Forex Basics

What is Forex?

Simply explained, FOREX — the foreign exchange market or currency market is the market where one currency is traded for another. It is the largest financial market in the world, with its $5 TRILLION a day trade volume. Yes, we said trillion!

But don’t get intimated by the large numbers and complex terms; Forex is actually pretty straightforward.

If you have ever travelled in a foreign country, you probably needed to exchange your money into the currency of the country you are visiting. With this one simple action, you have already participated in the forex markets.

Before flying back home, you stop by the currency exchange booth to exchange the money that you have left over (from the visiting country) back to the currency of your country.

Now, imagine doing this every day on a platform– buying and selling one currency for another. This is forex trading.

Why Online Trading?

With unique advantages like a 24-hour market, high liquidity, low transaction costs, leverage, and direct trading, the real question is – why not?

While many years ago, investing was available to only a few, today anyone can invest online. You can buy and sell currencies, invest in Apple, the same way as the big banks and rich investors do.

That's an opportunity you really would not want to miss (unless you are not into money or something!)

How does Forex trading work?

As an online trader, your job is to simply buy and sell currencies online. Let’s take an example.

These are currency pairs and you will always see them in pairs. EUR/USD or GBP/USD.

What you need to pay attention to is the exchange rate, because it is what allows you to possibly profit or lose. An exchange rate is simply the ratio of one currency valued against another currency.

The good news is that it never stays put and goes through rapid changes, sometimes several times a second (lot's of profit opportunities)

The currency exchange rate reflects the health of an economy in comparison to others. So, if the economies of the Eurozone are doing better than the US economy, the euro will go up compared to the dollar (EUR/USD ↑) and vice-versa.

How do you make money on the Forex market?

Don’t worry, Forex trading is really all about mathematics and calculations.

Let’s say that you purchase 10,000 Euros at the EUR/USD exchange rate of 1.1300. This costs you $11,300 (10,000 x 1.1300 = 11,300).

Two weeks later the exchange rate of EUR/USD changes to 1.1500. You decide to exchange back the 10,000 Euros into USD from which you get $11,500 (10,000 x 1.1500 = 11,500). Did you see that? In this example, you made $200 profit.

Keep in mind that the price may go in the opposite direction and you could lose all your investment.

Know when to buy or sell a currency pair

Now is probably a good time to introduce you to fundamental analysis, which will help us decide whether to buy or sell a specific currency pair. We will go deeper into analysis in the next lessons, for now let's focus on buying and selling currencies.

So forex fundamental analysis focuses on the overall state of the country’s economy, such as productivity, employment, manufacturing, international trade, and interest rates. And as you know, each country has its own currency.

Let's take GBP/USD pair as an example: Here the pound is the base currency and thus the “basis” for the buy/sell.

After doing your research, you conclude that the British economy will continue to do better than the U.S. in terms of economic growth, so you execute a BUY GBP/USD order.

If you, however believe the British economy is slowing while the American economy remains strong like Chuck Norris, you would execute a SELL GBP/USD order.

Pretty straightfoward, right?

How do I make money from selling position?

Remember what we said in the previous lessons: When you believe the price of a certain asset is likely to drop, you need to SELL. Say the GOLD price at the moment is $1,300 per oz and you believe it will go lower than that - you open a SELL position. In the next few days the price drops from $1,300 to $1,270 and you close your position.

Congratulations, this SELL position brought you PROFIT. Yes, it's is just that easy ☺️

Keep in mind that the price may go in the opposite direction and you could lose all your investment

How do I open my first position?

You go to the platform, and select a symbol (Gold, Silver, EUR/USD, GBP/USD, etc). Do your analysis to determine whether the price (rate) is likely to rise or to fall and based on that click on the BUY or SELL button.

Once again, if you believe the price (rate) is likely to raise you need to BUY it, but if you believe the price (rate) is likely to drop - you will have to SELL this symbol.

Congratulations, you can now make your choice opening your first trade (position) with TradeApp.

Spread

We talked about currency pair and which is the base and which is the quote currency. The first currency in the pair is called “Base” and the second one is called “Quote”. Now let’s expand a bit more.

If you take a look at the FOREX quotes, you will see that there are two prices for each currency pair.

One is the price at which you can buy, referred to as the ``ask price``, and the other is the price at which you can sell, referred to as the ``bid price``. The difference between these two prices is known as the spread. Remember that the ask price is always higher than the bid price.

Leverage

Be honest now, when you thought about investing the first thing that crossed your mind was the huge amount of cash you have to put in. While this may be the case with stocks, bonds and other investments, online CFD trading is much more accessible due to the use of leverage.

To explain, think of buying a home. You may want to buy a property that is worth $100,000. You go to a bank to take a loan and morgage. The banks requests that you give 20% of the property a down payment for your loan. So, for $20,000 you are now a happy owner of a $100,000 house.

As you can see from this example, we use leverage in our day-to-day life, without even knowing.

Now, let’s apply this to online trading.

You put a small amount of your own capital to buy an asset and then borrow the rest from your broker. For example, if you have a 1:200 leverage, this means that for every $1 you deposit, you get $200 to trade with. So if you have $1000 in your trading account, you can actually trade with- $200,000!

Keep in mind that the leverage can amplify your potential profits and losses as well.