Learn About Forex Trading
To better understand what foreign exchange (or forex for short) trading is, you should first know that the average daily volume on the forex market amounts to over $2.3 trillion. It is by far the largest market in the world, dwarfing all the world's stock and bond markets.
Why is it so popular?
There are several major reasons for forex's popularity, including the available leverage, high liquidity (the ease with which something can be bought or sold), round the clock accessibility (see Forex Market Times) and very low dealing expenses.
In the past, investing in forex market was the prerogative of big professionals and large corporations, such as funds, banks and brokers. Today however, with the advent of technological enhancements and the appearance of the Internet, forex market has put on a entirely different face, allowing anyone with sufficient knowledge of the market's functions to benefit from its advantages.
What are Base and Quote currencies?
When starting to learn forex trading, the first thing you ought to know is that currencies are always traded in pairs. The first currency is called the 'base' currency and the second 'quote' currency. Furthermore, some novice traders have trouble grasping the basic idea of simultaneous selling and buying of currencies. In other words, looking at the following representation, EUR/USD 1.2500, we should understand that one euro is equal to 1.25 US dollars. We want to buy the base currency, which is EUR in our case, in quote currency, which is USD.
In the forex market, currency quotes are always changing, which is a sign of strengthening or weakening of the currencies in relation to one another. For example, if the same EUR/USD quote moves from 1.2500 to 1.2490, it means that the euro is getting weaker while the dollar is getting stronger.
What is a margin trading?
One of the unique features of the forex market is that it is traded on margin. What it means is that a trader is not required to deposit a large sum of money only to be able to trade large market. Instead, by depositing a relatively small sum, a trader can qualify for larger positions in the market. For example, when an investment firm requires a 1% margin deposit, it means that in order to trade one million dollars, a trader must place only $10,000 to secure this position.
It translates into the profit/loss numbers as follows: if a change of 2% occurs in the underlying value of your trade, it will result in a 200% profit or loss on your original deposit.
What is a Spread?
The spread is the difference in price at which a base currency can be bought (bid) and sold (ask). This means that if the spread is 3 points (pips) and EUR/USD 1.7780-83, you can buy Euro at 1.7783 and sell at 1.7780 without any additional costs, commissions or fees. For other examples of spreads, see our Forex Trading News page.
What is a stop-loss?
By now, you have probably realized from our introduction to learning forex trading that this practice involves great opportunities, but also great risks. Fortunately, in forex trading there is what we call a stop-loss order which a trader can place and which will sell a currency when it reaches a certain price. This is done in order to prevent large losses on a trader's position.
Continue to: Forex Market Information