Beginners Guide To Forex Trading

The forex market is one of the biggest markets in the world. It is also open 24 hours a day as currencies are traded all around the globe: this makes the turnover to be really huge. Trading on forex can be very profitable but on the same way it does carry lots of risks so it is important to get some basic education first if you are interested in this field. Below we have summarised some basic technical terms and concepts so that you can get a better understanding of how to trade with foreign exchange currencies.

 

forex currency graph

 

As you can see name of the currency are shorten to make them more practical into three letter acronyms. USD for example is the currency code for the US Dollar while GBP is the short for British pound and EUR for the Euro. It is important to take note of those codes so you will know which are the corresponding currencies when you see one.

There are around 12 main currencies around the world and those are the following: the Euro, the US Dollar, the British Pound, the Euro, the Japanese Yen, the Swiss Franc, the Australian and the Canadian Dollar. The most important thing that you need to know is that in forex those currencies are always being traded in pairs. So there will always be two currencies and the pairs that have the highest daily volume are the following:

  • EUR/USD
  • USD/JPY
  • GBP/USD
  • USD/CHF

For the commodities section the following have the highest volumes:

  • Gold
  • Silver
  • Oil

For the indices those have the highest volumes:

  • Dow Jones Industrial Average
  • Standard and Poor’s 500
  • NASDAQ

When you trading in forex but also in other financial instruments, profits and losses are measured by the number of pips that are acquired or lost. Those are also called basis points. In forex for example the pips are the values after the decimal point of a forex rate. When there is a change to the forex rate this will be equivalent to 1 pip. When you are looking at the value of a currency pair there will be a difference between the buying price or bid and the selling price also know as ask.

 

Forex graph

 

What is the leverage?

The leverage is the money that you have decided to borrow from your broker. It will be used to buy financial assets which can be currencies but also commodities, stocks and indices. This allow the initial deposit to be lower and that for every dollar that you put up you can trade the x of a major currency. Let’s say for example that you have a leverage of 1:400 that means that you can buy or sell a currency or another asset which is 400 times greater than the amount you have in your account.

When you are trading with forex candlesticks are the charts that are most commonly used and you can get several advantages by using them. If you take a look at the candlestick chart you can see that there is a thin vertical line that indicates the trading range. The wide bar on the vertical line, on the other hand, show the difference between the open and the close. In short the candlestick shows the value of an asset and also the volume traded at a specific period.

candlestick chart

 

There are a number of different type of orders that you can make to increase the likelihood of a profit and lower the risks. Below are some examples:

 

Market Orders – those are orders that you give to buy or sell a currency pair at the most current best price

Limit Orders – those are orders to buy or sell a currency pair at a determined price or when it is better than the said price

Take Profit Orders –this tell your broker to close the trade after your profit has reached a certain level.

Stop Loss Orders – this tell your broker to close your trade after your loss has reached a certain level.

Trailing Stop Orders – this tell the broker to close the trade with a sell order if you have entered a trade with a buy order. In this way you are telling the broker to close with a buy order if you have entered a trade with a sell order.

Despite trading on forex is very risky there are many ways that you can manage your risks and the best way is to find the method that will suit your trading style the best. It is however very important that you follow those risk management strategies very closely so that they can work effectively for you. Being emotional in trading could result in horrific losses so we strongly advice you come in with a proper strategy and stick to it before getting involved in the markets.