Venturing the trading practice for the first time is not any wrong deed; but, venturing it without the basic understanding of the concepts involved and the terminologies used is certainly erroneous as not only your time but also your hard-earned money and the reputation are what you risk in the entire act! Particularly, if forex trading is your interested trading practice, you might be easily carried away by its popularity and its convenient ways of making some extra income and would no wonder be overly eager to behold whatever options come in your way, which is, of course, not appropriate if you haven’t learned what should be learned of about its must-knows that could make your trading practice trouble-free!
What is Forex Trading?
For the starters, it is important to understand the practice of Forex trading clearly so that you are aware what you are up to by choosing this trading scheme. Forex trading market or simply the FOREX is an international market, where the international currencies are traded against each other. Therefore, it is evidently the largest liquid market in the world and no wonder has captured the attention of the interested traders. The exchange rate fluctuations that arise while speculating the value of one currency against the other helps the forex traders to gain some profits and it is how the market works. The traded currencies are quoted in pairs, where the first currency, known as the base currency, is traded against the second currency, known as the quote.
Why are currencies traded?
Simple, only by trading the currencies, the international market could survive because a France dealer trying to procure the raw materials from the Japanese market could not proceed with his/her purchase if the money offered to make the purchase is not in Yen, which is the local currency of that country.
Thus, the trading of currencies is inevitable to effectuate the global trading practices and this proves, why forex trading practice is significant and, at the same time, profitable if you learn its nuances aka the must-knows. The leverage is the initial margin amount required to initiate the transaction as fixed by your broker.
For example, if however, the total cost of your transaction is 2000$, your broker might allow you to proceed with the transaction with only meager 2% margin rate and therefore, 40$ is what expected from you to complete the transaction. Leverage is often expressed in ratio and in our above case of 2%, the ratio is 50:1. Leveraging allows the trader to engage in the larger transactions of forex trading by investing only a little value of their own while borrowing the rest and therefore, if the market favors, the returns are extremely pleasing and if it’s the other way around then, prepare well to experience some obvious disappointments!
Long vs Short
We already know that in Forex trading the currencies are traded in pairs and therefore, depending upon the strengthening or the weakening of the currency value, we could either go long or go short.
For example, if you feel the base currency would perform well against the quote currency, you could go long by placing a buy trade or by holding the currency’s position for an extended duration. And, if it’s the other way around, you could go short by placing a sell trade for the base currency to avoid incurring losses.
Even when the experienced traders cannot be so sure of their success always in Forex trading practice, a newbie like you should be prepared to face the losses meticulously, for which the practice of risk management is essential. Any trading practice is absolutely dependent upon the various market factors that fluctuate drastically and hence, not devoid of worrisome losses. It is during such scenarios, the stop-loss order comes into the picture in the forex trading practice.
A stop-loss order is that order placed with your broker to close out your trading positions when the specific alarming loss value is met. By this way, the investor’s loss on a position in a security is restrained. It could be used both for the go-long positions and as well the go-short positions, in where in the latter case, the security is bought if it trades above the specified price value.
The concept of spread in the forex trading practice eliminates the need for the broker to charge you with a commission or the transaction fees and hence, compensates for it by selling the currency bought from you at a higher rate. Therefore, the spread is the difference in amount between the ASK and the BID!
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