Friday, July 1, 2011

Forex Trading Education: Basic Guide

What is Forex trading ?
Simple Definition of Forex trading (Foreign Exchange, Forex currency exchange) is the buying and selling currencies simultaneously or exchange one country to another country's currency. Forex market is non-stop cash market where currencies are traded from various countries, especially via brokers. Forex currency trading is constantly and simultaneously bought and sold through local and global markets and trader's investment increase or decrease based the value depending on currency movements. Forex market trading conditions can change at any time in response to real events.

Like in general markets, there is also is a bid / offer spread (differences between purchase price and sale price). From the difference between the major currencies, the difference between the price which the determinant of the market (market-maker) will sell ("ask" or "offer") to wholesale customers and the price at which the same market-maker will buy ("bid" ) from the same wholesale customer is minimal, usually only 3 pips. In EUR / USD price of 1.3022 a pip would be a '2 'at the end. So the bid / ask quote of EUR / USD likely to be 1.3022/1.3025.

Attractiveness of Forex trading for private investors are:

a. 24-hour trading, 5 days a week with nonstop access to the Forex dealers.
b. A large liquid market making it easy to trade major currencies.
c. A lively market offers opportunities to gain profit.
d. Standard instruments for controlling risk exposure.
e. The ability to achieve a profit when the market rose or fell.
f. Trade that were leveraged with low margin requirements.
g. Many options for trading with zero commission.

What is Leverage?
Leverage is the ability to help your account to position which is bigger than the total margin accounts. For example, if a trader has a margin of $ 1,000 in his account and he opened the $ 100,000 position, he leveraged 100 times or 100:1. When he opened the $ 500,000 position with $ 1,000 of margin in his account, his leverage is 500 times or 500:1. Increasing your leverage mean magnifies both profit or loss.

What is it Spread?
Spread is the difference between Bid and Ask prices. The difference between the sell quote and the buy quote or the bid and offer prices. For example, if EUR / USD quotes read 1.4200/03, the spread is the difference between 1.42000 and 1.4203, or 3 pips.

What is a Pip?
Pip is a small amount of price movement. Example: GBP / USD: 1.4000 then turned into 1.4001 so a movement of pip is 1 pip.

What is a Lot?
Lot is another name for Volume. Standard unit size of the forex trading transaction. Typically, one standard lot is equal to 100,000 units of base currency, while 10,000 units is the mini account, then 1,000 units are micro account.

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