The ABC Of Forex Trading

What is Forex Trading

Forex trading simply means the trading of foreign currencies. Forex is derived from the words Foreign Exchange. The Forex Market is like the Stock Market but unlike the latter, the former is open 24hours 5 days a week. That is, the Stock Market closes at the end of eacch business day and opens at the beginning of another but the Forex Market is open 24hours.

Forex trading is mostly done online through a Forex broker. The broker helps to deliver your trades through their platform to the market itself. There are three major types of brokers:

Straight Through Processing STP, Electronic Communications Network ECN and Market Makers MM.

To Start Trading Forex, One must open an account with a broker and fund the account through any preferable deposit options. Some deposit options require a fee for both deposits and withdrawals and are instant while others don't and may take a few business days.

Major Forex Lingo

Ask Price: The Price at which a Forex instrument can be bought at a particular time.

Bid Price: The Price at which a Forex instrument is been sold at a particular time.

Spread: The difference between the Ask and Bid Price.

Lot: The Amount of units of a currency to be a bought or sold e.g 1 standard lot is equal to 100,000 units.

Pip/Pipette: a pip is the smaller unit of an exchange rate to 4 decimal places e.g 1.3101, a move of 0.001 equals a pip while a pipette is the smallest unit of an exchange rate to 5 decimal places 1.31001, a move of 0.0001 equals a pipette.

Long/Short: Long means Buying while Short means Selling.

Stop Orders: These are orders given to the broker through a trading platform to either open or close a trading position. They include Buy Stop, Sell Stop, Take Profit, Stop Loss.

Limit Orders: These are orders that are used to set limits to an entry into a position. They include Buy Limit and Sell Limit.

Trading Platform: This is a software used by the trader to initiate trades, study the price action, forecast, connect to the broker, recieve news and signals, test strategies and close trades. They can be downloaded or used on an Internet browser through Flash Players. e.g MetaTrader, ZuluTrader, etc.

Trendlines: These are line that are used to show a trend movement of price through support and resistance points.

Leverage: This is money borrowed to you to support you in trade large units with a small margin deposit.

Support/Resistance: This is the lowest point at which the price line reaches in a trend while Resistance is the highest point that the price reaches in a trend in any timeframe.

Technical indicators:  These are instrument used to forecast or understand the price action. e.g Fibonnacci Retracements, Bollinger Bands, MACD, Moving Averages

How To Trade Forex

Forex Trading is easy as it involves buying and selling of currencies. For example

The current price of EUR/USD is 1.3002/1.3005

Here, the spread is 1.3005-1.3002 = 3pips

You buy the USD at 1.3005 if you forecast that the price will increase within a particular timeframe or sell the EUR at 1.3002 if you forecast that the price will decrease within a particular timeframe.

 If you open a position by buying a standard lot at 1.3005 and the price increases to 1.3025 and you then close the position. It implies that you made a profit of 20pips, i.e

1.3025-1.3005=20 pips

If 1lot = $10profit per pip then,

20pips X $10 = $200 profit made from a single trade and vice versa if it were a sell position.

Forex Trading Involves a high risk of losses especially when using a high leverage.