The advantage of the forex trading for the beginner is he/she gets the price quote at any time i.e. day or night. As the stock market in the US opens for Monday to Friday in 9.30 pm to 4 pm, the trader has to plan the trading schedule according to stock market. But in the case of forex trading it will not occur and so he/she can trade in off period also. It is not surprising to know that forex trading is the largest as well as most liquid global financial market.
Let’s start with forex
Before few years currency trading was limited to only major financial players like financial institutions, banks, global corporations, investment funds, etc. These were the only contributors that could invest huge amount of money in the market on regular basis. So, average investors could not compete in this trading with these institutions. Also he/she don’t have enough capital to compete with these major players. But, now the picture has changed.
Due to internet trading currency deals have become faster, accurate and cheaper. Now, every person from a billionaire to a hardworking professional can become individual forex trader. Also, the market is open day as well as night and so all these investors get more time for investment and also big trading experience in short period. Now, we consider some basic terms as well as ideas of forex trading before starting actual forex trading.
What is forex?
A question may emerge in your mind what the forex exactly means. ‘Forex’ is simply the short form of ‘Foreign exchange market’. Due to formation of forex, the backing of world currencies by valuable commodities like gold ended. This decision was taken by US President Richard M. Nixon in 1971. As a result, the era of fixed exchange rates ended and the era of floating exchange rates began.
As we know the forex is abbreviation of foreign exchange market, the currencies traded in this market also have abbreviations. This is known as currency code. The British pound has currency code of GBP. The US Dollar has currency code USD. There are other major currency codes available and these are useful to save time as well as space during forex trading. These currencies are not traded individually, but they are traded in pairs.
Trading of stocks and currencies are differentiated based on measurement of gains and losses. In stock market, the traders use mixture of points as well as fractions to denote their performance in the session. But, in the case of forex trading, they use pipe. Pipe is the smallest change occurs in the exchange rate. For example, If GBP is trading at 1.7800 then pip would be 1.7801 for profit or 1.7799 for loss.
The currency pair is generally quoted with two prices i.e. a bid and ask price. The spread is difference between buying bid i.e. bid and selling i.e. ask price. For example, in a forex trade the currency pair is listed as 1.7800/04 (GBP/USD). Here the spread will be 0.0001 or 4 pips.
From the above example, you will notice that making 4 pips is very negligible amount and the forex trader will make big sum obviously due to Leverage. Leverage allows the forex trader to invest 20, 50, 100, 200 etc. times more capital available in his/her account. This means he/she can bet more amount if he/she wants big sum. But he/she may lose money I he /she bets for wrong choice.
I hope now you are familiar with all basics of forex trading. Now you can put your efforts to become a successful forex trader.
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