Forex trading for beginners covered
Foreign Exchange also know as currency exchange, forex and FX is the practice of buying and selling of currencies in order to attain a good profit. It is undoubtedly the biggest market on the planet with trading volume exceeding $5 trillion a day. That is almost 100 times more than the daily trading volume of New York Stock Exchange ($55 billion) which is the biggest stock market in the world. The main trading participants in the forex market are the larger international banks.
Another lucrative thing about forex market is that because of such huge market size, most forex brokers don’t charge a fee for the trades and instead they give two different prices to buy and sell with a very little difference in the pricing which is called spread or the broker’s margin.
Each forex trade involves two currencies. Forex brokers display currencies in a pair, for example EUR/USD. The first currency in the pair is called the base currency and the second currency in the pair is called the quote or counter currency. The primary currency being traded is the base currency and the currency you want to exchange or want the exchange in is the quote currency.
When buying this pair, you are buying base currency for the price in the quote currency and when selling, you are selling the base currency for the price in the quote currency.
Spread, bid and offer price
The difference in the buying and selling prices for a pair is know as spread or the broker’s margin. For example, if you are buying or selling the EUR/USD pair, the broker will show two different amounts like 1.4745 and 1.4746, 1.4745 is the bid price here and 1.4746 is the offer or ask price. The difference in price or spread is generally shown as pips, difference here is 1pip.
Bid price is the price at which you can sell the base currency at and offer or ask price is the price at which you can buy the base currency at, so you can sell 1 Euro for 1.4745 US Dollars or you can buy 1 Euro for 1.4746 US Dollars.
Less volatile and high liquidity
Foreign exchange markets have very marginal movements and very small currency exchange fluctuations on a day to day basis. Usually less than 1% change in the value of a currency per day. This makes the foreign exchange one of the most less volatile and slow moving market. The fluctuations in foreign exchange markets are mostly based on supply and demand and cannot be manipulated easily because the size of the market does not allow even the largest players, such as international banks, to move prices at will. This also means that if you are interested in day trading or short term trading, you would require good amount of capitals to have any significant amount of profits. Therefore, many traders rely on huge leverages to increase value of trades during potential movements magnifying potential gains and even losses.
This market also offers high liquidity as the investments are already in a currency and can be cashed out easily. This makes the investments easily accessible and available for use.
Leverage and options
Foreign exchange markets are also well known for their high leverage ratios, as high as 250:1 with the average being 50:1 or 100:1 leverage. Leverage or borrowing ratio can depend on the forex broker, the trade value and the investor’s reputation.
For leverage, you would need to open a margin account with a forex broker. Before the forex broker will loan you the money, you will be required to keep your assets and cash as collateral.
For example, if you have a leverage of 100:1 on a trade and you want to invest $100,000 in the currency, you would only need to deposit $1,000 into your margin account to buy $100,000 worth of the currency being traded.
You can also look into investment instruments such as options. which are contracts that allow you to buy(call) or sell(put) currencies at the current price, in the future.
For example, if you buy a call option when the currency price is $20 and the price of the currency increases to $30 in a few days, you would still be eligible to buy the currency at the rate of $20 by using the options you bought. Similarly, if you buy a put option when the price is $20 and the currency price decreases to $10 in the next few days, you would still be eligible to sell the currency at the rate of $20 by using the options you bought.
You need to pay a price for each option you buy per security or currency amount and there is also a time threshold to use the options within know as the exercise date. If the options are not used before the exercise date, the options will no longer be valid.
The Foreign exchange market is open 24 hours, except on Saturday and Sunday. That is 24 hours, 5 days a week. You can trade currencies any time between this time frame. With the growth of over the counter (OTC) markets and the widespread availability of computerized trading networks, forex trading has become accessible to a much wider audience and is no longer only the domain of financial institutions, corporations and extremely wealthy individuals.