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What is FOREX MARKET?
Foreign exchange (also known as forex or FX) refers to the spot market where traders, investors, institutions and banks, exchange speculate on, buy and sell world currencies.
Forex trading is the act of buying or selling currencies. Banks, central banks, corporations, institutional investors and individual traders exchange foreign currency for a variety of reasons, including balancing the markets, facilitating international trade and tourism, or making a profit.
The value of a currency pair is driven by economic, political and environmental factors, such as wars, natural disasters, or national elections. Brokers act as intermediaries, facilitating trades by providing clients access to the 24-hour interbank in order to conduct trades.
Why Trade FOREX?
The Forex market is the world's largest market in terms of daily transaction volume, and it's almost the most liquid. This market is highly accessible given that it's open 24 hours a day.
Forex is one of the largest trading markets, with a global daily turnover estimated to exceed US$5 trillion. Because the global Forex market is so large, it offers traders significant liquidity, which is the ease with which traders can exchange one asset for another. In this case, the Forex market’s significant size makes it so traders can enter and exit positions very easily.
One major draw of Forex trading is that the currency markets are open 24 hours a day. Investors around the world want to trade currencies. Investors will find it far easier to combine this kind of trading with part-or full-time work. For example, if a person works a traditional, full-time job between 9 AM and 5 PM in their time zone, they can trade after they get out of work.
Traders may prefer Forex trading, instead of stocks because when trading the former, they can obtain far greater leverage. By borrowing money to make trades, investors can potentially enjoy stronger returns. For example, if a trader has access to 400:1 margin, they can make a £4,000,000 trade with just £10,000 in a margin. As a result, they would only need to put 0.25% of the trade down as margin. This can provide traders with stronger returns.
Understanding Currency Pairs
All transactions made on the forex market involve the simultaneous purchasing and selling of two currencies.
These are called 'currency pairs’, and include a base currency and quote currency. The display below shows the forex pair EUR/USD (Euro/US Dollar), one of the most common currency pairs used on the forex market.
How to become a Better Trader
As a trader, if you want true and lasting success the self-improvement never really ends. You want to constantly refine your trading methods, stay on top of current events and keep on improving, to remain competitive and relevant and, most importantly, to do the best you can.
Below are 6 ways that you can strive to be a better trader. Start manifesting these behaviors and your trading could improve:
1. The desire to be a better trader. This might sound painfully obvious, but sometimes the most common sense wisdom bears the most repeating. To become a better trader, you're going to have to want to become a better trader and to be willing to put in the work necessary.
This means recognizing that you have room for improvement and admitting that you don't know everything. It also means that you'll need to take inventory of your strengths and weaknesses, so that you can honestly evaluate where you have room to improve. While it's great to get better at the things you're already good at, there's even more benefit to improving in your weakest areas. It will raise your whole baseline as a trader.
2. Brush up on trading basics. Sometimes, you've got to rewind before moving forward. So, ask yourself this: do you really know how to trade stocks? Do you truly have a good grasp of the basic rules, terms and methods of trading?
Believe it or not, there are plenty of traders out there who never took the time to truly master these important tools of the trade. They might be carving out an okay career, but it could be a whole lot better, if they brushed up on the basics. Even if you did take the time to learn all that you could when you were starting as a trader, there can be benefits to revisiting the basics. Think of it as a tune-up for your foundation.
3. Get a mentor, and meet with them frequently. I'm often talking about how important having a mentor is for your career. But, many people think that once they've obtained a mentor, they can cross that off their to-do list.
Finding a mentor is a great first step. But, to really benefit from their knowledge, you've got to meet with your mentor frequently. Pick their brain and learn from them. Utilize the many tools and resources that your mentor has to offer.
4. Diversify. Don't put all your eggs in one basket. As a trader, diversification is important, because it will spread out your money and ensure that you won't lose it all, if a business deal goes sour. Most millionaires don't have just one stream of income–most rely on three or more different sources.
5. View mistakes as an opportunity to improve. When you make a mistake as a trader (and you probably have and definitely will in the future), do you shut down and retreat? Or, are you able to use the information from your error to move forward in a stronger and more confident way?
It's remarkably difficult to see mistakes as learning opportunities. But, if you can work on this one skill, it can truly make you a stronger trader.
6. Stay updated on the news. Don't just diversify your earning portfolio: diversify your mind, as well. Staying updated on the news is a powerful way to stay current and to become a better trader.
When you are aware of what is going on in the world, you have a better finger on the pulse of things that can affect the stock market. Sometimes, this can give you an idea for an investment, or let you know when you should pull out. Additionally, staying updated on the news makes you a more interesting and articulate person and keeps your mind nimble. It's a win-win situation.
Leverage and Margin Calculations
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The base currency is the first currency that appears in a forex pair. This currency is bought or sold in exchange for the quote currency.
So, based on the example above, it will cost a trader 1.0916 USD to buy 1 EUR.
Alternatively, a trader could sell 1 EUR for 1.0916 USD.
The quote currency – also referred to as the ‘counter’ currency – is the second currency tht appears in forex pair.
The Bid Price is the price a trader is willing to buy a currency pair at. It is given in real-time and is constantly updated.
The Ask Price is the price a trader will sell a currency for.
It is given in real-time and will change constantly, driven by market demand, as well as the political and economic factors that influence the value of individual currencies.
A spread is the difference between the ask price and bid price. In other words, it is the cost of trading.
For example, if the Euro to US dollar is trading with an ask price of 1.0918 and a bid price of 1.0916, then the spread will be the ask price minus the bid price. In this case,0.002.
A point in price – or pip for short – is a measure of the change in a currency pair in the forex market. The acronym can also stand for ‘percentage in point’ and ‘price interest point’. A pip is used to measure price movements, and it represents a change in a currency pair. Most currency pairs are quoted to five decimal places.