.1500 today and 1.1580 tomorrow, we can say that the EUR/USD exchange rate has increased 80 pips.

4. Ask price

A two-price quotation system is used for understanding currency pairs. Due to this, there are two prices when you open the order window. The Ask price, or the price at which you buy a currency pair, is displayed on the right side.

For instance, if the EUR/USD quote shows the following rates: 1.1520/1.1521, you have the option to purchase the currency at the price of 1.1521.

5. Bid

The “Bid price,” also known as the “price you need to pay if you want to sell a currency pair,” is listed on the left-hand side of the two-price quote system.

For instance, if the EUR/USD quote shows the following rates: 1.1520/1.1521, you are able to sell at the price of 1.1520.

6. Spread

The spread is the amount by which the price at which you buy (Ask) differs from the price at which you sell (Bid). The magnitude of the Forex spread is typically determined by the liquidity and volatility of the market.

7. Margin

Online Forex trading does not require the whole amount to trade. Margin is the amount deposited in a small fraction (percentage ) of your trading size which covers possible losses. The broker you choose to trade with provides you with a certain multiple of that margin, which works in conjunction with leverage.

For instance, if you want to buy $10,000 worth of EUR/USD and your broker offers you the leverage of 1:50, it means that you will only need to set aside $500 in order to complete the transaction. So, if you put down $500, you can trade as if you had put down $10,000.

Type of Currency Trading Pairs

Depending on how much trading a currency does, we can put it into one of three main groups:

Major Currency Pairs: These are all the currencies that are traded against the US Dollar, which is the world’s reserve currency. For instance, EUR/USD, GBP/USD, and USD/PY. The major pairs have the most liquidity, and EUR/USD is the pair with the most liquidity.

Minor Currency Pairs: Also referred to as cross pairs, these currency pairs do not trade against the US Dollar and are considered to be of lower importance. Examples include the euro versus the pound sterling and the euro versus the Swiss franc. They provide a lower level of trading liquidity.

Exotic Currency Pairs: Also known as minor currency pairs are currency combinations that are linked to developing economies located all over the world. Examples of such currencies include the South African Rand, the Brazilian Real, and the Turkish Lira.

Understanding and Reading Forex Quotes

The standard quotation system uses a three-letter abbreviation system and always involves two currencies: the base currency on the left and the quote currency on the right. The quoted price shows how much Quote currency is needed to buy/sell one Base currency.

How to Place Orders When Trading Forex

A Forex Order is, in general, a command that is given to your broker and demonstrates the following information:

1. What pair of currencies to buy or sell.
2. How you’re going to trade (Long or Short).
3. Price to buy or sell.
4. Where to take a Profit.
5. How to get out of a place.
6. how many units (lots) to buy or sell.
7. Type of order

A Forex Order can be used to do two things in terms of direction:

Buy (Long): We use a buy order that is executed at the Ask price and closed at the Bid price if we think the currency pair will go up.

Sell (Short): We use a sell order executed at the Bid price and closed at the Ask price if we think the currency pair will go down.

There are five common types of orders that anyone can use to enter or exit the Forex market:

1. Market orders
2. Limit order
3. Stop order
4. A Stop-loss order
5. Take profit order

How to Make Your First Trade in Forex

The first thing you need to do is open a demo account with the Forex broker you like best. This will let you trade on the Forex market from a trading platform.

Once you gain the idea of entering and exiting the market through practicing on a demo account, you can open a real forex trading account. There are different types of accounts that a broker offers, you can choose the account that is best suited for you.

Best Forex Trading Platform for Beginners

MetaTrader4, which was made by MetaQuotes Software, is the best forex trading platform for beginners. Millions of retail Forex traders around the world use the MT4 platform, which is one of the most popular Forex trading platforms. Its features can be used by both seasoned forex traders and those who have never done it before.

MetaTrader 4 is free, and it has a lot of built-in features. There are a lot of different technical indicators that can help you figure out how to read a Forex price chart. You can also use MT4 to build your own automated trading strategy and test any trading ideas you might have.

Conclusion

Trading on the foreign exchange market follows the same fundamental processes as trading on any other market. Attempting to generate a profit by buying at a low price and selling at a high price. The foreign exchange market is distinguished from other markets in that it offers a variety of trading opportunities that are not available in other markets. Because of this, the foreign exchange market is an excellent choice for beginning traders who are interested in either supplementing their income or starting a trading career full-time.

Originally Published on shortkro

Source: https://shortkro.com/what-is-forex-trading-a-beginners-guide/