Forex Trading: Where to Start?

Forex, or foreign exchange, is the process of buying or selling one currency with another one. It is the most common form of trade in the world for two particular reasons: everyone from people to countries can take part in it and it doesn’t require you to have an insane amount of money to start. Whenever you’re exchanging money when traveling abroad, you become a part of the forex market. 

The market is strongly controlled by the public’s pursuit of currencies, which either increases or drowns the price of one. There are a few things you need to learn before joining the market intentionally, and we are going to help you find out what they are down below. 

What Do You Trade? 

Whatever it is you are about to indulge in, it is important to understand what is what before you start investing your resources. We are going to explain how to deal with currency pairs in more detail for you to be prepared for your first trades. 

Currency pairs are what the market consists of. When you exchange Canadian dollars for American ones, you are only dealing with one of the hundreds of them, and what you care about is the value of one currency compared to the other. The CAD/USD pair reflects how many American dollars you need to buy a Canadian dollar. All currencies are represented by abbreviations, like USD, EUR, GBP, etc. Some of the most popular currency pairs on the market also include AUD, NZD, and JPY (Japanese Yen). 

Every currency pair also has a market price. This price indicates how much of the second currency the first currency is worth. So, for instance, if the CAD/USD pair’s price is 0.8234, 1 US dollar costs 0.8234 of CAD. 

In order to find out the worth of a Canadian dollar, spin the pair and divide 1 by 0.8234. In this example, the result will be 1.2144, which will be the price of 1 Canadian dollar. 

Considering the volatility of the forex market, you should keep in mind that prices of currency pairs constantly change, while they are being traded incessantly all over the world. 

Once you comprehend all the information trading platforms provide for you and how you can use it, you will feel more confident about the beginning of your trading journey. It is important to know what you’re doing even if you are going to rely on a broker. If you haven’t found one yet, check out what offer. 

So, now we are going to look into another element of your trading chart: pips. 

Pip stands for a point in percentage and is used to represent a movement of one-hundredth of a 1% in a currency pair. It is, in fact, the smallest change in price. Most currency pairs move from around 50 to 100 pips per day. So, when a CAD/USD pair changes its price from 0.8230 to 0.8280, it makes a 50 pip move. If you buy the pair at its initial price and sell it for 0.8280, you make a profit of 50 pips. 

How much profit you actually make on such a trade is defined by how much of the currency you purchased and sold. If you bought a thousand USD, each pip in this trade would cost $0.10. In order to calculate your profit, you have to multiply 50 pips by $0.10, which results in $5 for every 50 pips. If you bought 10 000 units of currency, each pip would be worth $1 bringing you a profit of $50, and so on. 

The “pip value” is what we call the price of a pip in a certain trade. The pip value from the example above can be applied to any pair with the USD listed second. If the USD is first in the pair, there may be some price fluctuations. To estimate the pip value in such situations, divide the standard pip value from the previous paragraph by the current rate of the currency pair you are interested in. If JPY is involved, you have to multiply the result by 100 afterward. 

Another thing you should pay attention to is that the first currency in the pair is always the one that sets the direction on a forex chart. If the price of a CAD/USD pair is increasing, the price of the Canadian dollar is rising compared to the US dollar. If the price is decreasing, this means that the Canadian dollar is losing its value compared to the USD. 

To get a deeper knowledge of what is actually happening on the market, try seeing how the prices of currencies move in real-time. Get a demo account, place some “empty” trades, take a look at how things are done in the industry without taking any risks. Once you get a hold of it, you will feel more comfortable placing your first trades. Do not, however, lose yourself in becoming overconfident and place huge trades right away. Start small and work your way up, once you can see proof of your expertise in a form of a profit. 

Most brokers nowadays offer online desktop platforms or even apps that can be used for demo as well. Another reason to enter the market is the fact that the technologies of our century allow anyone to place trades wherever they are. Take advantage of all the tools the world offers: demo accounts, mobile apps, charts, and so many more. 

All this information should help you better understand what exactly is happening on your chart. Try calculating the pips, see what your potential profit might be, and don’t stop learning and improving your skills. 

Interesting Related Article: “Essential Key Factors in the Forex Market