Basics of Forex Trading for a Beginner before Start Trading
The Forex market is a market for trading currency pairs. Currencies are always traded in pairs, such as EUR/USD, and traders establish positions based on their assumptions about price changes. The currency price changes in Points and traders use Points to establish trading positions.
FOREX stands for currency exchange and refers to the buying and selling of one currency in exchange for another currency. It is the most traded market in the world because people, companies, and countries are involved, and it is easy to enter the market without a large amount of capital. 1 When you travel and exchange US dollars for euros, you participate in the market global currency. At any time, the demand for a certain currency will push its value relative to other currencies up or down. Here are some basics of the foreign exchange market, so you can take the next step and start trading foreign exchange.
Basics of Currency Pairs
In the foreign exchange market, currencies are always traded in pairs. When you convert US dollars to euros, two currencies are involved, so the conversion always shows the value of one currency relative to the other. For example, the EUR/USD price lets you know how many U.S. dollars (USD) you need to buy one Euro (EUR). The foreign exchange market uses symbols to designate specific currency pairs. The Euro is symbolized by EUR and the U.S. dollar is USD, so the Euro/U.S. dollar pair is displayed as EUR/USD. Other commonly used currency symbols for transactions include AUD (Australian Dollar), GBP (British Pound), CHF (Swiss Franc), CAD (Canadian Dollar), NZD (New Zealand Dollar), and JPY (Japanese Yen). Every currency pair has a currency pair and a market price associated with it. Price refers to the quantity of the second currency required to buy a unit of the first currency. If the price of the EUR/USD currency pair is 1.3635, this means that the cost of buying 1 Euro is 1.3635 US dollars.
Know the Market Pricing
Learning currency trading involves understanding a few new terms that describe the price of a currency pair. Once you master the trick and know how to calculate your trading profit, you are one step closer to your first foreign exchange transaction.
Many currency pairs fluctuate between 50 and 100 points a day (sometimes more or less depending on general market conditions). Point (an acronym for Point in Percentage) is the name used to indicate the fourth digit after the decimal point in a currency pair, or the name used to indicate the second digit after the decimal point when the yen is in a currency pair. When the price of EUR/USD moves from 1.3600 to 1.3650, it moves 50 points; if you buy at 1.3600 and sell at 1.3650, you will get a profit of 50 points.
The profit you earn in the aforementioned notional transactions depends on the amount of currency you buy. If you buy 1,000 units (called micro lots) in US dollars and each point is worth 0.10 US dollars, then your profit is calculated as (50 points x 0.10 US dollars) = 5 US dollars, and the profit is 50 points. If you buy 10,000 units (mini lots), each pip is worth $1, so your profit will end up at $50. If you buy 100,000 units (standard lots), each point is worth $10, so your profit is $500.
The value of each point is called “point value”. For any currency pair in which the U.S. dollar ranks second, the above point value applies. If the U.S. dollar appears first, the pip value may be different. For example, to find the dollar/Swiss franc pip value, divide the normal pip value (mentioned above) by the current U.S. dollar/Swiss franc exchange rate. One micro-lot is worth 0.10 USD / 0.9435 = 0.1060 USD, where 0.9435 is the current price of the currency pair. For the JPY (USD / JPY) currency pair, follow the same process and then multiply by 100.
For Trading purposes, the first currency that appears in a currency pair is always the directional currency on the foreign exchange price chart. If the price rises against the euro/dollar, it means that the euro is higher relative to the dollar. If the price on the chart falls, the value of the euro relative to the dollar is falling. One of the best ways to understand foreign exchange is to observe price changes in real-time, and use accounts called paper-trading for some fake trading accounts (so you don’t have real financial risks). Some brokers provide simulated trading accounts based on online or mobile applications, which operate in exactly the same way as real trading accounts, but you do not need to take risks with your own funds. There are various simulators online to practice day trading and hone your foreign exchange trading strategies and skills.
Understanding the above concepts will help you understand what happens when you see a currency pair going up or down on the chart. Calculating the spread between two price points will also help you understand the potential profit of such changes.