Traders and investors all over the world find currency trading market as a great opportunity for making money by investing only small amount of money. Before stepping into this market, you should understand the basics of this market. You must know how the transactions are done, when to enter and when to exit. Do you know what is traded in foreign exchange market? The instrument traded by the investors and traders are currency pairs. The most traded currency pairs are: AUD/USD, USD/CHF, USD/JPY, USD/CAD, GBP/USD and EUR/USD. The 85% of the total volume is generated by these currency pairs in the market.
If a trader buys or goes for the EUR/USD, he/she is simultaneously buying the EUR and selling the USD. If any trader sells or goes short AUD/USD, he/she is simultaneously selling the AUD and buying the USD. The first currency of the FX pair is known as the base currency while the second currency is known as the quote or counter currency. The value of the FX pair is expressed in units of the quote currency needed to buy one unit of the base currency. For example if the quote or price of the EUR/USD is 1.2123, it means that 1.2123 USD are needed to buy one EUR.
Do you know bid/ask spread? All FX pairs are quoted with bid and ask price. Bid price in foreign exchange market is a price at which your broker is willing to buy; therefore a Forex trader should sell at this price. The price at which your broker is willing to sell is known as ask price; therefore a trader should buy at this price. For example, for the currency pair EUR/USD 1.2123/26, the bid price is 1.2123 and the ask price is 1.2126.
Do you know what pip is online trading? It is the minimum incremental move in the currency pair. Pip is an abbreviation for price interest point. A move in USD/JPY from 111.95 to 113.00 is equal to 105 pips. A move in EUR/USD from 1.2760 to 1.2775 is equal to 15 pips.
The most important thing in the Forex trading is leverage. In most of the other financial markets, you need full deposit of the traded amount but in foreign exchange market, you need only a margin deposit and the rest will be provided by your Forex broker. Some of the brokers provide leverage as high as 400:1. This means that you have to deposit only 1/400 amount in your account for opening a position. Usually most of the brokers provide 100:1 leverage, in such a case you need only 1% amount in your trading account for opening a position. High leverage is not recommended because if the trade goes against the trader, the broker closes the position and the trader may suffer heavy loss.
Are you aware of margin call? A margin call occurs if the balance of your currency exchange account becomes less than the maintenance margin (it is 1% if the leverage used is 100:1 or 2% if the leverage given by a broker is 50:1). If this position arises then the broker sells off all your trades leaving you with the maintenance margin. The main reason of the margin calls is wrong money management in foreign exchange market.
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