Trading Forex (Foreign Currency Exchange) is an exciting hobby as well as a great source of income for many people today. In terms of dollars, there are literally trillions traded every day on the Forex market (about $5 trillion a day in fact!). So, how can you get into this lucrative market and starting making mega bucks? Firstly, you need to understand the lingo:
Base Currency and Quote Currency
There are two currencies that are paired up (called a currency pair). The currency that you are spending or selling is your base currency and the one that you are buying is the quote currency. With Forex trading, you buy one currency by selling another.
Next, we need to consider the exchange rate. If you’ve been abroad and exchanged money then you may already be familiar with this term. In effect, Forex trading is exactly like buying your euros or pounds except you don’t actually handle the physical money, rather you reap the gains of selling them when the exchange rate is good. The exchange rate tells us how much of a quote currency we need to spend in order to buy the base currency.
A short position simply means that you want to buy the quote currency and sell the base currency whereas a long position is the other way round.
Bid Price, Ask Price and Spreads
A bid price means the price that the broker will buy the base currency to exchange for the quote currency. This is the best price possible at which you would be willing to sell the quote currency. An Ask Price is the opposite and is the best price that you would be willing to purchase the currency. The Spread is the difference between these two figures.
How to begin with Forex trading
Now that we understand some of the Forex terminology, we can start to make some decisions about which currencies to buy and sell. This is often a tricky decision for new Forex traders. Firstly, you should try to predict how the economy will fare. For example, if you believe that the economy in the US will continue to weaken, meaning a dip for the US Dollar, you will probably aim to sell dollars and buy a currency from stronger economy countries. Likewise, you need to consider a country’s trades and politics. Elections often affect the economy and governments bringing about austerity measures can cause stagnation or depreciation in the country’s economy. Being aware of such issues will help you as you start on your Forex trading journey.
What about profits?
Once we know what’s what in the Forex market, we need to think about calculating profits. Profits are measured by looking at pips. A pip is the change of value between a currency pair. A pip is usually representative of a change in value of 0.0001. In a EUR/USD pair, if it moves from 1.234 to 1.235, the currency has increased in value by ten pips. To work out the profit, you multiply the number of pips by the exchange rate.
By looking at all of this information and doing some thorough research,brokers it’s a lot easier to step into the Forex trading market. Here is a list of forex brokers to help you get you started! If you don’t feel confident yet, have a look at our comprehensive guide to forex trading.