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Learning Forex Basics

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Trading forex (short for “foreign exchange market”) is a great way to make money. Though most people are far more familiar with trading stocks, the foreign exchange market sees far more money. Consider that the securities market trades roughly $22.4 billion every single day. It’s a lot of money, but it’s peanuts compared to the $5 trillion forex sees on a daily basis.

Whether you are looking to transition into a new career or you just want a thrilling hobby that will turn a profit, beginning forex isn’t overly difficult, but you will want to know the following.

Basic Forex Terminology

currency-signs

Like all forms of trading, forex (a.k.a. FX) has its own terminology you’ll need to learn. Here are the most important words and phrases:

  • Base Currency: This is the currency you’ll be spending.
  • Quote Currency: This is the currency you’re going to be purchasing.
  • Exchange Rate: The amount you’ll have to spend in quote currency to buy the base currency you want.

Just to summarize these first three. In FX, you’re trading currencies, not shares. So let’s say you want to buy USD with euros and let’s say that, at the moment, one USD is worth two euros; that would be your exchange rate: two euros for one USD.

  • Long position: This refers to buying the base currency and selling the quote currency.
  • Short position: This is just the opposite; you’ll be buying the quote currency and selling the base currency.
  • Bid Price: How much your broker is willing to spend to buy the base currency in exchange for your desired quote currency. The bid is the best price that you’re willing to sell your quote currency at to the market.
  • Ask Price: This is sometimes referred to as the offer price. It’s the amount your broker will sell the base currency for the quote currency. The ask price, then, is the best price available at which you will purchase from the market.
  • Spread: This is the difference between the bid and ask prices.
  • Pip: The change in value between two forex currencies. Generally, one pip is equal to 0.0001 of a change in the value. For instance, if you’re trading EUR/USD and this pair moves from 1.555 to 1.556, then your currency value has gone up by 10 pips.

The world of forex is packed with all kinds of other terminology too, but this will suffice as a foundation for now.

Three Types of Analysis

Analysis of forex currencies is essential to success on the foreign exchange market. There are three different types

  • Technical Analysis: This involves reviewing historical data and charts to predict how a forex currency will perform based on past events. Your FX broker will usually provide you with these materials.
  • Fundamental Analysis: This type involves looking into a nation’s economy and figuring out how it will affect the future of their currency.
  • Sentiment Analysis: This is perhaps the most subjective form of forex analysis. It involves analyzing the mood of the market to see if it’s “bearish” or “bullish.” While this is a bit more of an art than a science, if you can read the mood of a market, you can often predict where a currency will go.

Chances are you’ll experiment with all three before you find which one tends to bring you the most success. Neither of them is the best, so it will really just come down to personal preference on your part.

Now that you understand the basics, beginning forex should be much easier. You still have a long road ahead before you start bringing in profits, but at least you’re off to a good start.

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Posted on September 30, 2016.

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