Forex stands for the foreign exchange market– it involves selling and buying of currencies and is growing at very fast pace.
Working of forex trading is similar to that of stock market, where you buy and sell. Forex trading is really simple since you do not have to select from thousands of sectors or companies.
The Basics of How Money is Made Trading Forex
We always buy or sell the currency on left side of the pair. When we are buying the currency on the left side called the base currency, we sell the currency on the right called cross currency. The opposite is also true that is if we sell the currency on the left.
In currency trading, taking a sell position means you are borrowing the other currency in the pair that you were selling from your broker and if the price reduces, you would then sell it at lower price to the broker. Profit is equal to price at which we borrowed from the broker and the price at which we sold back to him.
If you buy currency pair and its value increases then you make profit. Selling currency pair at price lower than initial price of pair would result in loss.
- The currency which you are selling is called the base currency. The currency which you are interested in purchasing is called quote currency. In forex trading, you sell one type of currency to buy another currency.
- The exchange rate decides how much of quote currency will we get for selling base currency.
- A long position involves buying the base currency and selling the quote currency.
- A short position involves buying quote currency and selling base currency.
- The bid price is the price which you are ready to pay for quote currency to the broker with base currency.
- The ask price, is the price broker is ready to pay for your base currency through quote currency.
Below are some points to guide someone to start forex trading –
Deciding Which Currency to Buy and Sell
The economy of a country decides the fate of its currency. Currency of a particular country boosts if economy of that country performs well, politically stale and other factors like inflation and employment.
Therefore you must keep yourself updated and have good knowledge of countries economic conditions.
You must consider various factors before choosing broker-
Check the services provided by broker. Also look into the history of the broker to make sure he is trustable and his research is good.
Analyze the market. You can try several different methods:
1. Technical analysis: Technical analysis involves reviewing charts or historical data to predict how the currency will move based on past events.
2. Fundamental analysis: This type of analysis involves looking at a country’s economic fundamentals and using this information to influence your trading decisions.
3. Sentiment analysis: This kind of analysis is largely subjective. Essentially, you try to analyze the mood of the market to figure out if it’s “bearish” or “bullish.” While you can’t always put your finger on market sentiment, you can often make a good guess that can influence your trades.
Determining Your Margin
Even on investing small amounts of money, you can make big trades, depending on policies of your broker. You must invest very prudently, considering charges levied by the broker. Then you can accurately determine your margin.
Placing orders – You can place different kinds of orders-
1. Market orders: This implies that you ask your broker to invest your money i.e. buy or sell at current market price.
2. Limit orders: In this type, you instruct your broker to execute the order at a specific value. For example you can instruct your broker to sell the stock one’s it goes below a certain limit price.
3. Stop orders: This involves buying or selling the currency above (anticipating it will increase) or below (anticipating it will decrease) the market price respectively.