The term ‘Forex’ is the combination of two words i.e. Foreign Exchange.
All forex trades engage two currencies because you’re betting on the value of a currency against another. Currencies need to be exchanged in order to perform foreign trade and business because you are always buying or selling one currency using another currency, you make the trade of ‘currency pairs’.
This is the world’s biggest financial market with making a daily turnover of $5 trillion.
80% trader make a loss in this market and 20% make profits, in which only 10% trader earn valuable income.
Forex Trading is not magic of making money, it is different kind of business where you can earn only and only with knowledge about basics and market fundamentals.
Forex Trading Example
If you live in the London and want to buy a burger from the USA, either you or the company that you purchase the burger from has to pay the London for the burger in British Pound (GBP). This means that the U.S. importer would have to exchange the equal value of GBP into U.S. dollars (USD). The same goes for traveling. A USA tourist in Egypt can’t pay in USD to view the pyramids because it’s not the locally accepted money. As such, the tourist has to exchange own currency for the local market currency, at the current exchange rate.
EUR/USD pair of Forex market is the most-traded currency pair in the world.
In the forex trading, when you calculate a price estimated on your platform, that price is how much one currency is worth in the other currency. You always find two prices because one is the buy price and second is the sell price. The difference between the two prices is the “spread”. When you click to buy or sell, you are buying or selling the first currency in the pair.
The big difference of forex trading with stock trading is that you can easily trade up or down. If you assume a currency’s value will increase, you can buy it. On the other hand, if you assume it will decrease, you can sell it. With a market, this large, searching a buyer when you’re selling and a seller if you’re buying is much easier than the other markets.
Some important key terms that every forex traders must be known.
The base currency is the first currency that appears in a forex pair. This currency is bought or sold in exchange for the quote currency.
The quote currency – also referred to as the ‘counter’ currency – is the second currency that appears in a forex pair.
The Bid Price is the price a trader is willing to buy a currency pair at. It is given in real-time and is constantly updated.
The Ask Price is the price a trader will sell a currency for.
It is given in real-time and will change constantly, driven by market demand, as well as the political and economic factors that influence the value of individual currencies.
A spread is a difference between the ask price and the bid price. In other words, it is the cost of trading.
A point in price – or pip for short – is a measure of the change in a currency pair in the forex market.
Conclusion: Here we have shown some basic and important information about forex trading. In the next chapter, we will cover market analysis and forex graphs