Learning basics currency trading is something of an adventure. It is easy to find straightforward information or take a class to become proficient in the currency markets, but taking the first step and trading with real money can be a great thrill. To prepare for the markets, build a strong foundation first.
What it is
Currencies are traded on major foreign exchanges throughout the world. They are open five and a half days a week and traders can execute over the counter orders 24 hours a day. Trades are made electronically and ‘OTC’ exclusively, and consist of a transaction between two parties with no other guarantees.
Trillions of dollars are exchanged on these markets daily, and the fluctuation of prices happens often and for a multitude of reasons. A beginning trader needs to have an understanding of what factors affect Forex quotes and be prepared to take advantage of it. A famine, wars, bad harvests, environmental or economic disasters, and political unrest and policy decisions will all affect a country’s exchange rate.
To learn basics quickly, individual investors can open an account through any major brokerage with as little as $25 depending on the firm. Practice software is standard for Forex accounts and will allow a person to execute trades without risking real money. Traders who use this practice until they are comfortable with the markets can give themselves an advantage, and gain an understanding of currency quotes.
How to Trade
Before executing the first order through a Forex dealer, the investor must understand what the numbers mean. The quotes are given in pairs, such as the USD/EUR, or U.S. dollar versus the European Euro. The U.S. is one of the seven majors, which are the most quoted and traded currencies in the world. To make a profit, the trader must overcome the bid/ask spread.
The numbers represent the bid/ask spread of a currency pair. The first number is the base, and the other is the ‘counter.’ When the last number of the base goes up, the counter is weakening. Currencies change fractionally, so they are traded in pips, which represent the smallest margin by which it can change.
Understanding Profit and Pips
The value of a pip, short for ‘percentage in points,’ can have great disparity depending on whether it represents the base or the counter. As the counter currency in the EUR/USD pair, a pip represents a single dollar for every 10,000 Euros traded. If the Euro increases in value by 10 pips, and 10,000 Euros were purchased, the trader makes a $10 profit.
Investors can trade any currencies they choose, but the ‘majors’ are the most active, and include the USD vs. the Japanese Yen, the Euro, British pound, New Zealand and Australian dollars, the Canadian dollar and Swiss Franc. When starting out, a trader can focus on one or two pairs to gain proficiency, and learn to spot trends in these countries before branching out.
Taking the time to learn basics currency trading will give the individual investor a solid foundation and a better rate of success.
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