Trading on Forex (the global currency trading market) is an activity that allows traders to buy and sell foreign currencies. How do we start trading Forex? To do Forex trading, or any other financial market, a Forex trader needs a Forex broker. A Forex broker allows the trader to develop in the currency market and foreign exchange trading. To start trading Forex, simply open a trading account with your favorite online broker. The trading broker will provide you with a trading platform that includes all the elements you will need to trade Forex and many other tools:
- Quotations (prices) of currency pairs
- Charts of currency pairs
- Graphical analysis tools
- Interface for placing market orders
What is Forex trading? Forex trading is speculation on fluctuations and changes in currency prices, up and down, by buying when prices rise and selling when they fall. When currency prices rise and fall, the Forex trader seeks to take advantage of these movements to make money by buying and selling one currency at the expense of another, in the form of a currency pair.
Example, if a trader expects the euro to rise against the dollar, he will buy EURUSD. Conversely, if a Forex trader believes that the Euro will fall, he sells the same currency pair. A profit is recorded when the trader has predicted price movements well, while a loss is incurred if the trader is wrong in his analysis and forecasts.
Forex recommendations to buy and sell are made on the basis of fundamental analysis and/or technical analysis, which we will see more about later in this article. Forex trading remains one of the riskiest forms of investment. The activity can be very profitable, but you have to learn how to trade and control risks.
Trading on Forex and basic forex trading terminology
Knowing the vocabulary used by investors and Forex brokers will not make you a successful trader, but it is necessary to know it in order to become a trader in the beginning. Here are some of the most important Forex basics:
- Currency pairs: It is the correlation of currencies in the form of one currency pair against another. The trader either sells or buys the pair according to the decrease or increase in the price of the pair, because the value of the currency rises and falls relative to other currencies.
- Reading the currency pair: If the EUR/USD pair is equal to 1.1000, this means that 1 euro is equal to 1.10 dollars.
- Base currency: It is the currency listed on the left side of the currency pair. It is the currency that a forex trader buys and sells. It is EUR in EUR/USD pair.
- Spread: This is the difference between the buying and selling price of a Forex pair, expressed in pips. This is the cost paid to open a Forex trade.
- Pips (Pips): This is a Forex pip and the smallest change in a currency pair’s quote, which is the fourth decimal place. When the EUR/USD pair goes from 1.1000 to 1.11001, it rises by 1 pip.
- Leverage: Increasing the investment capacity of the trader. In Forex trading, you can spend a small amount of money to invest more in the markets. Leverage causes increased gains but also losses.
- Contract/Lot Size: A lot is a unit of measurement for the size of a Forex trading transaction. In Forex, 1 lot corresponds to 100,000 units of the base currency (EUR, USD, GBP…). There are mini lots (0.1 lot) and micro lots (0.01 lots), of 10,000 and 1,000 units respectively.
Trading on Forex and the advantages of trading in the Forex market
Forex trading has a number of advantages:
- The Forex market is open 24 hours a day, from Sunday to Friday. Ability to trade outside normal business hours and at night.
- The Forex market is the largest market in terms of trading volume in the world, and provides high liquidity. Thus, it is easy to open and close trades and enter the market quickly.
- High leverage is available in this market. Forex brokers offer different leverages. It is very important for a trader to master leverage, because it increases gains, as well as risks.
- Low barriers to entry forex trading deals. Unlike the stock market, which requires a lot of capital, forex trading can be done online starting from $200.
- Forex trading is accessible. Anyone willing to devote the time and energy to learning trading can start trading with an Internet connection and a computer.
- Currency trading is a “macroeconomic” trade. If you love economics and have an understanding of how economies evolve, Forex is the market you need to trade. Some traders find it easier to interpret the movements of currency pairs than other financial instruments.
- Because the Forex market is so large, it is almost impossible to manipulate it.
- Traders should choose a reliable and licensed broker to carry out trading operations.
Forex trading risks
The disadvantages of trading in the Forex market are not many, but it is very important to remember them, because we must not forget that in this market we can lose our capital. The main risk of Forex trading is the inappropriate use of leverage. Using too much leverage certainly results in higher profits but so does loss.
Trading on Forex between profits and losses
Forex prices fluctuate constantly, and the trader places trades by buying or selling a pair of foreign currencies.
For example, by buying EUR/USD at 1.1000, and rising to 1.1050, the trader collects 50 pips (minus the spread). The reward for each point in profits depends on the number of contracts (lots) purchased.
On the other hand, if the same EUR/USD transaction falls to 1.0950, the Forex trader loses 50 pips (plus the spread). The same logic is repeated for selling any currency pair. The Mini Terminal of the MetaTrader 5 Supreme Edition trading software calculates the pip value and margin before opening any trade.
