Forex Trading Basics

If you are looking for a financial market where you can invest and maximize profits quickly, then Forex should definitely be on top of your list. Today Forex is the hottest trading ground for investors. It enjoys a daily turnover of over $3.2 trillion which is expected to rise to $4 trillion by the end of 2013.

Unlike the traditional equity markets like stocks and bonds, Forex is decentralized and open 24/7 and 5 days a week for trade. Round the clock trades enable traders to participate in buying and selling of currencies freely without any time limitations and tap on trading opportunities whenever possible.

However, buying and selling of currencies is not as simple as bonds. In fact in this aspect, FX is much more similar to stocks as trading of FX and stocks is carried in a volatile market which has a high degree of risk but at the same time if wise decisions are made, you can enjoy juicy profits and easily multiply your investment money.
To make intelligent trading decisions you need to learn to strategize. To strategize flawlessly, first you need to have a good understanding of the Forex ground, such as factors that influence the value of currencies, when to buy and sell, how to interpret trade and what tools to use.

Before you get started with Forex trades, first you must learn the basics:

Basic Instruments

The basic trade instruments of the FX arena are currency pairs. The trader selects a currency pair and then speculates the strength of one currency value against the other. If the speculation is spot on, the trader is in the money and enjoys a profitable transaction. The most commonly traded pairs in foreign exchange include USD/CAD, GBP/USD, USD/JPY, AUD/USD and EUR/USD. They generate a total of 85% trade volume of the FX market.

Pair Interpretation

For novice traders it’s important to understand pair interpretation. Each pair comprises of two currencies. The first in the pair is called the base and the second is known as the quote/counter. The pair is expressed in units of the quote currency. Let’s take a look at an example to understand the interpretation of the currencies better. For example if the quote of EUR/USD is 1.2587 then this means to acquire one EUR you need 1.2587 units of US dollar.

Bid and Ask

Bid and ask are the two common terms used in the Foreign exchange. You will quote FX pairs at bid or ask price. The bid price is always lower than the ask value. But the real question is what do these terms actually mean? The bid price is the value at which the buyer is willing to pay for the base currency whereas ask is the value at which the seller is willing to sell the base currency.

Spread

The difference between the ask and bid price is known as the spread. In FX brokers don’t charge commission on trades in fact they make money from spreads. Spread can be either fixed or floating. Like the name suggests, the fixed spread remains constant regardless of the market conditions while the floating spread changes accordingly as per the prevailing conditions. Floating spread is offered as a range. If the market is busy, traders enjoy a spread towards the lower range whereas if its low, then the spread is towards the higher range.

New traders should go for fixed spread instead of floating as fixed remains the same. So, even if you suffer from a loss, you don’t have to bear a high spread.

Fundamentals of Forex Trading

To speculate the movement of the FX values accurately, you must keep abreast of all those factors that influence or impact the value of money directly or indirectly. This includes macroeconomic factors, monetary policy, interest rate levels, political and geographical factors. The best way to stay updated is to read FX trading news on a daily basis.

Create a Demo Account Before You Start Live Trading

For beginners it is advisable to create a demo account before you put your real money at stake. Through a demo account you can enjoy risk free trades in a stimulated environment and learn basic strategies. It is a good way to gear yourself for live Forex trading.

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Risk warning: Trading binary options, CFD or other leveraged products carries a high degree of risk. Be aware that you can lose even more than the capital you invested. Only trade with money that you can afford to lose. This site is purely informational and cannot replace getting professional advice before trading for real money.