How to Trade Forex
Trading foreign exchange on the currency market, also called trading forex, can be a thrilling hobby and a great source of income. To put it into perspective, the securities market trades about $22.4 billion per day; the forex market trades about $5 trillion per day.
You can trade forex online in multiple ways.
This article discusses the following info :
- Understand basic forex terminology.
- Read a forex quote.
- Decide what currency you want to buy and sell.
- Learn how to calculate profits.
Understand basic forex terminology.
- The type of currency you are spending or getting rid of, is the base currency. The currency that you are purchasing is called quote currency. In forex trading, you sell one currency to purchase another.
- The exchange rate tells you how much you have to spend in quote currency to purchase base currency.
- A long position means that you want to buy the base currency and sell the quote currency. In our example above, you would want to sell U.S. dollars to purchase British pounds.
- A short position means that you want to buy quote currency and sell the base currency. In other words, you would sell British pounds and purchase U.S. dollars.
- The bid price is the price at which your broker is willing to buy base currency in exchange for quote currency. The bid is the best price at which you are willing to sell your quote currency on the market.
- The ask price, or the offer price is the price at which your broker will sell base currency in exchange for quote currency. The ask price is the best available price at which you are willing to buy from the market.
- A spread is the difference between the bid price and the asking price.
Read a forex quote.
You'll see two numbers on a forex quote: the bid price on the left and the asking price on the right.
Decide what currency you want to buy and sell.
- Make predictions about the economy. If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, then you probably want to sell dollars in exchange for a currency from a country where the economy is strong.
- Look at a country's trading position. If a country has many goods that are in demand, then the country will likely export many goods to make money. This trading advantage will boost the country's economy, thus boosting the value of its currency.
- Consider politics. If a country is having an election, then the country's currency will appreciate if the winner of the election has a fiscally responsible agenda. Also, if the government of a country loosens regulations for economic growth, the currency is likely to increase in value.
- Read economic reports. Reports on a country's GDP, for instance, or reports about other economic factors like employment and inflation will have an effect on the value of the country's currency.
Learn how to calculate profits.
- A pip measures the change in value between two currencies. Usually, one pip equals 0.0001 of a change in value. For example, if your EUR/USD trade moves from 1.546 to 1.547, your currency value has increased by ten pips.
- Multiply the number of pips that your account has changed by the exchange rate. This calculation will tell you how much your account has increased or decreased in value.