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Understanding the Basic Concept of Forex Trading

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The Foreign Exchange simply known as Forex is the world’s biggest financial market with highest liquidity, however many individual investors are not familiar with its concept. Forex trading is highly dominated by bank dealers and transnational companies. Individual investors became more interested on how Forex works with the introduction and increasing popularity of internet trading.

Understanding the Basic Concept of Forex Trading

What is Forex and how does it work?  As mentioned above it is the abbreviation of Foreign Exchange. It is the relative value of one currency versus another. In other words, you need a currency pair to be able to make a Forex transaction. You need a particular currency such as the U.S. Dollar (USD) to buy or sell another currency (EUR, YEN or Swiss Franc) based on the existing exchange rate.

Forex trading is done in currency pairs. The four major currency pairs include USD/EUR (U.S. dollar against the Euro), USD/JPY (U.S. dollar against the Japanese Yen), USD/GBP (U.S. dollar against Britain’s pound) and USD/CHF (U.S. dollar against the Swiss Franc).  Other currency pairs such as USD/AUD (U.S. Dollar against Australian dollar), USD/CAD (US dollar against Canadian dollar) and USD/NZD (U.S. dollar against New Zealand dollar) are considered main commodity pairs.

The exchange rate of world currencies is not fixed and it is always changing or fluctuating. Exchange rate is the purchasing power currency compared with another currency.

For example the exchange rate for 1 US dollar = 0.8018 Euro

Take note that exchange rates generally carry four decimal points. The smallest percentage point in the Forex market is called Pip (percentage in point).

Using the USD/EUR currency pair and the exchange rate above, a $200 will be able to buy 160.3592 Euros. If the dollar weakens and the exchange rate becomes 1 US dollar= .7500, the 160.3592 in your possession will be able to purchase USD 213.8123. You gain more than $13 based on the transaction.

Expert forex traders based their transactions based charts. They use charting to make decision particularly to determine the price movements over time before trading. The candlestick chart is commonly used by traders because it is simple and it provides a detailed information about the price movements on a particular time.

To be able to become a successful trader, it is important to use simple charts, get educated by watching free videos regarding the fundamental concepts and technical analysis of forex trading and most importantly learn by practicing trading in the actual market using paper trade without risking money. By doing that, you would be able to actually experience trading, experiment, use investing strategies, create charting patterns and eventually apply what you learn to gain profit. It is also important to consider your trading style with time, meaning short-term traders spend time analyzing the hourly, daily or weekly chart of price movements.

In terms of market analysis, Forex traders are closely watching the price changes, the quantity of trades (volume) over time. It is important to take note of the price patterns to determine buying opportunities and risks. It is also important for a person to understand the inherent risks, read the disclosures and warnings by the dealer before making a trade. Remember that Forex is a leverage product and there is a great chance that you will incur more losses because you can control large amount of currency with a small margin. For example, a 1:200 leverage means you will receive $200 in your account for every $1 you invested. If you invest $1000, you would be able to control $200,000 worth of currency trade.  Money management is significant to succeed in Forex trading wherein you need to plan your risks, learn how to apply stop, losses and practice diversification in your trading practices.

Find out further information about trading forex to gain more knowledge on the global currency market

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