If you’ve ever traveled internationally, you’ve touched on the world of forex trading, though you may not know it: When you stepped off the airplane, one of your first stops probably was to exchange your money for the local currency.To get more news about forex trading, you can visit wikifx.com official website.
Forex trading definition
Forex — or FX — refers to the foreign exchange market, which is where investors can buy and sell currencies from around the globe. It’s the largest financial market in the world but one in which many individual investors have never dabbled, in part because it’s highly speculative and complex.
A little healthy trepidation serves investors well. Active trading strategies and complex investment products don’t have a place in most portfolios. Financial advisors often strongly recommend low-cost index funds for long-term goals like saving for retirement.
But maybe you have a balanced portfolio in place, and now you’re looking for an adventure with some extra cash. Provided you know what you’re doing — please take those words to heart — forex trading can be lucrative, and it requires a limited initial investment.
Understanding forex trading
The concept of trading forex can be hard to wrap your head around. Here's how it works: Currencies are always traded in pairs, such as the Euro and the U.S. dollar. When you trade forex, you always buy one currency and sell another (which is why currencies are also always quoted in pairs).
Currencies rise and fall at different rates (for example, the Euro may rise while the U.S. dollar falls) based on geopolitical or economic factors such as natural disasters or elections. Based on those kinds of factors, you might think that a related currency — for example, the Euro — will rise in value. You could then buy Euros and sell U.S. dollars. If your prediction panned out, and the Euro did rise in value, you would make a profit. Of course, there are many more nuances that make forex trading complex, which we'll get into below.
Current forex trading rates
The chart below shows two paired currencies and reflects what one unit of the first listed currency is worth in the second listed currency. For example, the first row shows how much one Euro is worth in U.S. dollars.
How to read a forex quote
Being able to read and really understand a forex quote is, unsurprisingly, key to trading forex. Let’s start with an example of an exchange rate: EUR/USD 1.12044.
The number is what the counter currency is worth relative to one unit of the base currency. When that number goes up, it means the base currency has risen in value, because one unit can buy more of the counter currency. When that number goes down, the base currency has fallen. In this example quote, 1€ is equal to $1.12044.
You're always buying or selling the base currency. Within a pair, one currency will always be the base and one will always be the counter — so, when traded with the USD, the EUR is always the base currency. When you want to buy EUR and sell USD, you would buy the EUR/USD pair. When you want to buy USD and sell EUR, you would sell the EUR/USD pair.
Bid and ask prices
As with stock trading, the bid and ask prices are key to a currency quote. They, too, are tied to the base currency, and they get a bit confusing because they represent the dealer's position, not yours. The bid price is the price at which you can sell the base currency — in other words, the price the dealer will “bid,” or pay, for it. The ask price is the price at which you can buy the base currency — the price at which the dealer will sell it, or “ask” for it.
The bid and ask are typically shown as EUR/USD bid/ask, and the ask is represented with only the last two digits. For example, EUR/USD 1.12044/57 means that the bid is 1.12044 and the ask is 1.12057. You could sell 1€ for $1.12044 (the bid) and buy 1€ for $1.12057 (the ask).
The bid price is always lower than the ask price, and the tighter the spread, the better for the investor. Many brokers mark up, or widen, the spread by raising the ask price. They then pocket the extra rather than charging a set trade commission.
The last salient point about pricing is that the spread, earnings and losses are measured in a unit called a pip.
What is a pip?
Remember when we said forex trading was complex? We weren’t lying. In stock trading, you might hear or read that a stock's share price went up a point, or $1. A pip is the forex version of a point: the smallest price movement within a currency pair.A pip’s value depends on the trade lot and the currency pair. If you’re trading a pair that has the USD as the counter currency and you’re using a dollar-based account to buy and sell, the pip values are:
If the USD is the base currency, the pip value will be based on the counter currency, and you’ll need to divide these values for micro, mini and standard lots by the pair’s exchange rate.
To figure out how many pips are in the spread, subtract the bid price from the ask price: That gives you 0.00013 in our EUR/USD example. For most pairs, the smallest price movement happens in the fourth digit after the decimal, so the spread here is 1.3 pips, or $1.30 on a mini lot. That’s the cost of the trade.