The forex market is the world’s largest financial market in the world, with about $5 trillion traded every day.
Forex (or FX) stands for ‘foreign exchange’, travellers will have heard of foreign exchange as it's the process to buy currency when visiting another country. For example, you may sell your South African rand and buy US dollars for your trip to the USA. The online forex market is, however, 90% speculative, which means that you don’t take possession of the actual, physical currency. Rather, you open and close deals and make either a profit or loss which gets reflected in your online account balance.
Because the forex market is an over-the-counter (or OTC) market this means trading takes place directly between two parties without dealing through an exchange. Allowing you to access the forex market online anywhere in the world.
Currencies are always traded in pairs, the first currency is called the base currency and the second is called the counter currency. When you buy a currency pair you are always buying the base currency and selling the counter currency. The reverse happens when you sell the pair.
Most brokers allow the trading of many different currency pair combinations, just remember that the major pairs are the most liquid.
A pip, short for percentage in point, is the smallest unit of change in price. Most currency pairs are quoted with four decimal points, therefore, one pip usually equals 0.0001 but for some currency pairs 1 pip equals 0.01 such as the USD/JPY.
Long means to buy a currency or asset. You would want to ‘go long’ when you are looking for prices to increase, or rise.
Short means to sell a currency or asset. You would want to ‘go short’ when you are looking for prices to decrease, or fall.
The spread is the difference between the bid price (the price that a buyer is willing to pay) and the ask price (the price that a seller is willing to receive) of a security or asset. The spread is essentially the cost of your trading.
A stop loss order is an order placed with a broker to automatically close a position at a loss if the market goes in the opposite direction of your open order. Using a stop loss is a way to limit your risk and because you set the stop loss, you have control over your risk. A stop loss can be used for both long and short trades.
A take profit order is an order placed with a broker to automatically close a position in profit if the market reaches your desired profit level. Using a take profit rate helps you to control your trading as you don’t need to continuously observe your open position. A take profit can be used for both long and short trades.
Believing a market will rise or increase in value.
Believing a market will fall or decrease in value.
There is a third type of Analysis – Sentiment Analysis. This type of analysis involves studying the ‘feeling’ of the market. When a currency is falling in value it is said to have bearish sentiment, and when a currency is rising in value it is said to have bullish sentiment.
Many traders have their preference for analysis, and some would even go as far as to completely dismiss the validity of the others. This is not helpful, new traders should try to understand all types of analysis, and then decide what to apply when trading. It’s even possible to use more than one type of analysis whilst trading the markets.
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