A Quick Practical Guide To Forex Trading

Forex involves the trading of currencies. It is one of the world’s largest financial markets with a daily estimated turnover of 1.8 trillion dollars. This turnover is larger than the turnover of all the worlds’ stock market taken together on any given day.

Forex trading is becoming increasingly popular amongst traders and investors who mainly invest their funds in the stock and derivatives market. Currencies can be traded in amounts, a lot smaller than other financial products, which make learning forex trading safer than other markets.

There is no fixed exchange in the forex market. It is therefore considered as an over-the-counter (OTC) market. The forex market is completely electronic and trades are executed over the phone or on the internet. Until 10 years ago the forex market was the preserve of large financial institutions. Now an ever-increasing amount of individual traders are able to trade in the forex market through online forex brokers even from the comfort of their home and this entire credit goes to the internet.

Currencies in the forex markets are always traded in pairs. A typical pair would be USD/JPY (US dollars over Japanese yen). The first currency is the base. The second currency is the counter currency. The pair can be viewed, as the amount of the secondary currency that is needed to buy 1 unit of the first currency. If you were to buy the above pair you would buy US dollars and simultaneously selling Japanese yen. If the pair were sold the reverse would happen that is you would sell the US dollar and buy the Japanese yen. This might sound confusing but simply think of the pair as one item and you are buying or selling one item. If you think the US dollar will go up against the Japanese yen you buy the USD/JPY pair. If you think the US dollar will decrease against the Japanese yen you sell the USD/JPY pair.

When you watch forex quotes you will see two numbers. If we use the USD/JPY as an example you might see 109.70/109.71 the first number 109.70 is the bid price and is the price traders are prepared to buy US dollar against the Japanese yen. The second number 109.71 is the offer price and is the price traders are prepared to sell the US dollar against the Japanese yen. The difference between the bid and the offer price is the called the spread. The spread for the major currencies is usually 1 to 5 pips.

The most common increment of currencies is the pip. If the USD/JPY moves from 109.70 to 109.71 that is one pip. A pip is the last decimal point of quotation. Most currencies quoted to 4 decimal points. The exception is the Yen, which is quoted to 2 decimal points e.g. 109.71.

Forex is traditionally traded in lots also referred to as contracts. The standard size for a lot is $100,000. In the last few a mini lot size of 10,000 dollars has been introduced and this has become increasing popular. Forex trading is leveraged with most forex brokers offering 1% margins. This means you can control one standard lot of $100000 with $1000. Typically you would need a minimum of $2500 to open a standard size forex account.

A mini account can be opened with $300 with most forex brokers. To trade a one mini lot you need a margin of $100, which in turn controls $10000. If the currency goes up by 1% and if you traded one mini lot of $10000 you would make $100 dollars or 100% of your original margin. Forex trading is a very lucrative market to get into and it is suggested that traders new to forex trading trade a mini account for an extended amount of time. Trading a mini account is a low cost entry to the forex market, as only $300 is required to open an account. You can still make money while you become more experienced in forex trading. You can trade one mini lot until you have made your first $100 dollars then start trading 2 mini lots. As you gain more experience you can trade standard sized lots.

Thus it can be concluded that forex trading has gained importance in the recent years and can be a very lucrative market, which no trader can hope to neglect.