Forex trading has a reputation for being tricky – but it absolutely doesn’t have to be. Before you start trading, you need to learn the basics of forex trading and how it all works. Get to grips with basic forex terminology, forex quotes and how it all works by reading our guide below.
- Base currency – the currency that you are spending or selling
- Quote currency – the currency that you are purchasing
- Exchange rate – the amount of money that you have to spend in one currency to receive an equal amount in another country. For example, the current exchange rate for GBP/USD would be something like this: 1 GBP/1.5204 USD. This means that you need to spend 1 GBP to get 1.5204 USD.
- Short position – when you want to buy quote currency and sell base currency. For example, you would sell US dollars in order to purchase British pounds.
- Long position – when you want to buy base currency and sell quote currency. For example, you would sell British pounds in order to purchase US dollars.
- Bid price – the price at which you or your broker is willing to purchase base currency in exchange for quote currency
- Ask price – the price at which you or your broker is willing to sell base currency in exchange for quote currency
- The spread – the difference between the bid price and the ask price.
Understand Forex Quotes
Forex quotes are actually very simple. On the left hand side, you’ll see the bid price, and on the right hand side, you’ll see the ask price. That’s all you need to know!
Learn About Trading
Before you spend a single penny, you need to learn about the very basics of forex trading – which involves learning about different currencies, how stable or volatile these currencies are and how likely it is that you’ll make losses or gains in those currencies. Look at trading reports and financial newspapers and build your background knowledge about different currencies. As an example, if the US economy is in a weak position, the value of the dollar may also weaken and so a trader may want to sell US dollars in exchange for a currency from a country with a strong economy. You also need to look at how each country trades. As an example, China has a strong trading market and sells many goods. This means that their export market is very strong and the value of their currency is likely to be higher.
It’s also important to get an idea of the general economic status of each country that you’re looking to trade currencies in. For example, reading newspapers or articles should give you an indication into factors that could affect the currency, such as inflation, employment, immigration and recession. Elections can also play a part in how strong or weak an economy is. If a leader is elected with a strong financial position, the currency will increase in value, whereas if a leader is elected with a poor financial position or plans to make cuts, the currency may decrease in value. Keep an eye on the general economic status of each country and you’ll soon start to get to grips with which currencies are your best choices, and which currencies could provide the best yield.
Open a Demo Account
The only way for you to learn how to trade forex is to actually do it – but if you activate an account with your money, you’re setting yourself up for some huge losses. Get to know the forex market and do your homework, then open a demo account. This allows you to trade forex, buying and selling base currency for quote currency, without the risk of losing money. A demo account is really the only way for you to properly get to grips with trading and it will also allow you to build confidence when it comes to trading. Once you’re confident in your demo trading, you can open a forex account and start trading for real.
Know Your Profits
A pip, or a PIP, measures the change in value between two currencies. If your GBP to USD moves from 1.5204 to 1.5205, for example, your currency value has increased by 1 PIP. A PIP is usually equal to 0.0001, although this could differ from market to market. To calculate how much your account has appreciated or depreciated in value, you should multiply the number of PIPs that your account has altered by, either up or down, by the exchange rate.
Find the Right Broker
There are literally thousands of brokers and brokerage firms out here, and although there are many, many excellent firms, there are also a large number of shady firms. Find the right broker by following the tips below.
- Find a broker that has been working in forex trading for 10 years or more, as this shows they have enough experience
- Ensure that the broker is regulated by the governing body for your country. A broker that has not signed up to a governing body may be engaging in some shady tactics.
- Check out their website. If it looks professional and includes some customer testimonials, you should be on the right track. If the broker does not have a website, or they have a website jammed with broken links or poorly worded content, steer clear.
- Check what your broker deals in. If they also sell stocks and shares such as commodities and securities you can be safe in the knowledge that they have a wide and varied financial and business reach.
- Take a look at reviews. Some reviews will be genuine and some may have been “planted” by the brokerage firm. If you are unsure about whether or not the brokerage firm is being honest, look for what they offer in terms of customer service, support, advice and transparency.
- Ensure that the forex trading process is as simple and as transparent as possible. Get to grips with any charges and make sure you know whether you’ll be charged for accessing the money in your forex account.
- Ensure that there is a stop loss system in place whereby you can place the loss at a certain percentage or monetary value in order to prevent your losses from accumulating.
Once you’ve gotten to grips with the forex trading basics, you can move on to trading. Take a look at our other articles for more tips and advice.