Forex Trading
A Simple and Complete Guide for Beginners
Table of Contents
Introduction
When it comes to investing, the natural instinct most people have is to play it safe. This is why we all tend to gravitate towards more or less the same things time and time again. Real estate, stocks, and bonds are just some of the investment avenues that may come to mind when you think about investing. Of course, these types of investments dont come cheap and as a result, most people end up putting off investing until a magical time in the future when they have enough capital .
If there is anything that we have learned from looking at the uber-successful, it is that sometimes the answer is outside the box. Enter forex trading. The forex market has daily transactions that average a trillion dollars daily yet few people know how this market works. This means that a lot of would-be investors are missing out on a great investment opportunity due to lack of knowledge.
Fortunately, forex does not require a business degree or even experience in the financial markets. With some self-education and commitment to the process, any layman can trade profitably in forex. Many retail investors are making money hand over fist trading in currencies. Many of these successful traders started with a rudimentary knowledge of the market and worked their way from there. So what exactly do you need to become a forex trader? Not much actually. A modest investment capital, an online broker, and of course knowledge on the basics and you are good to go.
Forex investing is not just accessible but it is one of the most flexible types of trading. Accessible from any corner of the globe, open 24 hours, and with dozens of currencies to choose from, anyone can get started with as little as $500. This book is designed to show just how to do it. The first part introduces you to the ins and outs of currency trading. The focus in this section is to help you understand the fundamentals. What is it? how do you make money? and why should you even consider it?
Once we have helped you answer these questions we give you an in-depth look at the tools and platforms that you need as a forex trader. From the basics of technical and fundamental analysis to choosing the right broker, the second part of this book equips you to understand what you need and how to make the best of it.
Ultimately we understand that your interest in forex trading is driven by the need to make money and get a return on your investment. That is why the last section of this book covers strategies for success and risk management. We have kept it simple, but not simple-minded because ultimately the goal of this book is to help you take advantage of the wealth of opportunities offered by the foreign exchange market.
Chapter 1: Forex Basics
Even before currency as we know it, people have always found a way to exchange goods and services. Whether through a system of bartering goods or through the exchange of gold, trade between people across different geographies is as old as time. While we no longer batter goods against other goods, international trade requires that sometimes money be exchanged from one currency to another.
Forex trading enables country A to buy goods from country B, by allowing the conversion of country As currency into currency Bs currency. For instance, if you want to import a sleek new BMW from Berlin, you will take your currency and pay its equivalent in Euros to the dealer in Germany. This means that your dollars will be converted into Euros to facilitate the transaction. In essence, the forex market facilitates international trade and is, as a result, one of the biggest markets in the world.
With daily transactions in excess of 1.4 trillion US dollars, the Forex market is a veritable gold mine for investors. It creates plenty of opportunities for investors to make money by taking advantage of the fluctuation in currency prices. It is no surprise that both novice and seasoned investors are increasingly choosing forex for their investment portfolios. Unlike other markets, the forex exchange markets are open 24 hours a day which means that you can make money at any time of day or night.
For many retail investors, accessibility is always a stumbling block and in this regard forex trading still comes out on top. Foreign exchange markets are accessible from any corner of the globe for any type of investor. From individual investors to pooled funds, anyone with as little as $100 can get started in forex trading. If you are looking to invest but you do not have a lot of capital to get started, the flexibility of forex trading may just be what you need. Lets face it, everybody wants to build a nest egg but not everyone has thousands of dollars to get them started.
Building wealth starts with building knowledge and in forex trading, the good news is that many investors in this lucrative market have educated themselves. You do not need to be a financial wiz to trade profitably in forex. With the right tools and strategies even, an amateur can start making money trading currencies. However, like any other investment, your ability to succeed as a forex trader will largely depend on how much knowledge you cultivate about the forex market.
To do anything well, the first step is usually to understand how it works. Once you know how it works, then you will be able to spot and take advantage of the opportunities to make money. Many investors who lose money in forex trading do so because they have not taken the time to create a trading strategy that helps them manage their risks. In forex trading just like in any other type of investment, there is always the potential for risk that awaits the hapless and the ill-prepared. That is why before you put your hard money into forex, you need to understand just what forex trading is and how it works.
Basic Terms in Forex Trading
Currency pair
In any forex trade, you are exchanging one currency for another. This means that forex trading is done using two currencies that make a currency pair. If you want to buy Japanese Yen with US Dollars, then in this case the currency pair is USD/JPY.
Base currency
In a currency pair, there is the currency that you want to sell and the currency that you want to buy. If your home currency is USD and you want to buy a different currency with the USD, then the base currency, in this case, is USD. In simple terms, the base currency is whatever currency you are using to buy another currency.
Quote currency
In any currency pair, the second currency is being purchased. This second currency is referred to as the quote currency. The quote currency is also referred to as the counter currency or the secondary currency. It is usually the foreign currency in the transaction. In the USD/JPY currency pair example, the Japanese Yen is the quote currency because you are using US dollars to purchase Japanese Yen.
Cross currency pair
In forex trading, not all trades involve the use of US dollars. For example, if you want to purchase Euros using the Canadian Dollar then this CAD/EUR pair is referred to as a cross-currency pair. In a trade involving a cross currency pair neither the base nor quote currency are converted into US dollars first.
Pip
The smallest price change that can occur in the exchange rate between the base currency and the quote currency is referred to as a pip. In any forex trade, there is a difference in the exchange rate between two currencies. For example, you will need a certain number of Japanese Yen to buy a US dollar or a British Pound. In most cases, currencies are priced to four decimal places, which means that the smallest change will be that of the fourth decimal point.
