Understanding Basic Forex Trading Concepts and Terminologies

Forex trading primarily involves trading in global currencies. If you are new, then it’s best to know it’s not a get rich quick scheme. Those who have succeeded in this market began by building a solid foundation through a willingness to risk, and by sheer hard work.

Therefore, its necessary is to take your time to know what forex trading entails. This includes conceptualizing and putting into practice commonly applied terminologies.

What Is Forex Trading?

Forex is an abbreviation of Foreign Exchange. It involves the conversion and exchange of foreign currencies on the world market. In the past, the trade was mostly dominated by the banking sector and transnational companies. But now, more individual investors are participating because of the convenience that comes with online forex trading.

How Does Forex Trading Work?

Forex trading involves trading in currency pairs, with the relative value of one currency versus another. Hence, a trade cannot be complete without two currencies weighing against one another in terms of worth and price. A perfect example of how to quote currency pairs can be EUR/USD= 1.2360.This denotes the value of the EUR, as expressed in USD. A list of major world currencies that dominate the forex market include:

• US dollar(USD)
• Euro( EUR)
• GBP( Sterling pound)
• Japanese yen(JPY)
• Australian dollar(AUD)

The most common currency pairing you may come across can be in the form of EURO/USD, USD/JPY/GBP/USD, and the list continues. The currencies are also traded in various sizes known as lots, or contracts.

So at any one time, different lot sizes are being purchased. Given an example, 1 lot can be equal to say, 100,000 units. The units are subject to a base currency. In this case, if you are trading in GBP/USD, then the GBP is the base currency, which is equivalent to 100,000=1 lot. If you’re buying 10 lots, then it’s comparable to GBP 1000,000.

Other than that, the exchange rate is never fixed and the reason is that currencies are constantly fluctuating. So, in all circumstances, it is the purchasing power of one currency, in comparison to another.

Other Key Terminologies In Forex Trading

Forex trading consists of various terminologies. Understanding them helps you to know how the market works. Here are some examples;

1. Bid And Ask Quotes: A bid price e is that which a forex broker is willing to buy for base currency. An ask price is the amount forex is willing to sell this concept base currency.

2. Bid And Ask Spread: It is the difference between the bid and asks price.

3. Pip: pip is referred to as percentage in point. The meaning behind this concept is that the exchange rate usually carries four decimal points. Therefore, the small percentage point in the trade is known as pip. Let’s look at an example:

USD/GBP=1.1536

The last digit is 6, and it represents pip value. In the event the USD/GBP rises to 1.1540, the math is that the value has changed to 4 pips.

Pip=1-1540-1.1536=0.0004(pips)

4. Leverage Trading: leverage is used to maximize profits regardless of little change in the value of a currency pair. Leverage allows you to place large amounts of trade, even with a minimal amount of financial investment. Leverage is usually represented in the form of a ratio. For instance, if you invest $1000, and you are given $200000 as leverage, then the ratio is 20:1.

5. Charts: charting is a critical aspect of forex trading. Traders use these tools to determine price movement within the trading periods. Trading platforms have charts as a standard feature, which you can dedicate time to learn and use in predicting the market and making the correct decisions in your trades.

Conclusion

Forex trading runs round the clock during the five business working days. As a liquid market, most investors are spending their waking moments on forex trading platforms. Before you decide to participate, you need to know the most commonly used concepts; it allows you to  smoothly run your trades.