Forex Trading Basics

In our today’s global market it has become increasingly important to get adequate investment knowledge as this can adequately reduce risk exposure if well guided. The forex market has remained one of the world’s biggest financial markets with its daily volume well over US$3 trillion. It is expected that every would be investors get themselves acquainted with the forex trading basics. Unlike other financial markets, the FX market has no physical location or central exchange. When investors (banks, corporations and private investors) trade currencies, it’s done over-the-counter.

The forex market initially was open to larger entities that traded for commercial and investment reasons via banks. We have participation from small investors due to the emergence of trading platforms who now offer online services powered by technological leap in the IT sector. Some of the forex trading basics highlighted in this article would help you make informed decisions especially if you that individual who is indecisive about investing here or not.

The forex market’s products are priced currency pairs; hence all trades eventually currency rounds up into the buying and selling of currencies. As a rule, one currency is exchanged and speculated to have a rate change. If you buy a currency and the value appreciates, it is expected that you sell to lock-in on profits. We generally refer to positions as “open positions”, when a buy/sell order that has been entered is yet to be closed (via sell/buy). The currency pairs are aligned to have a base currency or the 1st currency in the pair and the counter, quote or second currency in the pair. This also means that a quoted pair is expressed as a unit of 1 of the first currency in the pair against the other currency in the pair.

When price is quoted by the forex broker, they include a “bid” and “ask”. The bid is the price the market marker has agreed to buy (and the client can sell) the base currency in exchange for the quote currency. The ask is the price the market maker is willing to sell (and the client can buy) the base currency in exchange for the quote currency. The spread is the difference between bid and ask price and is usually taken as commission by the market maker. This is how the market makers make their monies off commissions. This might look very minute but if you cumulatively look at the number of order taken by clients every day, I bet you’ll have a rethink.

Forex trading basics entails that you also know the best way to approach analyzing the market. There are two ways to go about this; you can either analyze the market fundamentally or technically. The technical analysis explains price movements, while the fundamental analyses views the factors affecting price movements. The best approach has always remained a good mix of both.

When trading forex discipline is key to success and having this is key.

  • Formulate a good trading strategy and stick to it.

  • Develop an effective money management strategy and abide by it.

If you discipline can take you to this pint, then you are good to go. Forex would put a smile on your face if you stay focused on these trading basics.