The currency trading is simply as easy to learn how the stock exchange works. But what are the fundamentals for forex trading – from the point of view of an interested private Canadian investor? The editors of Forexbrokercanada.ca have investigated the question of trading forex and have summarized all the fundamentals for beginners so that beginners specifically can find out how to trade forex. From the definition of “Forex” to leverage and margin call to the importance of rollover interest for your trading strategy.
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Important things to know when trading Forex
If you would like to trade forex, you must of course first familiarize yourself with a couple of theoretical things. The foreign exchange market ( FOR also EX change market = FOREX ) could be a very interesting market. That is because it is very liquid and at a similar time very volatile. Forex trading works differently than stock trading; two positions are always traded. One currency from a currency pair is bought while the opposite is sold at the same time. The currency first mentioned in a currency pair like EUR / USD is that the base currency, the currency following is the quote currency.
The rates on the Forex markets don’t move randomly , but react – even extremely sensitively – to relevant news. These are often major events such as a change in interest rates by the European financial institution or the Federal Reserve System, but also small changes in the trade balances of two countries. World-changing decisions such as the establishment of the “rescue package” for the euro area had a powerful impact on the foreign exchange market and even for months!
By combining currency trading with leverage products, the currency market is now also open to interested private investors. You should by no means be a whole beginner in trading before your first Forex trade. This is because financial products with leverage have their own laws. As long as you’re still unsure about a few points and connections, you must only observe the markets and place one or the other test trade with a free and risk-free forex demo account from a broker.
Forex Trading Basics: Specifics of the worldwide Forex Market
Consumer tipsForex is a concise abbreviation for the FOR own EX change market. With an estimated five trillion US dollars trading volume per day. The Forex market is the largest financial market in the whole world. Foreign exchange trading takes place over the counter. There are no major interchange exchanges and therefore the majority of foreign exchange trading takes place in interbank trading.
Forex Market is both a very liquid and a really volatile market and functions fundamentally differently than the stock exchange : Forex trading always involves trading two values at the same time, a currency pair. A currency pair is represented in the following form on the exchange market: EUR / USD or USD / EUR. The first currency in a currency pair is called the base currency. The second is termed the quote currency . In Forex trading, as in stock trading, there’s a bid price (for buying) and an ask price (for selling). The gap between these two rates is called the spread. The “unit of currency” in Forex trading isPercentage in Point , or Pip for brief . for many currency pairs, the pip corresponds to a change in the rate of exchange of 0.0001.
Attention : With the japanese yen, one pip is already a change of 0.01, because one euro is currently (as of December 2013) around 145 yen!
Learn Forex relationships and terms
The standard size in forex trading is the so-called lot , it always corresponds to 100,000 units of the base currency. Trading with one or even several standard lots is certainly not practicable for the vast majority of private investors, since sums of over 100,000 base currency units would have to be moved here. In order to be able to earn money from private investors’ foreign exchange trading, specialized forex brokers offer appropriate access to this interesting market: In order to be able to trade directly with standard lots, trading with leverage comes into play. The leverage ratio is shown in the ratio 1: x.
In return for the leverage provided by the broker, you have to deposit a margin. The margin is shown in percentage points. Margin and leverage are always directly related, the formula is 100 / leverage – ratio = margin in percent. With a desired leverage of 30: 1 , you as a trader can trade a standard lot of EUR / USD of 100,000 euros for 2,500 euros with a deposited margin of 2.5 percent. This is also a very affordable scenario for private investors. Due to the leverage effect, the return opportunities and the risks increase at the same time.
As a trader, you can bet on rising prices ( long ) or falling prices ( short ) for the base currency. A special feature of Forex trading: Both currencies are always traded in a trade! If you bet on a falling rate for the base currency, you are also speculating on a rising rate for the rate currency. In your trading strategy, you should never limit yourself to long or short, the instrument you use should always be based on market trends.
As an inexperienced beginner in the stock market, it can easily happen that you simply feel a bit “overwhelmed” by the multitude of English terms in forex trading. With a little previous experience in stock trading, you were probably already aware of some technical terms. Our trading tips for beginners also provide support. Learning to trade forex successfully is anything but a sure-fire success. You should definitely internalize the basics BEFORE your first trade. Otherwise a couple of miscalculations in forex trading can quickly cost you all of your venture capital!