When I started writing I thought I would go to the very nuts and bolts of it all and walk you through the basics of FX trading. Hopefully, along the way, I’ll be able to help you better understand what can be a very confusing, scary, and potentially disastrous world for the retail trader.
Forex Trading – A Basic Overview:
At its most basic level, forex trading is similar to flipping a coin. Theoretically you have a 50% chance of winning. Only in FX you’re betting on whether a currency goes up or down. If you buy, say, the EURUSD, you’re betting that the EUR gains strength and goes up against the USD.
We all know it’s not that simple and there are a lot of factors involved in making an educated, profitable trade. We won’t go into detail in this article, but I will include links to other articles that can help you if you plan to trade in the Forex market or are already doing so.
What is Forex?
The forex (foreign exchange) market is the world’s largest financial market, where currencies from various countries are bought and sold. It is a decentralized market where traders can buy and sell currencies around the clock, five days a week.
The forex market is the world’s largest financial market in terms of trading volume, with more than $5 trillion traded on average every day. Trading volume on the forex market is so high because it’s a global market. This means that currencies are constantly bought and sold by individuals, businesses, and institutions around the clock.
Because it is a global market, it is also very liquid. Since there is always someone willing to buy the other side of the trade, traders can easily buy and sell currencies at any time.
One of the things that makes the forex market so intriguing is that it offers a wide range of currency pairs to trade. This includes major, minor, and exotic pairs. This gives traders a diverse range of trading opportunities and allows them to capitalize on changing market conditions.
In addition, the forex market is open to traders of all skill levels, from novice to experienced. Many brokers have low account minimums and leverage, allowing traders to begin trading with little capital.
You can even open a Tradeview Markets demo account to practice technical and fundamental trading without putting your money at risk.
What is a PIP?
This is a great place to start as it is the most basic of functions in FX. A PIP or “Percentage In Point” is the measurement of how the market moves PIPs are calculated in units of 1 and move in the same units as well, and for most currencies 1 Pip = 0,0001.
A PIP is the smallest price that can be charged for a currency. – keeping aside the PIP fractions or Pipettes (We can leave this topic for a whole new article!).
For example, you may hear on the news that the “Aussie Dollar” had a strong day moving 200 “PIP’s” against the US Dollar, meaning if it had a starting position of 0.92180 it would have moved to 0.92380.
How Are the Lot Prices Determined?
A lot is the amount or volume of the currency you are either buying or selling. In other words, a lot helps standardize the trade size. As PIPS are tiny, trading in single units is non-viable. Lots exist so traders can buy and sell PIPs in groups or batches.
We all know the market prices move essentially thanks to offer and demand interaction and that this changes as traders respond to external factors (like the news, a country’s monetary situation, PIB changes, etc.) or internal factors (insecurities, fear, beliefs, etc.). Nonetheless, the price of a lot is set by an exchange or a market regulator.
There are 4 types of “LOT” or position sizes:
- A nano lot, which is worth $100
- A micro lot, which is worth $1,000
- A mini lot, which is worth $10,000
- A standard lot, which is worth $100,000
Having these different sizes helps traders place different sized trades in a speedy manner. You can, of course, place any type of trade you need depending on the position required i.e. a large position would be 50.00 standard lots or $5,000,000 and a small trade would be 0.03 or $30,000.
The size of your position (the number of lots) will determine how much each pip is worth per tick. Let’s say you placed a mini lot or a $10k position the market value for each tick or PIP would be worth $1. So even with a small trade a movement of 200 pips would equal a $200 gain.
What is Leverage?
Leverage is the use of borrowed funds or debt to increase returns from an investment. Leverage needs to be properly understood because it can work against you as well. It can both increase your gains and losses.
Many Forex brokers entice customers by offering massive leverage like 1000:1. This sort of leverage seems great at first because the amount of money needed to buy and hold a position is smaller with the same profitability should your trade move in your favor. However, like a double-edged sword, it can just as quickly move against you.
Normally the average investor is too small to enter the forex market place which is dominated by what’s called tier 1 banks i.e. your Deutsche Bank, UBS and JP Morgan’s, etc. However, someone with a $1000 investment and a 100:1 leverage now has the purchasing power of $100,000.
Leverage is one of the most important aspects of trading FX, and by using companies like Tradeview, you can gain access to the world’s largest market.
Example: If you place one mini lot ($10,000), each pip would be worth around $1. If you gain 5 pips, everything is great, you used $50 and made a 10% return. If you lose 5 pips, you have a 10% loss just as fast.
What is Margin?
When you trade sometimes you borrow money from a broker to purchase an investment. The margin is the difference between the total value of an investment and the loan amount.
Think of margin as a down payment to hold the trade you just placed that is larger in value like you would if buying a new car or house. As mentioned before currency pairs are traded in either standard, mini or micro so if a trader buys 1 standard lot ($100,000) of the base currency while selling the same amount of the counter currency.
Example: When the asking price for EUR/USD is 1.2500, 100,000 Euros are bought while 125,000 Dollars are sold. For a standard contract (1 Lot) in which the USD is the counter currency 1 pip will equal $10 ($1 for a mini lot). For all other pairs, exact pip values are slightly different and range from $8 to $10.
Advice
One thing I tell all of my clients who are new to forex is to download a demo and test every aspect of what we just covered until you are totally confident you understand what you are doing, then and only then should you think of investing real money. Start trading with Tradeview Markets!
BEN SADGROVE
Vice President of sales
bsadgrove@rhino-report.tradeviewforex.com
