5 Essential Lessons in Currency Trading Basics
The currency trading market is the biggest market in the world and anyone can participate in it. The forex market has the capabilities to give you extremely huge profits, yet at the same time it also could get you bankrupt overnight. That's why having solid forex trading basics is extremely important for anyone who wants to participate in forex trading.
The Basic: You Always Sell and Buy At the Same Time
One of the most confusing concepts for people who are not familiar with currency trading is the idea of "sell high buy low" to achieve profit. To put it differently, you "sell" first, then "buy" afterwards. How could I sell something if I do not own anything in my possession?
It will be better to explain it with examples, so here it is:
You might have seen this before: GBPUSD = 1.5341. It means 1 GBP = 1.5341 USD.
- If you buy EURUSD at 1.3578, it implies that you RECEIVE 1 EUR and PAY 1.3578 USD. In other words, you buy EUR and sell USD at the same time.
- If you sell EURUSD at 1.3578, it means you PAY 1 EUR and RECEIVE 1.3578 USD. Quite simply, you sell EUR and buy USD at the same time.
The Concept of Pips
A "pip" (percentage in point) is the tiniest movement that a currency pair can have. Example: current GBPUSD is 1.7657, then it moves up 1 pip, it will turn into 1.7658. To put it simple, you need to simply watch the decimal number. Commonly, 1 pip is 0.0001, but there are cases such as USDJPY where 1 pip is 0.01.
Here's another example:
- EURUSD is 1.4300, then it moves down 10 pips; thus: 1.4300 - (10 x 0.0001) = 1.4290.
- USDJPY is 100.24, then it moves down 4 pips, thus: 100.24 - (4 x 0.01) = 100.20.
The Concept of Leverage
Leverage is a system that allows common people who don't have large amount of capital to take part in forex trading. Quite simply, your broker "lent" you the capital that you need to back up your trades.
Example: with 1:300 leverage and USD 500 deposit, you can trade 300 x 100 = USD 150,000 worth of currencies.
The Concept of Lots
In forex trading, you trade in "lots". Usually, the standard size for a lot is 100,000 for any base currency. In other words, if you deposit USD 500 at a forex broker that offer 1:400 leverage, then you can trade 500 x 400 = 200,000 worth of currencies or 2 lots. Depend on your broker, they can also give you 10,000 lot size.
The Concept of Profit and Loss
It's just like any other trades in the world, you'll want to buy at low price and sell at high price. The only real difference here is you can sell first when the price is high, then buy later once the price has fell. As I have described above, it is possible since you always buy and sell at the same time.
The profit/loss formula for any currency pair with 4 decimal (such as EURUSD) is:
(pip difference x 0.0001) x lot size x lot volume
Note:
- Pip difference is sell price - buy price
- The result is in the right side of currency pair. Illustration: in GBPUSD, the result is in USD.
Illustration:
Buy 1 lot of EURUSD at 1.4500, then sell it at 1.4550
Pip difference: (sell price - buy price)/0.0001 = (1.4550 - 1.4500)/0.001 = 50 pips (profit).
Profit = (50 x 0.0001) x 100,000 x 1 = USD 500.
Learning forex trading basics is not as difficult as it may seem. An easier way to do it is simply open a demo account, then have a step by step lessons that you can practice immediately at the demo account. By using this method, you'll find it easier to comprehend the lessons and concepts. Have a look at forex trading course for totally free step by step course that cover the essential basics of forex trading.
If you willing to learn as you involved in real trades, see the details of a program that enable you to do it safely in Trader Outlook review.
Questions and Answers
Forex currency trading they say is really a gold mine - if you understand the ball game that is. The good thing about this game is when you come in believing that you'll be a winner just like the person with many years of experience prior to you, you're blatantly mistaken.
In Order to Learn Currency Trading to Its Fullest, You Must Follow All the Guidelines Set by the System. This is a Very Complex Task Which not All May Appreciate. However, With the Promises of Giving a Significant Return on Your Investment, You Definitely Would Want to Take Your Chances on It. to Make All Things More Fruitful for Your Money, it is Always Best to Go Into the Details of All the Basics and Complexes of the Forex Market.
This article will give an overview of currency trading or as it is also called Forex!
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