Forex Trading 101: The Basic Concepts Every Beginner Should Learn
You don’t have to be a math wiz to trade in the foreign exchange (Forex) market. The foreign exchange market is a place where you can swap one currency for another during trading. If you’re new to the Forex market and interested in getting started, here are some basic concepts that you should learn:
1. Trading Hours
Markets will be open over a 24 hour period in different parts of the world, and this enables trading in different time zones for various currencies. Although it’s very convenient to trade from anywhere, as long as you have the Internet and a laptop, it can also pose as a window for price fluctuations.
When you’re in the market, you might be expecting certain price movements. But you might be surprised that when you wake up, prices might already be different and way out of your expected range. Take note that different countries have different timelines. You might be sleeping while the currency you bought is having a crisis in broad daylight somewhere else, and you could totally miss it.
One of the basic concepts in Forex is leverage. This concept is different from other markets. It allows investors to make a trade with a larger amount of money compared to what they inject via borrowing from their broker.. If you don’t have a broker yet at the moment, here is a full list of trusted brokers that you can choose from.
This is a very big advantage when it comes to the Forex market. If you do things right, you can earn more money by starting with a small amount. This means that you can begin trading in the Forex market even if you only have a small amount of capital to invest. For instance, as a trader, you might only have $100 in your forex trading account, but you’ll be able to borrow money from the broker and trade up to $20,000. This is what the concept of leverage means in the stock market. However, you need to be careful because the concept of leverage is a two-edged sword. Even though it can give you more profit, it can also lead to greater losses if the deal goes awry.
3. Forex Contracts
Another concept that’s unique to Forex and that you need to know about is the type of Forex contracts. Forex contracts is a legal arrangement where 2 parties have agreed to trade at a certain rate and amount on a predetermined date.There are two types of Forex contracts:
- Spot Price: A spot price refers to the rate that’s currently available to the buyer. For instance, if you make the sale right now, the price that would be applied to it is the current market price, also known as the spot price.In layman’s terms, the spot rate is the rate that you usually see when you try to exchange your money in a foreign exchange kiosk at airports.
- Forward Price Contacts: On the other hand, a forward rate is a contract to either sell or buy a specific currency at a future price and on a specified date. Regardless of what the rate might be on the designated date, both will trade at the agreed future price. This is a strategy to hedge the price and mitigate against price fluctuations. For instance, if you think the rates will improve in your favor, then you wouldn’t agree with the forward rate. You’d agree on a forward rate if you believe that prices will dwindle. This will protect your position and let you take strategic and calculated risks.
4. Major Currencies
In contrast to the stock market, where there are numerous stocks available to trade, in the foreign exchange market, you only have to keep track of 8 major currencies. These are the 8 currencies in the foreign exchange market:
- Eurozone (includes Germany, Italy, Spain, and France)
- United Kingdom
- New Zealand
- United States
You only have to keep track of the mentioned countries. Know the current news, political situation, and economic status of the respective regions. These factors will play a role in the movement of the price of each currency. Remember that the prices are very volatile, so any kind of news you get is very important as you plan your next trade.
With a bit of eagerness to learn, you can start trading in the Forex market. Follow the tips above and do your own research as well. These basic concepts will build your foundation as you embark on your journey in the foreign exchange market.