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Foreign exchange

Check Out 8 Things To Know Before Trading The FOREX Markets!

What Exactly Is FOREX?

FOREX is basically, an acronym for 'Foreign Exchange'. The foreign exchange market, an international market with over $5 trillion dollars in daily trading volume, is a platform where financial assets like Currencies, Stocks, Metals, Energy are exchanged for the purpose of gaining profits within a given period of time, in a bid to make profits.

For instance, to further explain Foreign Exchange is all about, if I deal on cars and I want to purchase 100 BMW cars from its company in Germany, I will not pay in Naira.

What do I do? I will have to exchange my Naira to the local currency of Germany which the Euro, in other to transact effectively. Now that's how FOREX WORKS! One asset traded against another for profits.

The Eight Things To Know Before Getting On Board

1) Trading Sum

In starting up any business, one will need some start up sum to get along. Forex is no exception. Your trading sum is the amount of cash which start off forex trading with. Some financial firms would require a minimum of $100 as start up capital.

2) Broker Reputation/Services

A brokerage firm or broker, a market maker. They match buyers and sellers for transaction purposes. You certainly will not have to open a forex account with just any kind of brokerage form. Choosing which forex broker to trade with can be a very overwhelming task especially when you don't know what to look for. Well, these are basically, the things you should be on the look out for :


Security is paramount. The first and foremost characteristic a good broker is security. After all, you are not going to invest funds into a firm that claims to be legal when it's not, are you? You must check how credible the broker is. To know this, research to know if its under the control of known regulatory bodies. This will help avoid the risk of losing your hard earned funds.

* Deposits/withdrawal

Can you you Deposit and withdraw your funds hassle-free? Your broker should make sure that the process of Investing funds and withdrawing your profits is smooth.

Fees and Transaction cost

When you enter any trade, you pay transaction fees as spreads or commission. So look for brokers with cheap and affordable rates.

3) Financial Instruments

Financial instruments are items traded on for gains. These are currencies( currencies are traded in pairs) EUR/USD, Metals like Gold and Silver, Stocks and Futures, Energy like Crude. The changes in price of these instruments is the emphasis of trading! Financial instruments are represented by price charts.

4) Trading Sessions

The FOREX markets runs 24 hours a day, 5 and a half days a week. There are 5 trading sessions.

Tokyo (Asia)

Sydney (Australia)

London( UK)

Frankfurt( Europe)

New York (America)

Why is FOREX a 24-hour Market?

Every trading sessions lasts for Eight straight hours. The end of a trading session is technically the beginning of another! For example immediately the American session ends, the Asian session begins!

5) Time Frames

Time frame in FOREX is simply the time it takes for a session of price movement to complete. Some sessions lasts for 1 Minute, 4 Hours, 1 Week or 1 Month. Choosing a particular time fame depends the kind of trader you are and your expectations.

If you would love to sit in from of your PC or hold your mobile phone for the whole day, then you might go for smaller Time Frames.

If you are planning long-term, the bigger time frame would definitely suit your plans.

But note clearly that shorter FOREX Time frames can be some what busy and erratic. So tread with caution!

6) Lot Size

FOREX is traded in specific amounts called lots, basically the amount of currency units you want to buy or sell. In FOREX, your lot size is your investment size and depends on the nature of trading account. There are three types:

Micro (1000 units)

Mini (10000 units)

Standard (100000 units)

To further explain lots, let's see it from this angle. If three traders purchases the same item (say Gold). Trader A buys 100000 units of Gold, Trader B buys 10000 units of Gold, and Trader C buys 1000 units of Gold, when they each sell off their assets will they all have same profits eventually? Not at all!

That's what happens with lot sizes! Three persons can buy an asset at different volumes and get different profits!

0.01 Micro Lot

0.1 Mini Lot

1.0 Standard Lot

If you are trading on a $100 account, it's recommended you trade micro lots!

7) Buy / Sell Orders

In FOREX, there are buy and sell trades. To buy an asset means, you believe the price of such instrument will rise in with time! If your predict is in line with the market, you make profits!

Remember in FOREX, you are speculative about price changes. How do you know? Analysing the charts could help you!

Selling in FOREX is the opposite of Buy orders. You technically saying that prices of financial assets will come down with time. If your prediction is true, you gain profits!

Remember the amount of profits depends on your lot size! Remember the 'three traders' illustration? That's just how it works!

8) Price Quotes/ Bid And Ask

FOREX trading quotes are represented by two currency symbols for example GBP/USD which stands for Great Britain Pound and United States Dollar.

The first two letters define the name of the country whole the last stands for the local currency of the same country. The first currency is called 'Base currency' while the second 'Quote currency'.

Currencies are quoted in pairs reason been that, in order to express the value of an item, you need to compare it to something else.... In this case 'quote against'.

In a currency price quote, the are two prices The Bid and Ask or Buy and Sell as seen above. Here for instance,

GBP/USD price quote is = 1.6115 1.6119

What does this mean?

It means technically, that a quantity of GBP is sold at 1.6115 in the US. Got it? Yes! That's how you can read price quotes accurately!

For Bid and Ask, as a trader, it simply means you buy (predicting that GBP/USD will go up) at the Ask price and sell at Bid price.

The Ask Price is the rate at which sellers are willing to sell the currency pair (GBP/USD to you).

The Bid price is the rate at which Buyers are willing to buy the asset from you.

Remember you are 'exchanging' one asset for another! This is how the markets work!

Content created and supplied by: SclateX (via Opera News )

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