What Is Forex?
Forex which simply means ‘Foreign Exchange’ is a decentralized global market where currencies are traded. The forex market constitutes of buying, selling and exchange of currencies at a current price. The forex market is a very large market as it is a $5 trillion a day market.
Opportunities in Forex Trading
There is a huge opportunity in the forex market as getting a fraction of the volume traded can make can be very profitable. Also, such opportunity can’t be seen in other types of investment. In forex trading, all you do is determine if the market would go up or down and if you’re correct you make your profit easily. For instance, if an information is passed that a country would be devaluing their currency (let’s say currency X), probably to draw more foreign business to their country and in your opinion you feel the currency is going to devalue against another currency (let’s say currency Y) and you decide to sell currency X against currency Y. If currency X devalues against Y, then you’re in profit. The more it devalues, the more profit you make, but if currency X increases against currency Y then you will be losing money and you should want to get out of the trade.
Basic Forex Terminologies
Before doing anything, knowing the terminologies used in that field is very important as it would enable get less confused and prevent you from getting stuck at one point or the other. Here are a few basic forex terminologies you should know:
- Quote Currency – This is the currency you’re purchasing.
- Base Currency – This is the currency you’re spending.
- Exchange Rate – This tells you how much quote currency you need to be able to purchase the base currency.
- Long Position – This means you want to buy the base currency and sell the quote currency.
- Short Position – This means you want to buy the quote currency and sell the base currency.
- Bid Price – This is the price in which you broker would be willing to buy the base currency in exchange for the quote currency.
- Ask Price – This is also known as ‘offer price’. It is the price in which the broker is willing to sell the base price in exchange for the quoted price.
- Spread – This is the difference between the bid and the asking price.
- pip – This is a way in which the change of value between two currencies is measured.
- Margin – This is when the investor takes a short-term loan from the broker. This loan equals the amount of leverage the investor is taking.
- Leverage – This a scenario whereby a certain amount needed to be invested is borrowed from the broker by the investor.
How to Trade Forex
- Open a forex trading account
- Fund the account
- Place orders –
- Market orders – Here you instruct your broker to execute your trade (buy/sell) at the current market price.
- Limit orders – Here you instruct your broker to execute your trade at a pre-determined price.
- Stop orders – Here you choose to execute a trade above or below the current market price to cut losses.
- Monitor your trade – After placing trades, what’s left to do is for you to watch how your trades are going. Take Profits where necessary and cut losses where necessary.