The 123s & ABCs of Forex Trading

If you are planning to dive into forex trading but can’t understand anything listed on your broker’s website, don’t fret it as we will be learning about it in this post.

So what exactly is a currency pair?

If you have previously tried your hand at the stock market, you won’t understand the forex currencies immediately. When you trade forex, you are basically buying a currency and trading it for another currency in hopes of profiting from the difference they have in value.

There are 4 major currency pairs which are mainly traded by all traders around the world:
1. EURUSD
2. GBPUSD
3. USDCHF
4. USDJPY

They are the most traded among all other currency pairs and that’s why they are the most liquid as well. You want to have liquid pairs so that you can buy and sell whenever you want within seconds.

It’s much easier to learn from an example. If the exchange rate for this currency paid EURUSD is currently 1.5673

And the base currency is the EUR, whereas the counter currency is USD.

What this means is that you will require USD$1.5673 in order to be able to buy 1 Euro. Now that we understand their correlation, it’s time to learn some terms.

The most frequently used term in the forex trading world is pips. Pips is actually a small unit of a price change. It is hard to pronounce 0.0001, and even worse for brokers that need speed to make more money. And that’s why pips was introduced to represent 1 thousandth of a dollar. So that means that the more pips you gain, the more profit you get. It’s as simple as that. The point of trading is to earn as many pips as possible.

There are 2 types of prices for each currency pairs. They are the bid price and the ask price. Basically, you can see the bid price as the buy price and the ask price as the sell price.

It is just a rough definition. To understand deeper, bid price is actually what the current market is willing to pay to buy the currency for. This means that it is your selling price if you own the trade.

On the other hand, the ask price is what price the market is willing to sell the currency at. This in term means your buying price.

The difference between those 2 prices are called the spread. If you bought a currency and immediately sell a currency, you will be losing money. You would have to wait for it to rise to breakeven.

That’s why you need to play with low spread currency pairs to profit more.

In conclusion, there is so much more to forex that you need to know in order to get success from forex trading.

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