Foreign Exchange
Disclaimer: Note, The contents of this website are for personal research purposes only. They are not intended to be investment advice or a recommendation to buy or sell any security. You should consult with a financial professional before making any investment decisions.
What do you mean by foreign exchange? The process of exchanging one currency for another is known as foreign exchange (FOREX). The primary reason for foreign exchange trading is to conduct a fair and efficient financial transaction.
How does foreign exchange work? A trader can swap Euro for British Pounds in trading foreign exchange. Currency price are exchanged on the foreign exchange market or simply called the forex market.
The forex market is a highly liquid financial market with a daily volume estimated to be about 6.6 trillion dollars.
The forex market is a global network that comprises individual retail forex traders, investment funds, corporations, central banks of each country, commercial banks, hedge funds, and government.
Contents
What is Forex Trading?
Currency pairs are paired and traded in pairs, and the foreign currency exchange rates for each pair are determined in the global marketplace. The Euro is pegged to the US dollar (EUR/USD), the British Pound is pegged to the US dollar (GBP/USD), and so on. Each currency pair is represented by a three-letter code.
Prices of these foreign currencies are associated with each pair, if the price associated with EURUSD is 1.1025, this means it will cost 1.1025 USD to 1 EUR. If the price associated with EURUSD increases, it indicates the rise of EUR and the fall of USD.
Subsequently, if this price falls, it indicates the fall of EUR and the rise of USD.
The meaning of forex trading is achieved by buying and/ or selling one currency over the other in the forex market because of the strength of a particular currency.
The forex market is a decentralized market or as it is simply called the over-the-counter (OTC) market. The stock market differs from forex market (a foreign exchange reserves).
How to Read a Currency Quote
A forex trader must know how to read quotes of these foreign currencies when paired together. Forex trades are placed with respect to these quotes. In the foreign exchange markets, quotes are important.
The first currency that is named in a pair is called the base currency
The second currency named in a pair is called quote currency
For example,
EUR/USD
EUR is the base currency, and USD is the quote currency.
If EURUSD is trading at 1.1025 and you think the Euro will strengthen against the USD, then you go ahead to buy the trade ( GO LONG).
If you think Euro will weaken against the USD, then you sell the trade ( GO SHORT)
What is Leverage in Forex Trading?
When you deposit as low as $50 to a broker and you can successfully place a trade in the financial markets. Then, you are only trading based on the leverage given to you by this online broker.
Leverage in forex trading enables you to trade with a small initial investment. As much as leverage in forex trading can increase your profits, it can also increase your losses.
When trading with leverage, you have to learn how to manage risk very well. Managing risks differs from one trading strategy to another- swing traders would employ a different risk management compared to beginner traders. Technical traders have different indicators used for managing trades that enables a high reward.
What is Margin in Forex Trading?
Margin also plays a major role in leverage.
Margin is the initial deposit made available for your trading account as well as the positions of trades held. Trading decisions are made as regards the margin of a trading account.
What is a Pip in Forex Trading?
A pip is the fourth decimal place of a currency pair
If EUR/USD has moved from 1.1025 to 1.1030,
This implies that 5 pips have been moved upwards.
A pipette is a fraction of a pip
For smaller currency pair denominations, a pip is the second decimal place. Such as it is seen in USD/JPY
USD/JPY having 110.115 prices moved to 110.125 indicates a movement of just 1 pip upwards.
What is the Spread in Forex Trading?
Both bid price and ask price make up the price of a currency pair.
Ask price is used when you are buying a trade
Bid price is used when you are selling a trade
ASK = BUY
BID = SELL
Therefore, the difference between the ask price and the bid price is known as the spread.
What is a Lot in Forex Trading?
A standard lot is 100,000 units of currency
The mini lot is 10,000 units of currency
The micro lot is 1,000 units of currency
Currencies are traded in lots.
Forex Trading For Beginners
Beginners forex trading is required for in-depth knowledge of everything that forex entails, as well as how to make money as a retail trader.
Every 9 out of 10 retail traders lose money.
Only 1 out of every 10 traders make a consistent and sustaining profit in the financial market.
What does it take this 1 out of 10 traders to succeed in the forex business?
You have to learn from an expert who has the experience and can relate the trading skills to a beginner in the best way possible.
The foreign exchange market opens 24 hours a day, 5 days a week.
Currencies are bought or sold almost all day long.
The Forex Market
The 3 major types of the forex market are:
- Spot Market: This involves the physical exchange of currencies over the counter at an exact point where the trade takes place.
- Forward Forex Market: This is based on contract traded over the counter that is intended to take place at a specified price, and settled on a specific date.
- Futures Forex Market: This is done on an exchange to either buy or sell an asset at a specific price band date in the future.
With the advent of technology, online trading has become more accessible and affordable. Hence, the spot market is widely acceptable, most preferred, and popular.
Price is determined by supply and demand, economic news, interest rates, and political news.
Forex Trading App
The basic forex trading app or trading software where forex is being traded are the MT4 and MT5 mobile apps.
Tradingview is also a platform where traders can plot a good chart to enhance a good trading skill but it is never a platform to trade forex. But is used for training and to enable a better view of the market structure.
Best Forex Trading Platform
The beginner forex trading platform is an essential training platform for every beginner in forex trading.
Our forex trading platforms provide training and mentorship for free. You can join us today to learn and get the best daily free forex signals from our trading platform.
Forex Trading Scam
Because of the liquidity in the forex market, scammers are really taking advantage of this to swindle novices and beginners alike. Forex trading in Nigeria has been worrisome and difficult to break even for traders because of a lack of in-depth knowledge of trading forex.
Have you ever been told to trade forex with robots? Market participants look for massive profit in their day trading.
You can not make money trading forex with robots. How do you make money trading forex? You have to plan long-term, a step at a time, while learning your way up the success ladder. Forex is not only meant for professional traders. Do not believe the myths that forex brokers would scam you while trying to be a professional trader. Individual traders must first learn and practice the mastery of trading forex like a pro.
Forex Trading Example
The EUR/USD broke a weekly high and you took advantage to buy the trade for about 20 pips risking a minimum of 10 pips.
This is taking a 1:2 risk-reward ratio
If you use a lot size of 0.01, you get $2 if your trade hits target
If your trade hits stop loss, then you have a deficient of $1
Start off trading the major pairs and improve your trading strategy before trading the exotic pairs.
Forex Trading Frequently Asked Questions (FAQs)
Q: Is forex trading profitable?
A: Forex trading is profitable for every trader who has learned what it takes to enter and exit a trade. If you want to make money trading forex, you must be disciplined.
Conclusion
In this article, you learned the fundamental concepts of forex trading.
If you want to begin your forex trading journey, we would be delighted to accompany you.
Feel free to reach us and we promise to make the journey a successful one.
Disclaimer: Note, The contents of this website are for personal research purposes only. They are not intended to be investment advice or a recommendation to buy or sell any security. You should consult with a financial professional before making any investment decisions.
