The term forex means foreign exchange or currency exchange. The forex market or the foreign exchange market means a market where foreign currencies are exchanged. Forex trading involves trading in foreign currencies. Over 5 trillion dollars are traded daily on the forex market.
Forex trading is a great way to invest and make money when done correctly. You don’t have to make a large investment to be successful as a forex trader. This will be discussed further in another article. This particular article discusses the rudiments of forex trading to give you a glimpse of how the market works.
Base and quoted currency
The basis of retail forex trading involves the sale of one currency type in exchange for another currency. The currency that the trader is selling is referred to as the ‘Base Currency’ and the currency the trader buys is referred to as the ‘Quote Currency’.
The profit you will make out of the quote currency you sell varies. It depends on the exchange rates fluctuations. Learning how this exchange rate changes and what results in such fluctuations is the solution to trading forex successfully.
A crucial term about forex trading you need to know is ‘Long Position’. A ‘Long Position’ merely implies that you are purchasing the base currency and selling the quote currency. On the flipside, a ‘Short Position’ means the trader is selling the base currency and buying the quote currency.
How to choose the currency to trade
In the forex market, currencies are always quoted in pairs. There are a lot of factors that influence price movement of a currency pair. To succeed as a forex trader, you need to have a good knowledge of some of these factors and how they affect the market rate. An example of these factors is the condition of the country’s economy. When a country’s economy becomes weaker, the currency concurrently gets weaker in relation to other currencies in the market.
Political events may as well affect the price fluctuations of currencies. An imminent election for instance may cause an increase or decrease in the exchange rate of a particular currency. You need to follow up-to-date economic reports to have idea of what’s happening about the currency pair you want to trade to help you make a better trade decision.
Alternatively, traders can also use technical analysis, a means of predicting price movements between traded pairs based on historical prices.
Price changes in pips
The next fundamental of trading forex you need to learn is how to estimate your gain or loss. Currency price changes are estimated in pips. A pip is one ten-thousands of a unit. For instance, if the initial price was 1.32 and the price reduced by 10 pips, then the current price will be 1.22. To convert the change in pip to a real profit or loss, multiply the change in pip with the current exchange rate. When you do that, it will give you either an increase or decrease of the amount of money you have in your account.
To trade forex online, you need to have an account with a broker. Choosing a good broker is the key to succeeding as a forex trader among other things.
How pips changes work
- AUDUSD pair moves from 0.7530 to 0.7513 means the the Australian Dollar has depreciated 17 pips against the US Dollar since the Australian Dollar is the base currency
- USDJPY pair moves from 110.50 to 110.30 means the Japanese Yen has appreciated 20 pips against the US Dollar since the US Dollar is the base currency
- GBPUSD pair moves from 1.3025 to 1.365 means the The British Pound has appreciated 40 pips against the US Dollar since the British Pound is the base currency