Chapter 1 Forex Trading Basics
While the concept of forex trading is easy, executing your trades in the
market is difficult. This doesn’t mean you won’t become successful. What it
means is that you will need to educate yourself and work hard. The first
step anyone should take is to learn as much as possible about forex trading.
Understanding Pairs
The main difference between the stock market and the forex market is that,
in forex, you are essentially trading pairs of currency (that is you buy one
currency and sell another), while in the stock market, you buy shares of a
company. This is not an option when you are forex trading. Whether you
are trading, selling, or buying, you have to use pairs. For example, the
Japanese yen is often paired against the Canadian dollar and the Euro
against the American dollar.
What’s a Pip?
A pip is a 1% movement in the currency value. A pip is a basic unit that is
used when talking about currency quotes. It is the last number of the quote,
so when you are following the movement of two currencies, you observe
from the last two digits so that you can say that a currency moved by the
number of pips that differentiates the second from the starting figure. The
value of the pip is determined from the size of the trade. You make a
decision to buy or sell a currency pair depending on your estimation, which
is when you make the market order.
Entry Order
When you use an entry order, you enter your currency pair trade at a
specific price. If the price of the currency never reaches the specific price,
then your trade is not enforced. If the price is reached, then your trade is
completed regardless of your presence at the time.
Stop-Loss Order
A stop-loss order is the price at which you want your dealer to exit the trade
when the trade moves against your interests. A stop-loss order prevents
losses.
Limit
A limit is the price at which you want the dealer to exit the trade when it’s
moving in your favor. Knowing when to exit the trade even when things are
looking up is useful because you can hardly predict when a currency will
start to drop.
Margin
When you are buying or selling at a good margin, that means that you
control a large amount of currency for an initial investment that is way
smaller in comparison. For example, a 100-by-1 margin means that you
invest $1,000 for a trade of $100,000. Buying and selling on a margin is
safe and appealing because the only amount you risk to lose is the amount
you invested, but you have the opportunity to profit a greater amount.
Leveraging Ratios
You are betting at leveraging ratios. A $1,000 bet on 1,000 value of the
currency is considered 1:1 leverage.
Trading platforms allow you to follow and market currency in a way that
creates a profit. When you’re successful in trading one currency so that its
value increases against the currency you used to buy it, you can make a
profit. You are speculating whether the currency will rise or drop. Your
chances of profiting essentially increase with the success of your
predictions.
With forex, you trade using leverage, which means that you only need to
invest a portion of your positions. By using stop-losses, you can prevent
losing your investment.
When it comes to currency rates, many factors have an influence. Interest
rates, unemployment numbers, political events, and many more affect the
country’s currency value.
Currencies may rise and fall in different values for different reasons, one of
them being large companies exchanging currencies for the purpose of
international trading. The time and circulation of market information is also
a significant factor. False and accurate information circulating the market
can influence banks to swiftly market currencies, which additionally affects
the changes in currency values.
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