For new Forex traders, everything may seem highly unfamiliar and overwhelming. A good grasp of the fundamentals will help a trader to go about navigating confidently. Essentially, Forex trading involves the purchase and selling of one currency against another in pairs for profit based on price movements. Whether trading as a hobby or desiring to take up the profession professionally, obtaining an understanding of the basics is essential to moving ahead.
Forex trading on the basic level is an understanding of currency pairs. Every trade will involve two currencies: a base currency and a quote currency. The base currency is the first in the pair and the quote currency the second. So in the pair EUR/USD, EUR is the base currency and USD the quote currency. For instance, if the price stands at 1.2000, then this interprets to mean that one euro can buy 1.20 US dollars. Major, minor, and exotic are some of the common classifications for currency pairs. The most traded currency pairs with GBP/USD and EUR/USD are classified usually as major and often stable and liquid in nature.
Another essential concept which should be known is that of a bid and ask price. The bid price is how much a buyer is willing to pay for the pair and how much a seller asks for it, while the ask price is how much a seller asks for it. The difference between the two prices is called spread, one way for the brokers to profit from the exchange. Narrow spread is normally found in the most liquid pairs, that’s why many traders usually prefer the major pairs, for example EUR/USD.
The other big thing to remember in Forex trading is leverage. This helps you control a much larger position with a smaller amount of money. For instance, if you have 100:1 leverage, you can control a $100,000 position with just $1,000 of your own money. While it’s true that leverage provides spectacular profit potential, it also risks huge losses, so proper use should be dangerous and at risk.
The last most vital thing to learn to be effective in Forex trading is that of the difference between technical and fundamental analysis. Technical analysis is a study of historical price movements with the help of charts and indicators in order to make sense of patterns that are likely to prevail in the near future. Popular technical analysis tools include moving averages, the Relative Strength Index (RSI), and candlestick patterns. It is based on studying the economic factors influencing the value of currency, changes in interest rates, inflation, and all those sorts of geopolitics.
Probably the most critical aspect of profitable Forex trading is proper risk control and management. One of the most common tools of most traders for the purpose of risk management is the stop-loss order-a tool that closes your position automatically at a predetermined price in case the market shifts against you. Always risk only a small fraction of your capital on any given trade.
Knowing these are the basics, you will be able to begin trading within the Forex market. Remember that Forex trading is a game of patience and discipline. Do not dive into the game with real money without taking your time to learn and practice. The more you know and put these basic principles to use, the more prepared you’ll be for whatever comes your way within the markets.
