Forex Tutorials for Beginner Currency Traders
This tutorial aims at providing the basic knowledge to beginner traders. The following basic concepts are covered in this tutorial.
Introduction to Trading
Forex or is the largest financial market in the world where currencies are exchange in this Over The Counter market (OTC market). The market has a daily trade turnover of $7.2 trillion dollars and this makes the largest and most liquid market in the world. Due to the size of the market there is always someone willing to exchange their currency for the currency that you want to trade at any given time of the day.
This liquidity and size of the market also means that transaction costs of trading this market are very low and this is what attracts many traders to the currency exchange market.
The market is also open for 24 hours throughout the day for 5 and a half days every week.
About Market
The market is an Over The Counter Market (OTC Market) which means that there is no centralized exchange market place where transactions take place. Instead Forex is carried through a network of big international banks known as the Interbank network.
Popularity of Online Retail Trading
The retail traders in the currency market account for 95% of all transactions carried out in the trading market. Retail market has become more and more popular among retail traders and investors because of the advancement of technology. A beginner currency trader only needs a computer that has an internet connection to setup and start trading.
Once a trader wants to start trading the online currency market, they can open an account with an online broker. There are many online brokers from which a trader can choose from. Once a trader opens an account with a broker then they can trade any forex currency from this account. The trader will just use a software known as a software and the trader can then place trades directly to the online market through their online broker.
The broker provides access to the market to retail traders and investors by providing technology that connects these traders to the trading market.
Currency Pair
Forex Currencies are traded in pairs of two commonly known as Currency Pair. For example the EURO and the US Dollar currency pair which is denoted as EURUSD will be traded by traders wanting to exchange EUROs for US Dollar or US Dollars for EUROs. A currency trader wanting to exchange EUROs for US Dollars will be trading this currency pair EURUSD.
Currency Exchange Rate
The currency exchange rate is the price at which one currency is quoted against another currency. This exchange rate determines how much one currency will be exchanged for compared to another currency. For Example if EURUSD exchange rate is 1.2500 it means that a trader will exchange 1 EURO for 1.2500 US Dollars.
Pip
Pip means Price Interest Point & this is the unit used to calculate forex pair moves. A pip is equivalent to a one point movement in the exchange rate of a currency. A pip is the minimum price increase in the exchange rate of a currency. For example in EURUSD exchange rate is 1.2500 & the currency moves 1 pip then this will mean the current exchange rate will now be 1.2501 - the pip is the last point in this example and can be denoted as 0.0001. A pip is one hundredth of 1 cent, hence 100 pips movement is equal to 1 cent.
Spreads
In trading there are two prices for a currency pair, these two prices are:
Bid - or sell price
The bid is the price at which a trader can sell the currency
Ask - or buy price
The ask is the price at which a trader can buy the currency
The difference between these two is what is known as the spread. For example EURUSD may be quoted at Bid/Ask price of 1.2600/1.2602 which means the spread is the difference between the two prices which is 2 pips. The spread for this example is hence 2 pips.
What is Leverage?
Because many traders cannot afford to trade 100,000 units of currency or even 10,000 units of currency, there is the option of leverage provided in Forex which means that traders can borrow money and use this borrowed money to open trades with. For example leverage of 100:1 means that a trader with capital of $1,000 can borrow up to 100 times using this 100:1 leverage option & therefore after borrowing using this leverage option the currency trader will have a total of $1,000 multiplied by 100, which means the trader will have a total of $100,000 and can therefore trade one standard lot of $100,000 units of currency. This leverage is what makes accessible to many retail traders because retail traders can begin with little capital of their own & use leverage to borrow the rest of the money required for trading currencies. The money that the trader deposits is referred to as their margin and one can continue borrowing money using this leverage option as long as they have the required margin in their account. This is why traders must have the required account balance in their account to open the trades they want, for example a trader using leverage 100:1 must have more than $1,000 in their account to be able to open and trade using standard lots.
What is Trading Margin?
Margin is the particular amount of money which a trader is required to put aside in order to continue holding an open leveraged transaction. Margin can also be explained as the deposit that a trader is required to keep in their account so as to maintain his open positions. This margin is a percent of trading account equity that has to be set aside & allocated as a margin deposit for the open positions that are held by a trader.
Charts
A chart is the basic tool used to represent what is happening in the trading market. A chart will represent the currency price movements over a period of time. Traders use these charts to analyze market movements and to try and predict which direction the market is likely to move in the future.
A chart represent the demand supply of a currency and it is a reflection of the market psychology and shows the demand supply of a currency pair in relation to the participating buyers and sellers trading that currency.
