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Basics of Forex trading

What is Forex?

The Foreign exchange market, better known as forex is the world’s largest financial market with a daily turnover of $4 trillion. Currencies are bought and sold in the forex market and are traded in pairs. The most popular forex trading centers are located in Tokyo, London, New York and Hong Kong. The branch in London claims over 40% of the total global currency traded. Majority of the trading are carried out in New York, London, Australia, Singapore, Tokyo and Canada.

Who can trade?

The market participants in the forex market are majorly commercial banks, central banks and hedge funds. However, with the vast use of technology and the internet, the internet has opened the forex market to individual traders and small retail traders. All you need is a computer with internet connection and starting capital of $1 to get you started with trading forex.

Trading Currencies

The forex market is open 24 hours a day, five days in a trading week. Which give traders the opportunity to trade at any time.

Compared to the stock market, the forex market doesn’t have a physical location and can be carried out through electronic network of forex brokers and banks.

The forex currency symbols are represented by three letters. For example:

  • American Dollar (USD) also known as Greenback
  • Swiss Franc (CHF) also known as Swissy
  • Canadian dollar (CAD) also known as Loonie
  • British Pound (GBP) also known as Sterling
  • Australian dollar (AUD) also known as Aussie
  • New Zealand dollar (NZD) also known as Kiwi

The popular currency pairs include (EUR/USD, GBP/USD, USD/JPY and USD/CHF), while the common commodity pairs are (USD/CAD, NZD/USD and AUD/USD).

What is a quote?

In a currency pair, the currency on the right is called a counter currency, while the currency on the left is called the base currency. A quote records how much worth one unit of the currency is in terms of the counter currency.

What is a pip?

Percentage in point also known as pip is the last decimal point of a quote.

Long Trade & Short Trade

When a trader takes a long position, it means the trader expect the base currency to advance and want to buy it and sell it back at a higher price.

Taking a short position on the other hand, means the trader expects the base currency to decline and you can sell it now and buy it back at a lower price later.

Spread

Currency quotes are represented in two prices referred to as the bid price (buy) and the ask price (sell).

Forex traders are always looking to benefit from the trading .They can profit from spread which is the difference between a bid for sell price and ask price (exchange rate at the which the traders buys the currency). In most cases the buy price is more the sell price.

Leverage

Leverage is a ratio of when an increased volume of capital is borrowed using a smaller amount to magnify potential gains. Leverage is mostly used in the real estate field for transactions through mortgages to purchase houses.

Source: Saudi Forex Trading