Foreign exchange forex trading is buying or selling one currency in exchange for another, in an attempt to extract a profit from the price movements. All currency trades involve two currencies, and trades are facilitated by a forex broker. Currency markets are open hours a day during the week, which is an advantage over the stock market which is only open for a portion of each week day. This makes it an attractive option for new traders starting out with limited capital leverage increases the "buying power" of the trader's capital. That trading, there are also risks that forex traders need to be aware of, as well some basic information they should know before starting. These articles provide an overview of these crucial basics, including what a currency pair is, currency pair symbols, trading hours, position sizing and pip values, how profits are made, leverage, capital requirements for trading, forex brokers and trading fees. Any forex trade actually involves two currencies. If you are going on a trip to Europe, you take your US dollars and exchange them euros. That's a currency transaction—exchanging one currency for another. Forex traders do fear same thing, except they are attempting to profit from changes in the prices of the currencies. Currencies are always quoted fear to one another, called a pair. There will be a price associated with the currency pairand that price will constantly change. For example, if the price is 1. If the rate was 1. The most heavily traded currency pairs in the world are associated with the US dollar and other major global currencies, including the Japanese yen symbol: JPYBritish pound GBPAustralian dollar AUDNew Zealand dollar NZDEuro EURSwiss Franc CHF and the Canadian dollar CAD. Whatever order the currency pair is in reflects how much the second currency costs relative to one unit of the first, as mentioned above. To see how much it costs of the first currency to buy one unit of the second, flip the signs and then divide 1 by the price. All other global currencies also have symbols. Any symbol can be combined with another symbol to create a pair. That pair will then have a price forex on how much of one currency it costs to buy the other. The forex market is open hours during the week, this is because there is always a global market open somewhere in the world. This process continues throughout the week until the US market and all markets in the same time zone closes for business on Friday. This means for US traders, there is continuous trading from Sunday night to Friday afternoon. Because of the various global time zones and the hour market, traders often use GMT time. Major global markets include Sydney, Tokyo, London New York. Sydney opens at Note these times will change by one hour due to daylight savings time. Currency pairs move in increments called pips. A pip is the fourth decimal place in the price of a currency pair. For example, in 1. If the price moves up to 1. Currency pairs are often quoted to five pips. The fifth decimal place is a fraction of a pip. Forex example, if the price moves from 1. Looking at all these numbers can get a bit confusing, but with practice, it becomes much easier to monitor these numbers, especially with the help of a forex price chart. In pairs that involve the JPY, a pip is represented by the second decimal place. For example, if the price moves from The third decimal place, which is often provided, shows fractional pip movements. Pips matter because pip movements determine profits and losses discussed next. One of the major determinants of those profits and losses is the position size. This is called the pip fear. Unfortunately, these pip values only apply when the USD is the second currency in the pair. For pairs that don't involved the USD, or where the USD is listed first, the pip value will change as the price of the currency pair fluctuates. Pip values can also vary based on the currency deposited into the account since buying a currency pair with yet another foreign currency means there are multiple transactions occurring. For a full rundown on pip values, see Calculating Pip Values. Trading forex takes into account all that we have learned so far. We can buy or sell a currency pairand whether that price moves in our favor will determine if we make or lose money. Most forex traders use price charts to help determine which trades they will take. The first currency in the pair is the "directional currency" on the chart. If the EUR is expected to rise relative to the USD, the price on the chart will rise. If the EUR is forex, the chart will show the pair falling. They buy one mini lot of that currency 10, The price does rise to 1. If instead the price dropped and the trader closed out the position with a loss at 1. For more examples of profit potential see How Much Money Can I Make Day Trading Forex. Forex prices are quoted with a bid and ask price. The bid is the price you can sell at right now. The ask is the price you can buy at right now. The difference between the bid and ask is called the spread. A large spread is typical of currency pairs that aren't popular or that move a lot each day. Paying a spread is a cost. Forex traders use a number of tools and strategies to help them decide when to get into trades, when to cut losses and when to take profits. Gains and losses are magnified with the use of leverage. Leverage fear borrowing money from the broker to increase the amount of capital available for trading. Let's use the same example as before. That is much less than the leveraged trader. Leverage magnifies gains and losses. It allows traders, who are winning, to build their capital quickly. The downside is that when losing, leverage will erode capital very quickly. See How Much Forex Leverage? We now have enough information to start formulating how much capital we need to trade forex. We forex all the above information because it helps to define our risk and profit potential. Trading traders should not risk more than 2 percent on any single trade. Day traders should be risking 1 percent or less. Risk, in this case, is measured as the distance between the entry point and stop loss level where a losing trade is closed outin pips. This is multiplied by the pip value and trading position size to attain the dollars at risk on the trade. That amount should be less than 1 percent of the account balance. This is the absolute minimum required for this risk level. These sample calculations can be used to determine how much capital is required for the specific forex strategy you are researching. Every currency has a home, and those homes countries or zones have different economic climates. Interest rates differ across the world and currency traders take part in this. If you buy euros and place those euros in a European bank, you will get a different interest rate than if you buy New Zealand dollars and place them in a New Zealand bank. While forex brokers don't typically charge interest on leverage discussed aboveeach night forex traders are debited or credited interest based on their currency positions. If the trade was held all year, theoretically the trader would make 2. Over the course of the year, the negative interest rate will cost fear trader approximately 2. Note though, that interest rates are subject to change throughout the year. If a trader is leveraged these interest differentials will be magnified. This trade requires at least Also, keep in mind that the price of the actual currency is always fluctuating. There are forex brokers all over the world. Since the forex market is not highly regulated in certain regions, there are plenty of unscrupulous and ill-run brokers out there. When searching for a forex broker one of the primary things to look for is regulation and longevity. Ideally, the broker should be regulated in a major market such and the US, Great Britain, Canada, Australia, Japan or New Zealand, to name a few. Brokers with a long track record are preferred over new brokers, as there are always new brokers popping up and many disappear just as quickly. Also, consider what you are personally looking for from a forex broker. Some traders are more concerned with fees and trading costs, while others are more concerned with customer support. One major consideration when choosing a broker is the fees they charge. Most brokers do charge a spread though discussed above. Typically the forex the spread the better. Many brokers only charge the spread, but don't have any other fees. Other brokers may charge a commission, but if they trading the spread is usually much smaller. Day traders are typically better off paying the small commission for the reduced spreads, while swing traders and long-term traders should be able to do fine with a typical broker that has slightly larger spreads but no commissions. Commissions and spreads vary by broker. Compare them, along with other criteria to find a broker that works for you. There is a lot to learn about forex trading. This is just the tip of the iceberg. Dig deeper into each one of these sections to learn more. Before trading real capital open a demo account and trade some fake money. It is one of the best ways to interact with the market and learn, without risking any real capital. Search the site GO. Forex Trading Basics Getting Started Fundamental Analysis Technical Analysis Advanced Trading Forex FAQs. Updated May 20, The forex industry is not heavily trading and provides high leverage. UP NEXT in Forex Trading. 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How To DEAL WITH FEAR And Other Emotions In Your Forex Trading
How To DEAL WITH FEAR And Other Emotions In Your Forex Trading
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