The Basics of Currency Trading

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A great primer for readers with no experience trading Forex. Speaks clearly on basic topics such as, ´what is currency trading?´ and ´what is a pip?

Learning the basics of currency trading can be a profitable and exciting adventure. While it is easy to find straightforward information or take a class to become proficient in the currency markets, taking the first step and trading with real money can be a great thrill. To prepare for the markets, build a strong foundation first, and practice, practice, practice.

What it is

Currency trading happens on major foreign exchanges across the globe. The markets are open five and a half days a week and trades can be executed over the counter 24 hours a day. Trades are only made electronically and ‘OTC’, and consist of nothing more than a transaction between two parties, with only their good name to guarantee the exchange.

More than 2 trillion dollars are exchanged on a daily basis, and currency prices change often and for a number of reasons. Beginning traders need to understand what factors can affect a country’s currency and be ready to take advantage of it. Political, economic, and environmental policies, as well as civil unrest, natural disasters, and famine, will all affect a country’s exchange rate.

To learn the basics, individuals simply open an account through any major brokerage or the Forex website. They can start with as little as $25 and can test their skills before risking a penny of it. The practice software is typical in Forex accounts and allows the trader to participate in the action without risking real money. Traders using a demo account to become comfortable with the markets give themselves an edge and a better chance of success.

How to Trade

Before the first order, the investor must understand what the numbers mean. Quotes are always in pairs, such as the USD/CAD, or U.S. dollar versus the Canadian dollar. The U.S. is one of the seven majors, which are the largest and most frequently traded currencies in the world. Traders begin making money after the dealer earns their profit from the bid/ask spread.

The bid/ask spread is represented by the numbers of a currency pair. The first is the base, and the other is the ‘counter currency.’ When the last number of the base currency goes up, the counter loses value. The fractional value by which a currency change is called a pip, and it represents the smallest amount by which currencies can change.

Understanding Profit and Pips

Short for ‘percentage in points,’ pips can have a great disparity in value. In the example of the EUR/USD pair, a pip represents a single dollar for every 10,000 Euros traded. If the price of the Euro increases by 20 pips, and 10,000 Euros were purchased, the trader makes a $20 profit.

The most active currencies are called the “majors,” and are the USD vs. the Japanese Yen, the Euro, British pound, New Zealand and Australian dollars, Canadian dollar, and Swiss Franc. When starting out, a trader can focus on or two ‘major’ pairs to gain an understanding of how and why they move.

When the proper time is taken to learn the basics of currency trading, the individual investor builds a solid foundation and has a better chance of making profitable trades. Open an account today, and start practicing.

The Basics of Currency Trading
Christopher Todd