FOREX TRADING INTRODUCTION
Things you should know about trading Forex
The first thing you need to learn about as a forex trader is your trading environment. Whether you are a brand new trader or you have had experience trading in other markets—like the stock market—you need to understand the unique characteristics of the forex market so you can be properly equipped for success.
You have access to leverage in the forex market. Leverage gives you the ability to trade a position larger than the amount of money in your account. For example, using leverage, you could place a $100,000 trade by only using $1,000 of your own money in your account.
Word of caution: leverage is a tremendous tool for traders. It allows you to make more money on trades than you normally would if you were using only your own money. However, it also allows you to lose more money on trades than you normally would if you were using only your own money.
When you trade with leverage, you have to post margin. Margin is the amount of money you have to set aside in your account when you enter a trade. For example, if you are using 100:1 leverage and you buy 1 mini lot—which is worth $10,000—you must set aside $100 as margin ($10,000 ÷ 100 = $100).
When you trade in the stock market, you buy or sell the stock of one company. When you trade in the forex market, you buy or sell a currency pair (two currencies put together). As you begin investing in the forex market, you should focus on the major pairs and some of the crosses. Spreads (the difference between the price you can buy and the price you can sell the currency for) are tighter, liquidity is higher and information is more readily available for the major pairs—which makes it easier for you to be profitable trading them. As you progress, you can consider investing in some of the exotic pairs. Imagine each pairing as a tug-o-war, the stronger currency pulls the price of the currency pair in its direction. One thing causes currency pairs to become stronger or weaker: people (buyers and sellers). Remember that it is ultimately people who move this market.
The Forex market is the largest financial market in the world. More than $4 trillion in foreign currencies trade back and forth every day. Forex stands for the FOReign EXchange
How does the forex work? When you fly to another country, one of the first things you do when you get off the plane is look for a place you can exchange your ZAR Rand for whatever currency is used in the country you are visiting—such as British pounds, Japanese yen or euros. Why do you do this? Because you know the cab driver, the hotel clerk and the souvenir salesperson are all going to want you to pay them in their national currency, not ZAR Rand. When you slide your ZAR Rands over to the teller and she slides back a stack of multi-colored bills you have just participated in the Forex market. You exchanged one currency for another. When you a baby you start to learn a language to communicate your needs, now the same is true in FOREX you need to now the terms traders use, to be able t understand and trade successfully. Now, don’t worry. As far as vocabulary lessons go, this one is quite a lot of fun. Honestly! It’s a very short lesson:
You need to become intimately acquainted with the pips in the Forex market—because you will be using them to determine your profits and losses. A pip (percentage in point) or point, is the smallest unit of measurement in the Forex market. Most currency pair quotes are carried out four decimal places—i.e. 1.4500. The last decimal place is called a pip. So if the exchange rate of a currency pair moved from 1.4500 to 1.4510, we would say that the price moved up 10 pips. You make money when the pips move your way in a trade.
Currencies are sold in lots
In the stock market, when you want to buy something, you buy a share of stock, or a share of that company. In the Forex market, when you want to buy something, you buy a contract, or a lot. (We use the term contract because the Forex market utilizes currency futures contracts). There is no way to buy a share of the U.S. dollar like you would buy a share of Google in the stock market. When you trade in the Forex market, you are trading lots or contracts.
Contracts are divided into three categories: full-size contracts, mini contracts and flexible contracts. Full-Size Contracts control 100,000 units of whatever the base currency in the currency pair is. So for instance, if you were to buy one full-size contract on the EUR/USD, you would control €100,000 because the euro is the base currency in the pair. Mini-Contracts control 10,000 units of whatever the base currency in the currency pair is. As you can see, a mini contract is one-tenth the size of a full-size contract. Flexible Contracts allow you to choose the exact amount of a currency you would like to control. If you want to control 84,392 units or 2,755 units of the currency you are interested in, you can with a flexible contract. Being able to choose among full-size, mini and flexible contracts allows you to tailor your investing to best meet your investment style and strategy. Make sure to take the time to feel comfortable with the lingo of the Forex market. If you have a solid foundation of knowledge, you’ll be much better off in your investing. So now that you’ve got the basics, let’s watch the video and take a look at what makes the Forex market tick, how it came to be, and how you can use it to protect and multiply your money.
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