Forex 101: What You Need to Know about Forex trading
Forex trading has emerged as one of the most viable ventures that an individual can engage in. This is partly for two reasons: One is that traders in Forex Markets need only a stable internet connection with a computer that runs smoothly to start trading. The necessary knowledge to trade is an icing on the cake. Secondly, the potential to make a large profit on a relatively small investment is another aspect that makes Forex trading an appealing business venture. Therefore, the rise in interest for Forex trading can be attributed to the two reasons set forth therein.
Forex is the largest market in the world and as such the trade that happen in it affects everything from the price of clothing in imported from Malaysia to the amount of Money you pay for vacation in Maldives. It is however important to note that forex trading is similar to currency exchange that we do when traveling abroad.
Trading Currencies in Forex Market
Noteworthy is the fact that all currencies in the market are assigned a three letter code. While there exists over 170 currencies globally, United States Dollar is involved in a vast majority of forex trading, as such, it is helpful to know its code (USD). The second most popular currency in the Forex market is the Euro, the euro is type of currency accepted in 19 member states of the European Union and its symbol is EUR.
Other major currencies in the Forex market are (they are mentioned in order of popularity): Japanese Yen (JPY), British Pound (GBP), the Australian Dollar (AUD), the Canadian Dollar (CAD), Swiss Franc (CHF) and the New Zealand Dollar (NZD).
Consequently, all forex trading is expressed as composition of two currencies being exchanged. Below are known as the majors in the Forex trading markets — they account for 75 percent of trading in the forex market: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CAD, USD/CHF and NZD/USD.
It is crucial to note that, unlike Currency exchange, forex trades are not made for the purposes of exchanging currencies but rather to speculate about future price movements much like stock trading. Like stock traders, Forex traders attempt to buy currencies whose value they think will increase relatively to other currencies or get rid of currencies whose value they think will decrease soon. As result of this, there exists three ways to trade forex which will accommodate the varying goals of different forex traders. These are:
(a) Spot Market
It is the primary market where those currency pairs are swapped and exchange rates are determined in real-time based on demand and supply. Most Forex traders prefer this mode of trading
(b) Forward Market
Instead of triggering a trade now, traders can also enter into a contract with another trade and lock in an exchange rate for an agreed upon amount of currency on a future date.
( c) Future Market
Here, traders can opt for a standardized contract to buy or sell a pre-determined amount of currency at a specific exchange rate at a date in future. Like forward markets, this is done on exchange rather than privately
Importantly, Forward and future markets are done by traders who want to speculate or hedge against future price changes in a currency. Exchange rates in these two markets are based on what is happening in the Spot Market.
Crucial Trading terms to know
Currency pair — As already highlighted, trading is expressed as a combination of two currencies being exchanged. Therefore, currency pair is a combination of currencies being exchanged.
Pip — this term is an acronym of Percentage in points. A pip refers to the smallest possible price change within a currency pair. Forex prices are quoted out to at least four decimal places and therefore, a pip is equal to 0.0001.
Bid-ask Spread — As with other assets like stocks, exchange rates gets determined by the maximum amount that buyers are willing to pay for a currency (bid) and the minimum amount sellers require to sell (ask). The differences between these two amounts and the values traders ultimately will get executed at is bid-ask spread.
Lot size— Forex is traded by a standardized unit of currency. The typical lot size is 100,000 units of currencies, though there exists mini (10,000) and Micro (1,000)lots available.
Leverage — Due to large lot sizes, some traders are not willing to put up so much money to execute trade. In Forex trading, Leverage is another phrase for borrowing money and it allows traders to participate in Forex market without the amount of money required.
Margin — Crucial to note is that trading with leverage is not free. Traders therefore must put down some money upfront as a deposit and that is what is called a margin.
In Conclusion, Forex trading is one of the ways through which companies, firms and individuals are amassing a lot of money. While untangling Forex trading can be disconcerting, with patience it can be a goldmine. This is why Forex trading has risen in popularity over the last year especially in the Continent of Africa.
