For Beginners: What Should I Know about Forex?

What is Forex trading？

Forex trading is about opening a buy / sell position on any currency pair at a certain price, and closing it at another price level. The difference in these two prices will determine a traders profit or loss.

Unlike the equities market, forex is a decentralized market. It operates for 24 hours, 5 days a week at 4 different time sessions, which are Sydney, Tokyo, London, and New York.

The currency code usually has three letters, and the exchange rate is a pair of two currencies, such as “EUR/USD” which is the Eurodollar to the U.S. dollar. The former is the base currency and the latter is the counter currency. When the pair is traded, the base currency is used as the standard, e.g. how much USD can be exchanged for one Eurodollar.

With so many online Forex brokers offering their FX services, the cost of trading is often the primary consideration for retail investors. Investors can determine the cost of trading through spreads.

The “pip” in “spread” refers to the unit of currency movement in the foreign exchange market quotes. In order to accurately represent the exchange rate, almost all currency pairs are quoted in five digits. A pip is equal to 0.0001, and a pip is used as a unit for buying and selling. As its name implies, the “spread” is the “difference in points”, that is, the difference between the bid price of the buyer and the ask price of the seller.

Spreads fluctuate with the market and are influenced by factors such as currency liquidity, transaction amount, market direction, and investment strategy, with currency liquidity having the greatest impact. Generally speaking, the higher the currency liquidity, the smaller the spread.

When trading foreign exchange, most firms offer their clients trading prices with spreads. Compare the spreads offered by forex brokers at ease with WikiFX:

In addition to the ease of use of the trading platform, it is crucial to consider reputable and reliable forex brokers that are operating with valid licenses and legitimate business premises. The last thing any trader would want is to end up having their money scammed by a fraudulent broker. Download the free WikiFX app to check the information of your forex broker right now:

Foreign exchange trading is a leveraged investment. As leverage is a double-edged sword, retail traders should have a sound risk management system in place to protect themselves. Generally, investors only need to pay a specified amount of money (margin) to start trading, without having to shell out the full amount.

A trader who is optimistic that the USD will rise against the Euro dollar buys a contract for different at an exchange rate of 1.02000. He places a 10.00 lot. 10.00. Suppose the exchange rate rises to 1.03000, and he terminates the contract. The difference between the purchase and sale is 0.01000, which means the trader made a profit of $10,000.