Forex Trading for Dummies
“Forex Trading for Dummies” Forex trading always attracts new investors as well as experienced investors from stocks and other investment vehicles. The sheer market size of 5.1 Trillion US Dollar transactions per day makes the forex markets the largest financial markets. The forex markets are the most liquid markets providing trading opportunities 24 hours with the volumes mentioned earlier. This omnipresent trading opportunity attracts investors around the globe as the markets follow the sun.
The simplicity of trading systems makes it easy and approachable by almost everyone. With no central command, the trading is done through a network of banks, making it the largest OTC (Over the counter) market available for retail traders and big institutional players. All needed to trade is a stable internet connection, a laptop, or a Smartphone.
The widespread availability of resources on the Internet openly accessible to everyone makes forex trading for beginners further easy. As a result, all you need is the determination to succeed in self-study and some good sources for study materials or forex trading tutorial. Study materials like forex trading for beginners pdf files can help. The alternate methods to learn currency trading for dummies are watching educational videos, explainer videos, or live trading video sessions like those in the asiaforexmentor YouTube channel.
Forex Trading for Dummies
- What is forex trading and how does it work?
- Forex Terms for currency trading for dummies
- How to calculate profits in forex trading?
- Forex trading for beginners
- Do it yourself forex trading for dummies
1. What is forex trading and how does it work?
Forex trading involves buying and selling currencies simultaneously. Travelers exchange money by selling the currency they have and buying the currency where they intend to travel. Import and export firms do forex trading for their purchase of merchandise from other countries. While every currency buyer or seller has their reasons, a group of people buys or sells to take advantage of the currencies’ price fluctuations. These forex traders speculate and trade without any real-world need to purchase or sell currencies. These speculators are often referred to as retail forex traders.
All currencies have a three-letter code. Usually, the first two letters refer to the country name, and the last one refers to the currency name, such as GBP – Great British Pound, JPY – Japanese Yen, AUD – Australian Dollar.
Traders always trade the currencies in pairs.
EURUSD = 1.2300
In the above example, the EUR is traded against the USD. The currency first mentioned is the base currency, and the second one is the quote currency. In the above example, EUR is the base currency, and USD is the quote currency. The value of one unit of the base currency is mentioned in the quote currency.
Referring to the above example, one Euro is equal to 1.2300 US Dollars. In other words, by selling one EURO, the trader will be able to buy 1.2300 US Dollars. Similarly, to BUY one EURO, the trader has to SELL 1.2300 US Dollars.
If the forex traders expect the EURO to strengthen against the US Dollar and increase the pair’s value, they buy the EURUSD pair and sell it once its value reaches higher.
On the other hand, if the trader expects the EURO’s value to weaken, they SELL the pair and BUY once the value reaches lower.
The forex trader makes the trade with a click of a mouse. But in reality, it involves multiple parties to execute this trade. The trader places the order in a computer terminal, the trading software provided by the dealer. In turn, the dealer looks for the best possible price to execute the order with multiple banks. Banks bid their best price, and the dealer will choose the best bank with the best price. Once the bank accepts the deal, then the same is conveyed to the forex trader. Sophisticated software performs all these behind the scenes, and the software completes the whole process in milliseconds.
2. Forex Terms for currency trading for dummies
Like every business, retail forex trading also has some industry terms. The following are some of the essential terms in currency trading for dummies.
Most of the trading happens within these four major currency pairs and provide much-needed liquidity to the market participants.
EURUSD , GBPUSD , USDJPY , USDCHF.
These four currency pairs are considered minor pars and have less liquidity than the major pairs.
AUDUSD, NZDUSD, USDCAD.
These currencies are called cross currency pairs and are also actively traded.
GBPJPY, EURJPY, GBPCAD , EURCAD, GBPAUD , EURAUD, GBPNZD, EURNZD, GBPCHF, EURCHF, AUDJPY , CADJPY , NZDJPY
Price Interest point (PIP):
Forex brokers quote currency pair values with four digits after decimal points for most of the pairs, while Japanese Yen pairs come with two digits after the decimal point.
ex : EURUSD = 1.2300
USDJPY = 103.14
A pip is the smallest increment in the value of the currency pair. The price change for EURUSD from 1.2300 to 1.2301 is called one pip movement in the above example. Consequently, a price move from 1.2300 to .12350 is equal to a 50 pip movement.
In USDJPY, a change from 103.14 to 103.15 is a pip movement.
However, these days forex brokers offer five-digit pricing, with the fifth digit called a pipette. A pipette is one-tenth of the value of a pip.
Forex brokers always display two different prices of a trading instrument at any given time. BID is the price you can sell the trading instrument to the broker
Ask is your buying price and is displayed next to the selling price. Your buying price will always be higher than your selling price. In other words, your broker will provide an ASK that is always higher than the BID price.
The difference between your broker’s BID and ASK is called the spread. Spread is the cost of the transaction. Forex brokers offer different spreads for various account types. Some forex brokers provide accounts without a spread but offer a fixed commission.
Brokers execute forex trades in lots. Lots are the minimum volume accepted for a transaction. The lots sizes are as follows;
1 Standard Lot = 100,000 Units of the base currency of the pair.
1 Mini lot = 10,000 Units.
1 Micro Lot = 1,000 Units.
Leverage and Margin:
Leverage is the funds borrowed by the trader from the broker. The broker offers the trader different leverage options from 1:50 to 1:500. In the EURUSD Example, If a trader wants to buy 100,000 units of EURUSD, it would cost him 123,000 US dollars. The forex trader does not necessarily need to have that amount of money in his account but borrow it from the forex broker.
If the broker offers a 1:100 leverage, the broker will keep aside 1000 US dollars from the trader’s account and provide the trader 100,000 US dollars for trade.
If the leverage is expressed in percentage, then 1:100 will be 1 percent. Leveraged mentioned in percentages is called margin. In the above example, the required margin to trade is one percent.
3. How to calculate profits in forex trading?
It is essential to know to calculate the profits and losses in forex trading. It helps forex trading for beginners to calculate the risk and the reward in advance.
For example, if the trader decided to buy one standard lot of EURUSD for 1.2300, then the trader will be buying 100,000 Euros at the value of 1.2300 US Dollars each
BUY EURUSD @ 1.2300 , Volume = 1 standard lot
100,000 * 1.2300 US Dollars = 123,000 US Dollars
If the trader decides to sell them if the price reached 1.2350, then he would be selling at
100,000 * 1.2350 = 123,500 US Dollars
Your profit is selling price – buying price
123,500 – 123,000 = 500 US Dollars profit
The profit will be 500 US Dollars in this transaction. However, traders should deduct any spread or commissions further.
Calculating the profits of Japanese yen pairs are as follows.
USDJPY Buying price = 103.00 , Volume = 1 Standard lot.
Then the trader will be buying
100,000 * 103.00 = 10,300,000 Yen
The trader closes the trade at USDJPY = 103.50, then the trader will be selling
100,000 * 103.50 = 10,350,000 Yen
The profit is selling price-buying price
10,350,000-10,300,000 = 50,000 Yen
The trader will need to convert then Yen back to dollar
50,000 Yen at the rate of 103.50
50,000/103.50 = 483 US Dollars.
The same way also calculates the losses. In the above example, if the trader closed the EURUSD at 1.2250, then the forex trader will incur a loss of 500 US Dollars.
Similarly, if the trader closed the USDJPY at 102.50, the loss will be 483 US Dollars.
4. Forex trading for beginners
Though the big banks and institutional players rule the complex financial instruments and play a significant role, the retail trader is also not left in the dark. Beginners in forex trading must understand what moves the markets to successfully speculate the currency pair’s price movements. The study of past price movements and expected future price path is called price analysis. There at two types, Technical and Fundamental analysis.
The study of macroeconomics and statistics of the countries’ economy to understand its underlying strength and predict the future price path is fundamental analysis. Governments release financial data to the public; these data affect the price movements. The major news releases like Non-farm payroll, GDP, Interest rates, Inflation are some of them to name.
The study of history using charts and technical tools to understand the current price trends and predict future price movements is called Technical analysis. Traders widely use technical analysis and chart analysis to understand the price movements. Moving averages, RSI, MACD, Bollinger Bands, and Stochastic are some of them. However, many traders prepare custom tools and software to enhance the ability to currency trading for dummies.
5. Do it yourself forex trading for dummies
Forex trading provides limitless opportunities, so new traders should be prepared to spend time understanding the markets and what moves the market before they start to trade.
The Internet offers many forex trading for beginners pdf files. It would be in the traders’ best interest to indulge in a detailed study of them and prepare to trade.
Forex trading for dummies youtube
Learning Forex trading is a process. It’s better to see and learn to enhance understanding by watching videos. YouTube offers easy access to videos these days.
The YouTube channel asiaforexmentor offers many such explanatory videos to newcomers. The channel explains the forex basics for any newcomer to get accustomed to the industry and the terminology. The channel provides very detailed videos on fundamental analysis and technical analysis.
As mentioned earlier, the critical feature of technical analysis is chart analysis asiaforexmentor explains chart analysis in small digestible chunks for any newbie to understand, follow, and trade the markets successfully.
Watching over the shoulder is an effective method to learn. asiaforexmentor YouTube channel provides trading videos and insight on the mind of professionals during a trade. This will enable the new trader to understand the mindset behind successful traders.
How to start forex trading?
Currency trading for dummies is easy if they can prepare with the essential study and understanding the market.
Markets move up and down and are volatile every moment. The trader should identify and prepare their strength and weaknesses and identify the best trading tools.
The markets provide multiple opportunities for scalpers who buy and sell within a few seconds to swing traders who stay in a trade for weeks or even months. So the trader should identify the best time frames to trade.
The markets provide both risk and reward, so the trader must effectively calculate the risk and reward in every trade in advance and be prepared to expect and accept losses.
All forex brokers provide demo accounts to practice forex trading for beginners. These demo accounts help the new trader to simulate the real-time trades with demo money. They are thus validating the preparedness of the trader to engage in trading with real money.
To summarize the above Forex Trading for Dummies Guide: Forex trading provides a multitude of opportunities. Many successful traders acquired the knowledge by self-study and following the trading strategies and advice of successful traders. It is beyond doubt that dedicating enough time and self-determination to succeed are the critical factors for many successful traders who were once a newbie.