Foreign exchange, more commonly referred to as Forex, is the selling and buying of currencies in exchange with other currencies. It is the largest trading market globally. This is because countries, businesses, and people participate in forex trading.
It is easy to commence forex trading because all you need is little capital to start. Sometimes, people even participate in forex exchange without knowing it. For example, when you’re on vacation and convert your monies to that of another country you are taking part in foreign exchange.
In forex trading, you will always find a currency’s value being pushed either down or up. The following are some forex basics to get you started.
Currency Pairs Outline
Before commencing with your first-ever trade, you need to get conversant with currency pairs. Here are some of the key points you should take note of:
- As earlier stated, currencies in the forex market trade-in twos. For example, if you want to exchange euros for dollars, you have two currencies involved. The USD/EUR price tells you how many euros it will take to purchase a (USD) U.S. dollar.
- In forex, particular currency pairs are designated by symbols. For example, AUD (Australian Dollar), JPY (Japanese Yen), NZD (New Zealand Dollar), CAD (Canadian Dollar), CHF (Swiss Franc), and GBP (Great Britain Pound).
- All forex pairs have market prices that are associated with them. This means the amount the secondary currency will take to purchase a unit of that first currency. For example, if the USD/EUR is 1.4746, it means that you’ll need 1.4746 euros to purchase a dollar.
Tip: If you’d like to know how many USD you’ll need to purchase a euro, flip that pair to EUR/USD. Then, device 1 by 1.4746 (or whatever that current rate will be). Using this example, the result is 0.67815. This means you will need 0.6782 to buy one euro.
An overview of Market Pricing
Here, you will get to hear a different terminology (pip) as is used in the forex market. The term is used to describe currency pairs’ prices. The moment you understand how you can calculate trade profit, you will be a step closer to a successful first trade.
Pip (point in percentage) is a name used in indicating the 4th decimal place in currency pair. In the JPY, it is used to describe the 2nd decimal place. Most exchange pairs move about fifty to a hundred pips daily. This depends on the whole market conditions. When a USD/EUR moves to 1.4750 from 1.4700, it is said to have moved 50 pips. That way, you’ll have made a 50 pip profit.
Note: The best way you can learn about forex is by finding out how prices move in real-time. You can try out demo accounts (that way, you won’t incur any actual financial risks). Many forex accounts offer mobile and online-app-based trading accounts’ simulators.
How does Currency Trading Work?
Currency trading is a round-the-clock market. It does not open from Friday to Sunday evenings. Even so, the 24hr trading sessions tend to be deceptive. There are 3 sessions including the United States, Asian, and European trading sessions.
Even though there are sessions that overlap, the main currencies in all markets mostly trade in the assigned market hours. This is to means, that there are currency pairs that will have larger volumes in some sessions.
What changes currencies?
Many stock traders take interest in forex because the forces moving the stock market are the same forces moving the currency market. Supply and demand are among the largest. For example, when there is a global need for dollars, the dollar value will go up. When many dollars are circulating, prices go down. There are also other factors such as interest rates, which affect the prices of currencies.
Much like all things in the world of investing, learning about forex trading is not difficult. The tough part comes in when you’re trying to find a winning strategy for trading. This will take more than one try to get it right.
Most forex brokers have dummy accounts you can use to familiarize yourself with the real thing. Most of these demo accounts enable you to trade using virtual money. That way, you have time to find trading strategies using oscillators.