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Fundamentals about the forex trading: Beginners tutorials.

It's time for us to learn how to trade the Forex market .In the Forex market there many different trading currency pairs with different volatility and spread. Traders chose their specific currency pair and execute their trade with the help of the trading platform offered by the broker. Before we get into the details lets learn how to read the “Forex Quote”.

We all know that currency is traded in pairs. Reading the Forex quote is very simple! Let’s say the quote of “GBPUSD” is 1.44128.The Forex quote is often written with a slash which separates the two major currencies (GBP/USD).The first currency in Forex quote is known as “base currency” and the second currency which stays on the right side of the slash is known as “quote currency.”

Let's see an example

GBPUSD=1.44128

This means if you want to buy 1 Great Britain Pound than you need 1.44128 $.In other words, it can be said that with 1 Great Britain pound you can get 1.44128 dollars. Seems pretty easy! Hold on. We have much more to tell you about the forex quote. Forex quotes are always quoted with two prices, the Bid Price and the Ask Price.

Let's see an example.

GBP/USD=1.34561/1.34581

The first price on the right-hand side of the equal sign is known as “bid price” and the second price is known as “ask price”. Remember that the asking price is always greater than the bid price. In general bid price is the price by which broker is willing to buy any single asset whereas ask price if the offered price by the broker to sell that asset.

We have talked about the capital cost of trading the Forex. This is where the term spread comes. “The difference between the asking price and bid price is known as the spread”. This is the commission which the brokers’ charges to a trader for their service. In the above example, the spread of GBP/USD is “3 pips”. Traders make a profit in terms of pips gain. Before taking any trade, the pip value is set with the variation of lot size by the trader. If the lot size is 0.1 for a standard account this means for every single pip trader will make a profit of 1$.So if the trader makes a 40 pips profit then we can say that he made a 40$ profit.

We are now able to read the Forex quote in the financial market successfully. So when do we buy or sell a pair? Traders enter into the long trade (Buy) when they think the price will go higher and goes for short (Sell) when the price goes down.

Let's see some examples for clarification

Let's say that you read news about US economy. The news was terribly bad for us economy and you are certain that its impact will be huge in the financial market. Keeping the bad economic data of USA you went long on EURUSD since US Dollar is broadly weak. After  1 hour you came to your trading station and found that the “EURUSD” has rallied more than 120 pips from your entry point!120 pips profit in your pocket just within one hour of the news release.

Just after one week, the Federal Reserve Bank announced their “interest rate” decision. Remember, a rate cut in the interest rate makes the currency weaker whereas rate hike makes it extremely stronger. You were watching the news and spotted the rate hike by the Federal reserve bank of America. Keeping the news in mind you entered short on “GBPUSD”. After 2 hours you came back and saw your trade is running with 200+ pips profit! So if you had 0.1 lot trade open in your standard account you would have made 200$ profit.

Trading the forex market with the high lot is much common since there no needed to deposit a huge amount of money in your trading account. Forex broker offers high leverage which allows you to open a trade with the high lot even though if you don’t have enough capital. Typically 500:1 leverage means that, if you have 100 dollar deposit in your trading account then you can trade 50000 US dollar worth of equity in the forex market.

You might be wondering what actually the word “Pip” means. Don't worry! Once you read the next few lines, you will be able to tell what pip is. The movement of the financial instrument or currency pair is measured in pips .For instance, assume that you have opened a long trade in “GBP/USD at price 1.4423” and the market move in the favor your direction for the next 1 hour. After one hour you found that the value of “GBPUSD quote is 1.4453”.The market moves in your direction for 30 points. This “thirty point” is known as 30 pips in forex.

Many Forex brokers offer 5 digit pricing for the major currency pairs. The fifth digit is known as pipettes. Pipettes help the trader to get more precise raw price data of the currency pair movement. In the Forex industry, it takes 10 pipettes to make one pip.

Lot size is very important in the Forex trading since, its value determines how much money you are going to make or lose for every single pip movement for a certain currency pair.

Understanding the lot size/volume is pretty simple. Some traders lose their mind by trying to understand the lot size with unit calculations. We have decided to make your forex trading journey simple and smooth so that you don’t need to worry about the complex calculation.

Every single pip that moves in our direction gives us profit. For instance, we entered long on “EURUSD” at 1.1139 and the market moves 20 pips in our favor. This 20 pip is our net profit from trading the EURUSD pair. Profit from "traders to traders" will vary according to the lot size which they used while taking the trade. Technically speaking, trading with high lot size will always generate a large amount of profit or loss since the value of single pip will be much higher than that of low volume trade.

 

Article was written by Dwayne Buzzell

An economist, Forex trader and Forex writer.  I have a keen eye for spotting international trading trends. My Forex experience as an individual trader has been thoroughly enjoyable and has brought significant returns for myself and my clients. Get more forex news from my site.

 

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