Trading 101: Everything You Need to Know About Forex
Forex, also known as Currency, Foreign Exchange or FX trading is $4 trillion a day global market. In it, traders from across the globe, comprising the biggest financial institutions to private individuals invest in the strengthening of one currency versus another currency. (Currency prices are effected by economic events, trader sentiment, geo-political actions and of course; changes to Supply and Demand. Forex trading has become popular as it is suitable for technical and fundamental traders, as well as short and long term investors.
How to Trade Forex
Forex trading instruments are comprised of Trading Pairs. The most commonly traded Forex pair is the EUR/USD EUR is the Euro, & USD is the US Dollar). When trading Forex, you trade the change in value of one currency versus another.
In our example of the EUR/USD if the price is 1.30, that means that the value of €1 = $1.30 (this is also known as the exchange rate). If the rate rises to 1.3100, than the Euro has strengthened against the Dollar as €1 is now worth $1.31. Traders who bought the EURUSD when the price was 1.30 will have profited as the price rose to 1.31.
If a trader believes that the Dollar will strengthen against the Euro, than they believe that the EURUSD exchange rate will drop. Such a trader would sell the EURUSD and profit when the EURUSD drops to 1.29.
Prices of the exchange rate will rise and fall based on supply and demand for each currency. To measure supply and demand, Forex traders can use Fundamental and Technical analysis. Fundamental analysis includes economic reports like employment figures, central bank policies, and inflation data (more on Fundamental analysis). These news releases reveal the health of a country's economy and can determine whether demand will rise for its currency. Technical analysis includes indicators and mathematical formulas that measure when a Forex pair is experiencing an increase of demand or supply (more on Technical analysis).
Basic Forex termsListed below are some of the key terms used in Forex and CFD/Share trading
PIPA Pip is the "Percentage in Point" (PIP), sometimes also referred to as "Point". It is equal to the minimum price increase of a Forex trading rate. The most common Pip is 0.0001.
ASK RATEThe ask rate is the price you can buy a currency at. It is also the lowest price at which a seller agrees to sell a financial asset.
BID PRICEThe bid price is the price you can sell a currency at. The market is willing to pay you this price for this particular currency.
SPREADSSpread are the difference between bid price and ask price.
CURRENCY RATEA currency rate against another currency rate.
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In order to help you learn Forex trading, we offer several education and training programs. Once you grasp the basics of currency trading online and have tried your hands on our demo account, you should be ready to go!