Basic Concept Of Forex Trading

Forex is a popular term that means foreign exchange or currency trading, which is the buying and selling of currency. A forex trader purchases currencies that are undervalued and sells currencies that are overvalued.

HOW DO YOU TRADE FOREX?

Today, forex trading is primarily done online through software or web-based trading platforms. If you have access to a personal computer or a cell phone, you most likely have everything that is required to trade forex.

WHAT DOES IT MEAN TO "BUY A CURRENCY PAIR?"

Each forex transaction involves the buying of one currency and the selling of another.

For example, you might buy euros (EUR) while selling US dollars (USD). This transaction is often referred to as buying the EUR/USD currency pair.

Currency pairs are needed to create exchange rates, which tell you the value of one currency relative to another.

For example, if the EUR/USD currency pair had an exchange rate of 1.3500 it would take $1.35 to exchange for 1 euro. If the EUR/USD currency pair had an exchange rate of 0.9500 it would take $0.95 to exchange for 1 euro. Forex traders essentially speculate on exchange rates by buying or selling currency pairs. The decision to buy or sell is determined by whether they think the exchange rate will go up or down.

WHAT IS A PIP?

A pip is a common term that is used in the forex market. It refers to the smallest movement (not considering fractional pips) that a currency exchange rate can make. For example, if the GBP/USD exchange rate changed from 2.0010 to 2.0012, you could say that it increased by 2 pips.

Most currency pair exchange rates are priced to the fourth decimal place, frequently making the fourth decimal place represent the pip value. However, for currency pairs like the USD/JPY, which are only priced to the second decimal place, the pip value is not the fourth decimal place but instead the second. So a two pip increase could be represented by a change of 85.35 to 85.37.

Calculating price changes in pips helps you determine transaction costs, profit and loss on trades, among other things.

WHAT IS A LOT?

A lot is the smallest trade size available and is determined by the account type.

WHAT IS LEVERAGE?

One of the reasons forex trading is attractive to some individuals is because it can be traded with leverage. Leverage allows an individual to control market positions that exceed the equity available in the trader's account. For example, a trader may have $5,000 of equity in their account, but still open a trade size with a value equivalent to $10,000. This would represent a position that is leveraged 2:1 because the market position is twice as large as the equity in the account. Leverage is a double-edged sword and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange with any level of leverage may not be suitable for all investors.

Disclaimer

Foreign Exchange trading carries a high level of risk, and may not be suitable for all investors. Before deciding to trade any Forex Exchange financial instruments you should carefully consider your investment objectives, level of experience, and affordable risk. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with the Foreign Exchange trading, and seek advice from an independent financial advisor if you have any doubts.