A beginner’s guide to trading forex

A beginner’s guide to trading forex
Table Content
What the heck is forex?
How does forex trading work?
What are the major currency pairs?
What’s a base currency?
What’s bulls & bears trading?
Basic forex vocabulary
Bottom line

Hello, and welcome to our forex trading digest. In terms of liquidity and trade volume, the foreign exchange market is the largest financial market in the world. Forex traders trade a staggering $6.6 trillion every day, which means there is a potentially big opportunity to make money. But it also means a big chance you will lose money. So, if you wanna get into trading forex safely and profitably, grab a cuppa and dive right in!

What the heck is forex? 

You probably know this much - forex stands for the foreign exchange market. Forex trading is also known as FX trading, currency trading, or foreign exchange trading.  You can use any of these terms you like best. Forex trading is done ‘round the clock every day. 

The key players in the FX market are large banks, governments, big enterprises, and hedge funds. They create the biggest movements in the currency market and are known as institutional market participants. But there are also independent traders on the market too. These people are known as the retail crowd, and if you join the forex market, you’ll become one of them. 

The retail clientele is very diverse. It’s customers trying to purchase items from another country, tourists wishing to explore a country abroad, firms doing international commerce, and investors and traders like you hoping to profit from price swings. Now that we’ve covered the basics let’s dig a lil’ deeper!

 

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How does forex trading work?

So, what is forex trading, and how does it work? Trading Forex is like when you buy a car at one price and sell it at another to make a profit—except that you’re buying and selling currencies, not a car. For example, it’s when you swap Turkish lira for Saudi riyal.

Picture your last holiday to Europe. Remember walking to an exchange office and buying a few hundred Euros with American dollars or your country’s official currency. The moment you made that money swap, you participated in the FX market. So, when we trade in the Forex market, we swap one currency unit for another—it’s that simple. We buy a currency at one price and sell it at a higher price at the right time to make a profit. Easy, right? Well, not quite…

What are the major currency pairs?

Forex traders interact through an organized network of dealers and computer networks that operate as so-called market makers for their clients. The market makers are there to place currency pair orders (or pairs of currency that you plan to swap) on behalf of investors like you. 

The most frequently traded currencies in the world are the US dollar (USD), the euro (EUR), and the British pound (GBP). The Japanese yen (JPY), Canadian dollar (CAD), and Australian dollar (AUD) are also major players in the FX market. 

The so-called major currency pairs are the EUR/USD, USD/JPY, GBP/USD, and USD/CHF. We call them "majors” since they’re the most actively traded pairs in the world. But there are also so-called commodity currency pairs: the USD/CAD, AUD/USD, and NZD/USD.

What’s a base currency?

Let’s say you want to buy a currency pair from a foreign exchange broker. What you’ll buy is the so-called base currency, and what you’ll sell is the quote currency. 

Let’s take the USD/EUR pair as a base currency example. In that pair, the USD is the base currency, and EUR is the quote currency. Now let’s say you’re buying this pair. In that case, you’re buying the USD (base) and selling the EUR (quote). On a side note, we can also call the quote currency the counter currency.

On the other hand, when you want to sell a currency pair, you’ll be selling the base currency (USD) and receiving the quote currency (EUR). All good? Now let’s talk bulls and bears. 

 

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What’s bulls & bears trading?

You probably heard this term and wondered what the heck do animals have to do with trading? Bull and bear markets are essential to know about as they help you figure out current FX trends. A bull market is when prices of currencies rise, and traders look to sell once they believe the market’s reached its peak.

What about the bear market? A bear market is when the currency prices are falling, and traders look to buy once they believe the market’s reached its peak.

Several significant variables influence the exchange rate and whether the market is a bull or bear market. The central bank's monetary policy, economic statistics, various political events, and even geopolitical risk events all play a major role.

But at the end of the day, it all comes down to price action and making the right move at the right time. If you’re a visual person, you can learn how to interpret a price chart to estimate future market movements.

Basic forex vocabulary

Learning the language of Forex is the best way to get started. Here are some words that will help get you in the zone:

Forex account: You can’t trade currencies without a forex account. Usually, there are three types of forex accounts based on the size of the lot:

Micro forex accounts let you trade up to $1,000 worth of currencies in one lot.

Mini forex accounts let you trade up to $10,000 worth of currencies in one lot.

Standard forex accounts: Accounts that let you trade up to $100,000 worth of currencies in one lot.

Ask: An ask, also called an offer, is the lowest price at which you’re willing to buy a currency. For instance, if you place an "ask price" of $3.1481 for GBP, that is the least amount of USD you’re willing to pay for a pound. Typically, the ask price is higher than the bid price.

Bid: A bid is the price at which you're willing to sell a currency. In a particular currency, it’s the job of a so-called market maker to keep putting out bids in response to buyer requests. The bid price is typically lower than the ask price.

Contract for difference: A contract for difference (CFD) is a derivative that lets you bet on price changes for currencies without owning the underlying asset. If you think the price of a particular currency pair will go up, then you’ll buy CFDs for that pair. If you believe the price will go down, you’ll sell CFDs for that pair. Although, because of leverage, a bad CFD trade can cost you a lot.

Leverage: Speaking of leverage, that’s when you use the money you didn't pay yet to make more money. In other words, it’s like borrowing money. Say you have $100 in your trading account, but you buy a CFD for $1000.You’re trading with nine times more money than you have in your account. That’s called leverage. High leverages are typical of the forex market, and traders often use them to improve their positions. If you win, you win big.  But you can also lose big. And remember, you are 80% more likely to fail.

Lot size: When you trade currencies, you do that in amounts called "lots." The four most common lot sizes are standard, mini, micro, and nano. The standard size of a lot is 100,000 of the currency. Mini lots are made up of 10,000 units of the currency, and micro lots are made up of 1,000 units. Traders can also buy currencies in small amounts called "nano lots," which are worth 100 units of the currency. The choice of lot size dramatically affects how much money your trade makes (or loses overall.) 

Margin: This is the money you set aside in your account for currency trade. Margin money lets your broker know you’ll still be able to pay your bills and stay in business even if the trade doesn't go how you hoped it would. When you trade in the forex market, you use the margin along with leverage, as we mentioned above.

Pip:  Now, pips is where things get a bit… mathematical. A pip is a "percentage in point" or "price interest point." In currency markets, it’s the most minor price move, equal to four decimal points. So, the value of one pip is 0.0001. That means one pip is worth one cent, and 10,000 pips are worth one dollar. 

Although, the value of a pip can change based on the size of the standard lot that your broker offers. In an average lot worth $100,000, each pip is worth $10. But because there’s much leverage in currency markets, small price changes (measured in "pips") can significantly affect a trade.

Spread: A spread is the difference between the bid price (the price to sell) and the ask price (the price to buy). Forex traders don't charge commissions; instead, they use spreads to make money. Many things affect how big the spread is. Some of them are the size of your trade, how much people want the currency, and how unstable it is.

Stop loss: A stop loss is probably the most important term you need to know in forex trading. A stop-loss is an advance order to sell a currency when its price reaches a certain level. It's used to limit your trading loss or gain. You give an automatic order to tell your broker or agent to sell a currency when it hits a specific price. It can be extremely useful to protect your funds when the price is falling, and you’re not near your app or computer. 

Bottom line

As you've seen, Forex trading is not exactly a walk in the park. That said, it could be a great way to make extra money with little risk because you don't need much money to start.

If you want to learn more on how to trade Forex online:

  1. Check out our top 16 tips for Forex traders.
  2. Keep growing your knowledge and take advantage of amana’s learning center’s video content
  3. Take it one step at a time. Grow your knowledge to grow your gains!
  4. When you feel like you’ve got it nailed, download the amana forex trading app and start trading with small amounts until you get better and better at it.
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