Basic Concepts in Forex Demystified
For any beginner in forex trading the whole avalanche of trading and jargons used in the industry could be overwhelming. Other than learning how the financial markets work, any serious trader must also understand how to use some basic concepts.
Since you’ll need to constantly read educational material and online news related to forex trading, let’s dig into some basic concepts and demystify them.
The “eight majors”
As opposed to the stock market, where you would have to deal with thousands of stocks and derivatives, in forex trading you’ll most of the time focus on eight major economies and then decide which ones will provide the best undervalued or overvalued opportunities. United States (US Dollar), Eurozone (Euro), Japan (Yen), UK (Pound), Switzerland (Swiss Franc), Canada (Canadian Dollar), Australia (Australian Dollar), and New Zealand (New Zealand Dollar) are the countries and currencies you’ll be dealing during your forex adventure.
Spreads and pips
A pip is the smallest price change that an asset can make, quoted with five decimal which make a pips equal to 0.0001. For Yen pairs, which are quoted with two decimals, a pips is equal to 0.01. The spread, on the other hand, is the different between the bid and ask, or the buy and sell price. All brokers, including easyMarkets, forex.com, and others, are “middlemen” and spreads are a source of revenue for them.
Generally a strategy for big institutional investor, carry trade refers to a trade operations in the long-term. The initiator aims to generate return based on the price movements and on a positive swap rate.
A swap fee is charged when you hold a trading position overnight and it is calculated using the interest rate differential between the two currencies involved in the transaction. Swaps are also calculated according to whether your position is long or short.
The Foreign Exchange is the most liquid market in the world, with an estimated daily volume exceeding $5 trillion. Yet, we are retail forex traders are active on the FX spot market, which accounts for less than $2 trillion in daily volume.
Stop loss and take profit
Since Forex trading involves risk, management tools are a must for any trader and that’s the case with stop losses and take profits. With them you will be able to get out of the market at a predefined level when the price moves against your trade (stop loss), or cover profits at a predefined level when you are trading in the direction of the market (take profit).