Forex Basics

FOREX BASICS – INTRODUCTION

Introduction

Forex is a commonly used abbreviation for “foreign exchange,” and it is typically used to describe trading in the foreign exchange market globally. This is similar to stock markets. A stock trader will buy a stock if they think its price will rise in the future and sell a stock if they think its price will fall in the future. Similarly, a forex trader will buy a currency pair if they expect its exchange rate will rise in the future and sell a currency pair if they expect its exchange rate will fall in the future.

In both markets the rate at which the asset changes constantly moves . Forex tends to move a little bit faster than traditional stocks and commodities due to the constant exchange of currencies from the small consumer to the larger investors.

There are many benefits and advantages of trading Forex. In the ‘forex’ market you buy and sell currencies, commodities or even stocks. ‘THAT’S all there is to it.

Some of the benefits of trading Forex are as follows

No commissions- Most retail brokers earn their commission from the “bid-ask spread“. This put simply is the difference between what they are offering to retail traders to buy and sell a particular pair.
No fixed lot size– Lot or contract sizes are determined by the exchanges. In spot forex, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25
A 24-hour market– There is no waiting for the opening bell. From Sunday evening the markets open in Australia to the afternoon close in New York, the forex market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.
Leverage In forex trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.

BASIC KEY DEFINITIONS

Base vs Quote

Currencies are normally quoted in quoted in pair’s. Let’s look at an example; Let’s say we wanted to trade EUR/USD in the market

EURO- Will be the base currency
USD- Will be the quoted currency

The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency.

A pip – is a unit of measurement to express the change in value between two currencies. Taking EUR/USD if this pair moves from 1.1160 to 1.1161, that .0001 USD rise in value is ONE PIP. A pip is usually the last decimal place of a quotation. Most pairs go out to 4 decimal places, but there are some exceptions like Japanese Yen pairs (they go out to two decimal places).

Lots – The standard size for a lot is 100,000 units. There are also a mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units respectively.

As you may already know, the change in currency value relative to another is measured in “pips,” which is a very, very small percentage of a unit of currency’s value. To take advantage of this minute change in value, you need to trade large amounts of a particular currency in order to see any significant profit or loss.

Margin– When you open a new margin account with a forex broker, you must deposit a minimum amount with that broker. This minimum varies from broker to broker and can be as low as $100 to as high as $100,000.

Each time you execute a new trade, a certain percentage of the account balance in the margin account will be set aside as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units (or lots) traded. The lot size always refers to the base currency.

For example, let’s say you open a mini account which provides a 200:1 leverage or 0.5% margin. Mini accounts trade mini lots. Let’s say one mini lot equals $10,000. If you were to open one mini-lot, instead of having to provide the full $10,000, you would only need $50 ($10,000 x 0.5% = $50).

Leverage – Leverage is the ratio of the amount capital used in a transaction to the required security deposit (margin). Leveraging varies dramatically with different brokers. Understanding these differences can mean a huge different between profit and loss on a particular trade.

TYPES OF ANALYSIS

To begin, let’s look at three ways on how you would analyze and develop ideas to trade the market. There are three basic types of forex market analysis:

Technical Analysis – Looks at analysis the price movement using charts
Fundamental Analysis- How the economy is doing?
Sentiment Analysis- determines whether the market is bullish or bearish on the current or future fundamental outlook.

In our opinion no one method is best but we will address this over the course of our training.

It is also worth of note that most online forex brokers offer “demo” accounts to practice trading and we at Binary Umpire suggest you utilize these before going live, build your skills, along with real-time forex news and become a ‘TOP NOTCH TRADER’. It is also worth of note that forex is a not a quick rich scheme and takes alot of patience, discipline and practice.

 

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Forex Basics