What is Forex?
Forex (FX) is a word combination of “foreign currency and exchange”.Foreign exchange is the process of one currency to another while the forex market is the global marketplace for exchanging national currencies.
It is the world’s largest and most liquid asset market due to the worldwide reach of trade, commerce, and finance.
For instance, EUR/GBP is the currency pair for trading the euro against the British pound.
How to start trading forex?
1. Learn about forex
You need to fully understand first what forex really is before you start trading. There are a lot of online courses available for beginners that would teach you every thing that you need to know.
2. Develop a trading strategy
Once you fully understood the concepts and how the market works, you now need to develop your trading strategy. It will help you to set broad guidelines for your trading journey. A good strategy should be developed based on the reality of your situation and finances, taking into account the amount of cash that you are willing to give up and the amount of risk that you can tolerate without getting burned out.
3. Set up a brokerage account
In order to trade, you will be needing a forex trading account. For beginners, it would be a good move to set up a micro forex trading account with low capital requirements. It has variable trading limits, allowing brokers to limit their trades to amount as low as 1,000 units of a currency.
4. Select a currency pair
Most new traders are starting out by trading the most commonly offered currency pairs, including EUR/USD, EUR/CHF, and AUD/JPY.
5. Read the quote
When trading forex, you will always buy once currency and sell the other at the same time.
For instance, a quote for EUR/GBP may look like this:
In this pair, EUR is called the base currency and USD is known as the quote or terms.
The first rate (0.85150) is the price at which you can sell the currency duo, and the second rate (0.85200) is the price at which you can buy it.
The difference between the first and second rate called the spread or pips. It is the amount that brokerage charges to the trader for making the trade, and it varies among dealers.
6. Pick your position
BUY: With a buy position, a trader believes that the value of the base currency would increase against the quote currency.
For example, in buying EUR/GBP, an investor thinks that the price of the euro will strengthen (bullish) against the pound (bearish).
SELL: With a sell position, a trader believes that the value of the base currency would decline in comparison to the quote.
For instance, in selling EUR/GBP, a market participant thinks that the price of the euro will weaken (bearish) in comparison to the pound (bullish).
Entering a buy position:
The current price for EUR/GBP is 0.85060/120. For a buy position, the entered price would be 0.850120.
For instance, a trader would look at his position later in the day. Now, the EUR/GBP is at 0.853320/340. This means that the trade has gained 32 pips. If the trader closed his position at the current sell price of 0.853320, he would take a profit.
Entering a sell position
At this point, since a trader is making a selling position, he entered at the price of 0.85060.
Later in the day, the price of EUR/GBP turned to 0.85332/340. It means that a trader has lost 272 pips. Once the position was closed at the buy price of 0.85340, the trader lost and would not take a profit.