Basics Forex for Newbies - Forex Basics Training Guide
Learning to trade the currency market is much easier for beginners when beginners start by learning the basic terms in forex trading. This way the other forex trading concepts become much easier to learn because the new forex trader will have already learnt about the Basics Forex for Newbies before proceeding to the other forex concepts.
The Basics Forex for Newbies that traders should learn first before starting Forex trading are:
What's Forex? - Basics Forex for Newbies
Forex is the simultaneous buying and selling of one currency for another. Traders buy and sell currencies for speculation purpose and for the purpose of trying to make a profit. Traders will buy a currency that they think will appreciate in value and sell the currency that they think will depreciate in value.
In Forex trading traders buy currencies when the currencies become undervalued and sell currencies when currencies become overvalued. This is the basic concept of trading forex, as a beginner if you want to become successful when trading currencies you must learn to buy undervalued currencies and sell overvalued currencies. Many Forex traders miss this concept and do the exact opposite buying overvalued currencies because that is when these currencies seem to be moving up and up and they sell undervalued currencies because these currencies seem as if they will continue to move lower.
Just like in stock market successful trader buy stocks when the stock price is low & sell stocks when the stock price is high. This is the same trading concept that traders should follow when trading currencies.
What's a Currency Pair? - Basics Forex for Newbies
Forex trading is the simultaneous exchange of one currency for another, for this reason forex currencies are traded in pairs known as currency pairs. For example EURUSD is the currency pair which traders wanting to exchange EUROs for US Dollars trade. In this currency pair the EURO is being traded against the US Dollar.
What's a Currency Quote? - Basics Forex for Newbies
Because forex currencies are traded in pairs, the price at which these currencies are exchange is determined by the currency quote. For example if EURUSD currency quote is 1.2500 it represents how much one EURO is worth in terms of US Dollars. 1.2500 currencies quote means that 1 Euro is equivalent to 1.2500 US dollars.
Currency quotes in Forex are quoted in the format of four decimal places.
What's a Pip?
Currency quote are quoted in the format of four decimal places. The last decimal place represents a Pip which is the smallest movement used to calculate profit and loss in forex currency market moves.
Pip means Price Interest Point: it's a one point move in the currency quote. For example if EURUSD currency pair is quoted as 1.2500, then 1 pip movement will mean that the exchange rate will move up by one point to 1.2501 or down by one point to 1.2499.
If the EURUSD currency quote moves from 1.2500 to 1.2600, this would be a 100 pip movement in the currency quote and this pip movement would be used to calculate the profit a trader would make if they had opened a trade at 1.2500 and closed it at 1.2600.
What's a Lot? - Basics Forex for Newbies
In Forex currencies are traded in units known as lots. The standard lot is made up of 100,000 units of currency. There is also the Mini lot which is made up of 10,000 units of currency and the Micro lot which is made up of 1,000 units of currency.
For one standard lot the profit is $10 per pip, for mini lot the profit is $1 per pip and for micro lot the profit is $0.10 per pip. Therefore, in the above example where the currency pair moved up by 50 pips if a trader was trading using one standard lot then their profit would be $10 multiplied by 50 pips which is $500 dollars.
What's Leverage? - Basics Forex for Newbies
Because not many Forex traders can afford to trade 100,000 units of currency or 10,000 units of currency, there is leverage in Forex which means that traders can borrow money and use the borrowed money to make trades with. For example leverage of 100:1 means that a trader with capital of $10,000 can borrow up to 100 times using the 100:1 leverage option & therefore after borrowing using this leverage the currency trader will have a total of $10,000 multiplied by 100, which means the trader will have a total of $1,000,000 and can therefore trade ten standard lots of $100,000 units of currency. This leverage is what makes Forex accessible to retail traders because retail traders can begin with little capital of their own & use leverage to borrow the rest of the money required for forex trading. The money that the trader deposits is referred to as a trader’s margin & a trader can continue borrowing money using this leverage option as long as they have the required margin in their account. This is why traders must have the required account balance in their account to open the trades they want to, for example a trader using leverage 100:1 must have more than $1,000 in their account to be able to open and trade using standard lots.
What's Margin? - Basics Forex for Newbies
Forex Margin is the specific amount of money that a trader is required to put aside in order to continue holding an open leveraged trade. Margin can also be explained as the deposit a trader is required to keep so as to maintain his open positions. This margin is a percentage of account equity that has to be set aside and allocated as a margin deposit for the open positions that are held by a forex currency trader.
