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The Basics on how to trade Forex – Everything you need to know
The currency market or Foreign exchange market is one of the most rapidly changing investing markets in the world, with over 5 trillon USD traded everyday! FX can be highly profitable to individuals and companies that can predict minimal changes in currency pairs.
Currencies tend to only change minimally on a daily basis, but as explained in the what is forex article, with leverage you can create high percentage profits daily, if not hourly, on minimal currency changes. Currencies or positions can be held for minutes all the way to years and the frequency at which you trade is entirely dependent on what you are trying to accomplish both long and short term.
The forex markets are extremely stable, as currency prices are based off supply and demand, which cannot be easily manipulated, even billions invested by banks cannot move prices. The markets can provide both long and short term sources of profits, but there are a number of basics that individuals should know before starting trading in the fx markets.
Understand Quotes, Currency Pairs and the PIP
When you first look into starting to trade Forex, especially if you are a complete beginner, the quotes and graphs and mountains of data can look pretty daunting.
Every currency quote will be valued against another currency. Hence the price will always be displayed as: Currency1/currency2 = Price. For example most platforms or brokers will generally display prices similar to below, (image source).
The base currency is always equal to 1 unit, in this case you can sell 1 euro for 1.4745 USD.
Direct vs Indirect Quotes
Currency pairs can either be quoted directly or indirectly. A direct quote is simply where the domestic currency is quoted first, whereas an indirect quote is simply where the domestic currency is the quoted figure.
The PIP (Spread)
The difference between the bid and ask prices is called the spread. Most forex brokers don’t tend to take commissions or charge to trade in the fx markets. Instead they make their money by the spread on a currency. The spread is measured in points or PIPS. In the above example the 4th decimal point indicates the spread and the difference is 1 point (45 to 46) and hence the spread is 1 Pip.
The pip itself is the smallest fraction by which a currency can move. Pips can vary for different currencies but must pips tend to be the 4th decimal place on a currency pair. The spreads themselves tend to be 5 pips. For example at the time of writing the spread for the Euro to the US Dollar is pictured right. This is a spread of 4 pips.
Forex Markets Opening Times
In the opening hour of the day the forex markets are incredibly active and the majority of large trades by big companies are done. This is not the ideal time to invest if you are a newbie to fx trading. I’d recommend waiting and trading throughout the day when the fluctuations are less violent. The forex market opening times are below, image pulled from dailyfx.com
The Forex Toolbox
Forex trading is done online instantaneously (or close enough anyway.) So its important to have the most efficient tools to allow you to get every advantage on the information and signals you research.
Leverage – Calculate how much leverage you can afford, afford to lose and most importantly NEED to make your trading profitable. It’s worthless trading $1000 including leverage as even a great day will only equal a 1% ROI and hence a $10 profit….Not worth it. With 100x leverage this $10 profit becomes $1000 a day…Suddenly becomes a lot more valuable.
Experience / Training / Guides – Please tell me you weren’t just going to jump into trading straight away? Pick up a GOOD guide. We have our awesome free training course here. But make sure you stick with whatever strategy you have developed, remember to back-test theories that you have before jumping in and remember that just because you think a strategy looks good on one or two particular days, it doesn’t mean that it will be good a year from now. Remember PAST RESULTS DO NOT EQUAL FUTURE RESULTS.
Automated Robots – Please avoid automated robots. This is something we used to test exclusively and although some did work very well in the short-term, we found that over the months and years that went on the strategies and systems they were developed on were incredibly risky. I’m talking risking 20% of your BR on one trade. When this starts to happen it is time to get away from robots and any sort of automation. Still our number 1 reason to trade is to have freedom, but this doesn’t mean you have to get automated, we read price action daily and use 1 or 2 indicators. That is it. That’s 2 hours a day in most cases. If you cannot work 2 hours a day forex is not for you.
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