Introduction
The foreign exchange or forex market is one of the biggest markets in the world.
This is a 24-hour market since currencies are traded all around the globe and the daily volume or turnover is REALLY huge.
So how do you begin trading forex?
If you’re interested in this field then here are some of the basic technical terms and concepts that you can start with as you continue to learn and understand trading with foreign exchange or currencies.
Let’s get started!
Forex trading on eToro’s platform
Currency Codes
Did you know?
Because traders like to keep things quick, they decided to shorten the name of the currencies into three-letter acronyms.
For example:
USD is the currency code is for the US Dollar, GBP is for the British pound and EUR is for the Euro.
Sounds simple right?
Make sure that you’re aware of these codes to so you’ll know what the corresponding currencies are when you see one.
Major Currency Pairs, Commodities and Indices
Fact:
There are half a dozen major currencies around the world and this includes the British Pound, the Euro, the Japanese Yen, the Swiss Franc, the US Dollar, the Australian Dollar and the Canadian Dollar
Here’s what you need to know:
The basic concept is that in forex, these major currencies are always traded in pairs.
So what’s the deal?
That means there will always be two currencies and those that have highest daily volume are the following:
Pips and Spread
In forex trading, profits and losses are measured by the number of pips that are gained or lost.
Also called basis points, the pips are the values after the decimal point of a forex rate.
The smallest change to the forex rate is equivalent to 1 pip.
And here’s another thing…
If you’re going to look at the value of a currency pair, there will be a difference between the buying price (bid) and the selling price (ask).
Here’s a short introductory video that you might want to watch to further understand about spreads:
Leverage
Moving on…
The leverage basically is the money that you borrowed your broker.
This is used for purchasing financial assets which includes currencies, commodities, stocks, indices and cryptocurrencies.
This means:
For every dollar you put up, you can trade the x of a major currency.
For example:
A leverage of 1:400 denotes that you can buy or sell a currency which is 400 times greater than the amount you have in your account.
Want to know more about leverage and margin? This video a must-watch:
Reading Charts
In forex, candlesticks are one of the most commonly used charts and you can use them fully to your advantage.
In this type of chart, there is a thin vertical line that indicated the trading range while the wide bar on the vertical line describes the difference between the open and close.
So what’s the purpose?
Basically, this shows the value of an asset and the volume traded at a specific period.
A candlestick chart on Plus500’s WebTrader platform
Types of Trading Orders
There are different types of orders that you can make to control increase the profits and lower the risks.
- Market Orders – these are orders to buy or sell a currency pair at the most current best price
- Limit Orders – these are orders to buy or sell a currency pair at a certain price or when it is better than the said price.
- Take Profit Orders – this orders your broker to close your trade after your profit reaches a certain level.
- Stop Loss Orders – this orders your broker to close your trade after your loss reaches a certain level.
- Trailing Stop Orders – this orders the broker to close with a sell order if you have entered a trade with a buy order. On the other hand this orders the broker to close with a buy order if you have entered a trade with a sell order.
Risk Management
There are plenty of ways to manage your risks and you need to find the best method that will suit your trading style.
However…
It is important that you strictly follow these management strategies in order for them to work effectively.