Basic Introduction To Forex Trading

Forex Trading is nothing more than the direct access to trading different types of foreign currencies. A few years ago, foreign exchange trading was mostly limited to large banks and institutional traders. But today, technological advancements have made it so that traders with small capital for as low as $100 can take advantage of the many benefits of forex trading just by using the various online trading platforms offered by reputable international forex broker.

In forex trading, the currencies of the world are on a floating exchange rate, and they are always traded in pairs. And about 85 percent of all daily transactions involve trading of the major currencies.

So I’m sure you know that there are hundreds of currencies out there as each countries have thier own currencies. But of all the currencies in the world, only the The United States Dollar (USD), The Euro (EUR), The pound sterling (GBP), The franc (CHF), The yen (JPY), The Canadian dollar (CAD), The Australian dollar (AUD) and The New Zealand dollar (NZD) are the ones that are with interest to the majority of currency traders for their speculative purposes because of their volatility and dynamics. This is the reason why they are called the “Eight (8) Major Currencies”. These major currencies when combined and paired with each other forms a total of “Twenty-Eight” (28) currency pairs to trade with and they are as follows:

Forex Pairs

  • AUD/CAD – In this currency pair, the item or the product is the The Australian dollar (AUD) and if you want to BUY or SELL AUD, it will be priced in terms of The Canadian dollar (CAD).
  • AUD/CHF – Same goes with this pair. The item or product you are buying or selling is the The Australian dollar (AUD) and its price is expressed in The franc (CHF).
  • AUD/JPY – Basically, the idea is the same for this pair. The Australian dollar (AUD) is the item or the product you wish to buy or sell and its corresponding price is expressed in yen (JPY).
  • AUD/NZD – The Australian dollar (AUD) is the item or the product you wish to buy or sell and its corresponding price is expressed in New Zealand dollar (NZD).
  • AUD/USD – In this pair, the Australian dollar (AUD) is the item or the product you wish to buy or sell and its corresponding price is expressed in The United States Dollar (USD).
  • CAD/CHF – The Canadian dollar (CAD) is the BASE CURRENCY (the item/product you wish to buy or sell) and The franc (CHF) is the QUOTE CURRENCY (the price of the item/product).

So basically, the idea of forex trading is that; if you think one currency will appreciate against the other currency being paired with, then you may exchange that second currency (also called the “Quoted” currency) for the first one (which is also called the “Base” currency) and be able to stay in it and hold it. So in case you are right and everything goes as you predicted, you may be able to make the opposite deal in that you can exchange this first currency back for that other and profits from its exchange rate difference.

forex charts
A typical forex chart of the EURUSD on the upper left, USDJPY in the upper right, USDCHF on the lower left and the GBPJPY on the lower right screenshot.

Typical Trade Example

Lets do some practical example so you further get the idea. So lets say that upon checking the latest US news online, you notice that the economy of the US is not that great right now and the latest news for EURO is actually a good news for the economy. So you look at the Forex chart on your broker’s trading platform and you see that the current price for EURO is at 1.12346 if you want to BUY and 1.12333 if you want to SELL.

Now based on the information you have read about the US economy and the EURO news, you now have the reason to believe that the price of EURO might go up to 1.30000 in the next couple of hours.

So you’re now SPECULATING. And you want to BUY EURO against the USD (EUR/USD) at the current market price of $1.12346.. If you’re speculation is correct and the price of EURUSD indeed went up to $1.30000, you will be gaining 0.17654 points. (This is the price difference of subtracting your current buy price of 1.12346 to your target price of 1.30000)

Still referring to our example; if you do not close your trade and the price keeps going up above $1.30000, then you will continue to gain the price difference. But if you close your trade at $1.30000 then you have profited 0.17654 points from your market buy price of 1.12346 earlier.

  • $1.12346 – the price of EURO in terms of USD when you BUY it at the current market price.
  • $1.30000 – the price you believe EURUSD will go up in a couple of hours based on your speculation about the information you believe in.
  • $1.30000 – $1.12346 = $0.17654 is the price difference which you gain (or lose if you’re prediction is wrong). This Price difference Is expressed in POINTS. (also called a PIP)

Your Actual Earnings based on Volume

Now that you have an idea how you will be able to profit in Forex trading in terms of POINTS or PIPS, you might be asking, how does this $0.17654 points relates to my actual earnings? And the answer to that has to do with your TRADE SIZE also called VOLUME. Remember that before you can actually BUY or SELL a currency pair, you must choose a desired volume or trade size.

In forex trading, the trade size or volume will depend on your ACCOUNT LEVERAGE which will be set by your forex broker when you register your trading account with them. And the minimum trade size or volume that you can use is 1 MicroLot (0.01 lot). And depending on your ACCOUNT MARGIN, you can increase your trade size or volume in multiples of 1 MicroLot (0.01 lot).

  • 1 MicroLot  – 0.01 lot or 1,000 units of currency you want to buy or sell.
  • 1 MiniLot  – 0.10 lot. (10 MicroLots) or 10,000 units of currency you want to buy or sell.
  • 1 Standard Lot – 1.00 lot. (10 MiniLots or 100 MicroLots) or 100,000 units of currency you want to buy or sell.

So going back to our example, you already gained $0.17654 points right?

If you used a volume of 1 MicroLot (assuming your ACCOUNT MARGIN will allow you to open a 1 MicroLot), you are essentially saying you want to buy 1,000 units of EURO at the current market price of $1.12346 and since the price went up to $1.30000 as you predicted, so you profited $176.54 USD ($1.30000 – $1.12346 = $0.17654 X 1,000 units)

If however, you used a volume of 1 MiniLot (assuming your ACCOUNT MARGIN will allow you open a 1 MiniLot ), you are essentially saying you want to buy 10,000 units of EURO at the current market price of $1.12346 and since the price went up to $1.30000 as you predicted, so you profited $1,765.40 USD ($1.30000 – $1.12346 = $0.17654 X 10,000 units)

now, if you used a volume of 1 Standard Lot (assuming your ACCOUNT MARGIN will allow you open a 1 Standard Lot), you are essentially saying you want to buy 100,000 units of EURO at the current market price of $1.12346 and since the price went up to $1.30000 as you predicted, so you profited $17,654.00 USD ($1.30000 – $1.12346 = $0.17654 X 100,000 units)

So now you know that your actual profit or losses is based on the amount of volume you use. The less volume you use, the lower the PROFIT or LOSSES. the more volume volume you use, the higher the PROFIT or LOSSES.

More on forex trading

Forex trading is a necessary part for the world economy to prosper. Transactions on the FOREX market are performed by dealers at major banks around the world thru a FOREX brokerage company. So just remember that every time you are sleeping in the comfort of your bed wherever you are in the world; note that, people around the world conducts forex trading as dealers in Europe are trading currencies with their Asian counterparts and so as the US dealers are trading currencies with European dealers and vice versa to facilitate transactions.

Therefore, it is reasonable for you to believe that the FOREX market is active 24 hours a day and dealers at major institutions are working 24/7 in three different shifts. Clients may place take-profit and stop-loss orders with brokers for overnight execution. And price movements on the FOREX market are very smooth and without gaps (except when there’s major risk events over the weekend) that you face almost every morning on the stock market.

Indeed, the FOREX market never stops. The currency market is the largest and oldest financial market in the world. It is also called the foreign exchange market, or the FX market for short. It is the biggest and most liquid market in the world which according to the Triennial Central Bank Survey of foreign exchange, the daily turnover on the FOREX market is averaged somewhere around $5.1 trillion per day as of April 2016, so a new investor can enter and exit positions without any problems.

Because its such a huge market, when you compare the forex market against other markets, you will see that the currency futures market for example is only one per cent as big. And unlike the futures and stock markets, trading currencies is not centered on an exchange. Trading is conducted in whats called the Over The Counter (OTC) ie., it moves from major banking centers within the U.S down to Australia and New Zealand and into the Far East, to Europe and finally back to the U.S. Non-Stop!

In the past, the forex inter-bank market was not available to small speculators because of the large minimum transaction sizes and strict financial requirements. Banks, major currency dealers and sometimes even very large speculator were the principal dealers. Only they were able to take advantage of the currency market’s fantastic liquidity and strong trending nature of many of the world’s primary currency exchange rates.

Today, foreign exchange market brokers are able to break down the larger sized inter-bank units, and offer small traders like you and me the opportunity to buy or sell any number of these smaller units. These brokers give any size trader, including individual speculators or smaller companies, the option to trade at the same rates and price movements as the big players who once dominated the forex market.

As you can see, the foreign exchange market has come a long way. Being successful at it can be intimidating and difficult when you are new to the game. So if you want to step into this market, first thing you do is get the right knowledge and educate yourself until you feel ready to jump in.

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MagForex has been actively trading currencies since 2008 and up until today, he is still very passionate about it.