Foreign Exchange Trading Guide
Want to learn how to make money trading the currency market? This foreign exchange trading guide is the ultimate beginner’s guide to learn how to properly operate in the FX market. The Foreign Exchange market is infested with big sharks and controlled by the big banks, corporations, and hedge funds. You need to have the proper trading skills if you want to swim with the sharks, otherwise, you’re going to be eaten alive.
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In this Forex trading tutorial, you’re going to learn the exact trading skills and what pieces of information you need to accumulate so you can become a currency trader.
We have taught thousands of traders how to make money in the Forex market and we can show that even a novice can do the same if you put in the right amount of time to educate yourself.
Let’s get our feet wet by defining what the Forex market is, how the Forex market works, and highlight some features of the foreign exchange market. Last but not least, we’ll give you a list of Forex terms to familiarize yourself with the market.
Forex Trading Tutorial
The Forex market, a shortened term for the ‘Foreign Exchange Market’, is the marketplace where currencies are traded against another. The FX market is the world’s biggest financial market in terms of daily transactions.
Forex trading works the same way as stock trading. The only major difference is that the Forex market is a decentralized market.
In its simplest form, currency trading is betting that one country’s currency will rise or fall against another. There are numerous things that can affect the value of a currency to rise and fall. You can use the FX market to speculate on these currency exchange rate fluctuations.
The currency exchange rates change almost constantly during the day, which can give you additional patterns for trade setups.
How to Make Money Trading Forex Currencies
Like in any business, you make money by buying something at one price and selling it at a higher price. The same principles work in FX trading. The difference is that you’re not buying physical products, but buying and selling currencies.
You can make money trading Forex currencies if one of the two things happens:
- If you bought or got long a currency pair and its value increases.
- If you sold or went short a currency pair and its value decreased.
There are several key factors that drive the exchange rate. The central bank monetary policy, economic data, political events, and geopolitical risk events, but ultimately it all comes down to the price action. If you are a visual person, you can learn how to read a price chart to forecast future market trends.
Forex Basic Terms
Learning a new foreign language starts with learning the alphabet. The same goes for the Forex market which has its own alphabet and language. It’s important to learn this new language to understand the market.
Understanding the Forex jargon is essential if you want to learn Forex trading. In TSG’s Forex glossary you will be able to find the basic Forex terminology.
Forex Term #1: Currency Pair
Forex is quoted in currency pairs, one currency unit against another currency unit. And each currency has a 3-letter abbreviation.
For example, if we put together the euro and the US dollar we have the currency pair EUR/USD.
The first currency of the quotation system is called the base currency – the euro.
The second currency of the quotation system is the quote currency or counter currency – the US Dollar.
Forex Term #2: Exchange Rate – The Quote
The exchange rate is the price at which you can buy or sell one currency for another. The price quote shows you how much you need to buy one unit of the base currency using the quote currency.
Since currencies are quoted in pairs, it means that the value of one currency is always stated relative to another currency.
The currency exchange rate is determined by the supply and demand law.
Forex Term #3: Pip
A pip stands for Price Interest Point (or Percentage in Point) and is the smallest price change that a currency exchange rate can make. It’s the last decimal of a Forex quote.
For example, if the EUR/USD exchange rate is currently at 1.1500, and by tomorrow is at 1.1580, we can say the EUR/USD exchange rate has increased by 80 pips.
Forex Term #4: Ask Price
Currency pairs use a two-price quotation system. That is the reason why when you pull up the order window you’ll have two prices. On the right side, you have the Ask price, which is the price at which you buy a currency pair.
For example, if the EUR/USD quote displays the following rates 1.1520/1.1521 you can buy at the 1.1521 price.
Forex Term #5: Bid Price
On the left side of the two-price quote system is the Bid price or the price you need to pay if you want to sell a currency pair.
For example, if the EUR/USD quote displays the following rates 1.1520/1.1521 you can sell at the 1.1520 price.
Forex Term #6: Spread
The spread is the difference between the price at which you buy (Ask) and the price at which you sell (Bid). Usually, the size of the Forex spread depends on market liquidity and volatility.
Forex Term #7: Margin
In the Forex market, you don’t need to have the whole amount of what you’re trading. You only need to deposit a small percent of your trading size to cover possible losses. This deposit that you’re required to set aside is called margin. Your preferred Forex broker will let you trade a certain multiple of that margin. Margin works in conjunction with leverage.
For example, if you want to buy $10,000 EUR/USD and your broker offers you 1:50 leverage, it means that you’ll need to put aside only $500. So with the $500 margin, you can trade as if you actually had put $10,000
Features of Foreign Exchange Market
The main features of the Foreign Exchange Market are that it’s open 24 hours a day, five days a week from Monday morning till Friday night, excluding weekends. Trading around the clock gives you the ability to trade from anywhere without having the time constraint. This means you can trade even after your 9-to-5 job.
The minimum investment to get started trading FX can be as little as $100. On top of that, the cost of FX trading is much less than other asset classes like trading stocks.
High liquidity is one of the key features of the forex exchange market. With a volume of more than $5.5 trillion, this will ensure stable exchange rates. Secondly, you can open and close trades instantly, without any slippage.
The most appealing part of foreign exchange trading is the use of leverage. Leverage gives you the possibility to trade with bigger amounts of money than your deposit. For example, if your preferred forex broker offers a 1:50 leverage, it means that for every $1 in your account you can control $50 in the FX market.
Conclusion – Forex Trading Tutorial
If you’re committed to learning the foreign exchange trading language and start developing your trading strategy, you’ll be trading like a professional trader. Foreign exchange trading can become another source of income for yourself if you develop the right skills.
While every market has its own characteristics, FX trading is extremely popular among new traders and fairly accessible. If you already decided that the Forex market is for you, follow our Forex trading tutorial to get the proper education.
We also have many Forex trading strategies that suit all types of trading styles, so make sure you check out our blog.
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