Forex trading is the act of a person who simultaneously buys and sells two currencies. Forex trading is always carried out by currency pairs. The traders want to take advantage of exchange rate fluctuations. Multiple pairs are used for trading, like USD/EUR, USD/JPY, and others.
PAIR trading
In the currency pair USD/EUR, the first one, USD, is the base currency, and the second one, EUR, is the second currency, and it is also denoted as the quote currency (counter currency). The prices of pairs are set according to the base currency and the quote currency. For example, in the USD/EUR pair, the price is set as one unit against the quote currency. If USD/EUR is traded at $.99, it means $.99 USD is worth one Euro.
If a trader believes that in the future the prices of USD will increase relative to the quote currency, he will take a long position, and if the prices are weakening, he will consider selling the currency pair or taking a short position. The real objective of a trader is to make the right judgment for currency appreciation.
In forex trading, the most frequently traded pairs are major pairs, and these currencies have low volatility and high liquidity. In addition, these major pairs must include the U.S. dollar on one side.
Buy and sell currencies.
Traders bet on the value of one currency against another. The trading involves two prices, bid and ask. For example, if you are interested in EUR/USD, the bid price is 1.245, the asking price is 1.243, and the spread is 2 pips. Bid is the buying price, and ask is the selling price of the trading pair. The difference between the two, which is 0.2, is the spread. A pip is the smallest unit to calculate the price difference between two currencies.
Forex Broker.
The role of a forex broker is to act between the traders and the liquidity provider. You are not directly trading the currency pairs, but a broker can execute the trades you are interested in. If you want to do forex trading, always choose the licensed and regulated broker. Before transferring the money to a broker account, make sure he has a good reputation.
Margin & Leverage
Both terms are equally important and related to each other. For example, if you do not have sufficient funds to trade but use another person’s money and take a position without depositing the money. It is margin trading. But how does a person make money when the fluctuation only occurred in hundredths of a cent? The answer lies in how much leverage you may have. For example, if you are allowed to perform trading with 100:1 leverage, it means you will take a $1,000 position but keep only the $10 in your trading account. If the leverage ratio is changed, your margin is also changed.
Leverage trading is more profitable compared to spot trading, but keep in mind that if you make more money in leverage trading, you can also lose money very quickly. If you are new to forex, try to avoid a large position because most forex disasters happen because of extraordinary leverage trading.
Key factors for forex trading
- Learn the government’s monetary and fiscal policies.
- Learn about the national economic indicators.
- Learn about interest rates and central bank policies.
- The international balance of payments.
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