“Forex” means “foreign exchange” and refers to the buying or selling of one currency against another. It is the most traded market in the world as people, companies, and countries all participate in it, and it is an easily accessible market without the need for substantial capital. When you travel and exchange your US dollars for euros, you are participating in the global foreign exchange market.
Introduction
At any given time, the demand for a particular currency will push it either up or down in value compared to other currencies. Here are some basics about the currency market so you can take the next step and start trading forex.
Currency Pair Principles
Before entering your first trade, it’s important to familiarize yourself with currency pairs and what they mean. In the forex market, currencies are always traded in pairs. When you exchange US dollars for euros, there are two currencies involved, so the exchange always shows the value of one currency compared to the other. For example, the EUR/USD exchange rate tells you how many US dollars (USD) are needed to buy one euro (EUR).
Market Pricing: A Quick Overview
Learning to trade forex involves getting acquainted with a small amount of new terminology that describes currency pair prices. Once you understand these terms and how to calculate trade profit, you are one step closer to your first trade in the currency market.
Many currency pairs move about 50 to 100 pips a day (sometimes more or less depending on overall market conditions). A pip (short for “percentage in point”) is the fourth decimal place in a currency pair, or the second decimal place when the Japanese yen (JPY) is in the pair. When the EUR/USD price moves from 1.3600 to 1.3650, that means a movement of one pip; if you bought the pair at 1.3600 and sold it at 1.3650, you would make a profit of 50 pips.
The profit you achieved in the above theoretical trade depends on the amount of currency you bought. If you purchased 1,000 units in USD (called a “micro lot”), then each pip is worth $0.10, so you can calculate your profit as 50 pips × $0.10 = $5 for a profit of 50 pips. If you bought 10,000 units (“mini lot”), each pip is worth $1, so your profit would be $50. If you bought 100,000 units (“standard lot”), each pip is worth $10, so your profit would be $500.
The value of each pip is called “pip value”. For any pair where the USD is listed second, the pip values mentioned above apply. If the USD is listed first, the pip value may be different. To find the pip value in the USD/CHF pair, for example, divide the normal pip value (mentioned above) by the current USD/CHF exchange rate. A micro lot equals $0.10/0.9435 = $0.1060, where 0.9435 is the current price for the pair. For Japanese yen pairs (USD/JPY), use the same process and then multiply the result by 100.
For trading purposes, the first currency in the pair is always listed as the base currency on the forex price chart. If the price is rising on the EUR/USD pair, it means the euro is gaining value against the US dollar. If the price on the chart is falling, the euro is losing value compared to the dollar.
Frequently Asked Questions (FAQs)
When does the forex market open and close?
There are forex exchanges around the world, so forex is traded 24 hours a day throughout the week. The forex market opens at 5 PM EST on Sunday and closes at 5 PM EST on Friday.
What
What is “spread” in forex trading?
“Spread” usually refers to the difference between the ask price (buy) and the bid price (sell). Brokers keep a portion of this difference as a way to profit from the trades they help execute. The more liquid and stable a currency pair is, the smaller the spread. Conversely, pairs with little liquidity and stability will have a wider spread.
What is “scalping” in forex trading?
“Scalping” refers to a very short time frame for trading. It is a strategy that can be used in any market, whether it is forex, stocks, or commodities. Traders exit the position almost immediately after the trade becomes profitable. This typically takes a matter of minutes or a few seconds.
Source: https://www.thebalancemoney.com/what-is-forex-trading-1031015
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