Trading foreign exchange on the currency market, also called trading forex, can be a thrilling hobby and a great source of investment income. To put it into perspective, the securities market trades about $22.4 billion per day; the forex market trades about $5 trillion per day. You can make a lot of money without putting too much into your original investment, and predicting the direction of the market can be a real rush. You can trade forex online in multiple ways.
This article consists of three parts:
- Learning Forex Trading Basics (You are on this page)
- Opening an Online Forex Brokerage Account
- Starting Trading
Part 1 of 3: Learning Forex Trading Basics
A. Understand basic forex terminology.
- The type of currency you are spending, or getting rid of, is the base currency.The currency that you are purchasing is called quote currency. In forex trading, you sell 1 type of currency to purchase another type.
- The exchange rate tells you how much you have to spend in quote currency to purchase base currency. For example, if you want to purchase some U.S. dollars using British pounds, you may see an exchange rate that looks like this: GBP/USD=1.589. This rate means that you’ll spend 1.589 dollars for 1 British pound.
- A long position means that you want to buy the base currency and sell the quote currency. In our example above, you would want to sell U.S. dollars to purchase British pounds.
- A short position means that you want to buy quote currency and sell base currency. In other words, you would spend sell British pounds and purchase U.S. dollars.
- The bid price is the price at which your broker is willing to buy base currency in exchange for quote currency. The bid is the best price at which you are willing to sell your quote currency on the market.
- The ask price, or the offer price, is the price at which your broker will sell base currency in exchange for quote currency. The ask price is the best available price at which you are willing to buy from the market.
- A spread is the difference between the bid price and the ask price.
B. Read a forex quote. You’ll see two numbers on a forex quote: the bid price on the left and the ask price on the right.
- Make predictions about the economy. If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, then you probably want to sell dollars in exchange for a currency from a country where the economy is strong.
- Look at a country’s trading position. If a country has many goods that are in demand, then the country will likely export many goods to make money. This trading advantage will boost the country’s economy, thus boosting the value of its currency.
- Consider politics. If a country is having an election, then the country’s currency will appreciate if the winner of the election has a fiscally responsible agenda. Also, if the government of a country loosens regulations for economic growth, the currency is likely to increase in value.
- Read economic reports. Reports on a country’s GDP, for instance, or reports about other economic factors like employment and inflation, will have an effect on the value of the country’s currency.
D. Learn how to calculate profits.
- A pip measures the change in value between 2 currencies. Usually, 1 pip equals 0.0001 of a change in value. For example, if your EUR/USD trade moves from 1.546 to 1.547, your currency value has increased by 10 pip.
- Multiply the number of pips that your account has changed by the exchange rate. This calculation will tell you how much your account has increased or decreased in value.
Continued: How to Trade Forex in Layman’s Term (Part 2 of 3: Opening an Online Forex Brokerage Account)
See my article documenting my own experience first hand in the Forex Trading world! See it here.
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