A crash course in everything you need to know when forex trading

Forex trading involves buying one currency in large amounts when you believe it will rise in value against another. You can then sell this back. The profit you will make comes from the growth of the currency. Stability is one of the key reasons you may chose to add forex to your portfolio. The main points you must know as a new forex trader are included in this article.  

How important is diversity and stability in your portfolio? One way to add this is by trading in forex. It involves buying one currency in large amounts and accruing value when it rises against another. Below, we give a crash course on the basics of forex trading.

What is forex? 

Forex is the global system for trading in currency. This is measured using exchange rates, which are the values of currencies in relation to each other. You have probably engaged in a similar trade before. If you have exchanged cash at a bureau for one currency and turned it into another, you will have worked with exchange rates and may have noticed that they go up and down. With a forex trade, you are making an investment against the value of these currencies rising and falling, just on a much bigger scale.  

Forex is short for foreign exchange market, sometimes abbreviated to FX. It is a decentralized market, meaning nobody or any organization has control over it. Previously, it was only open to banks, financial institutions and hedge fund traders. However, it is now possible for individuals, such as yourself, to invest in the forex exchange. You can trade on the forex market at almost any time, as it is open 24 hours a day, five days a week. This makes it  very unique when you compare it to other asset investment methods.  

How does forex trading work? 

The concept of trading in forex involves currency pairs. If you think a currency is going to rise in value against another, then you buy that currency. When it rises, you can sell it back for more than you spent.

For example, imagine you think that GBP will rise against the USD. You buy the GBP with your USD and wait for it to rise. Once it has, you sell the GBP back for USD, getting more than you paid for it because of the rise in value.  

It is worth noting that currency rates change very little in a day. Thus, many view forex trading as a fairly stable investment. Companies will use it as a form of hedging. If a company is in a new market and country, it can use forex to protect against potential drops in the host currency. It’s also possible to use an mt4 forex trading bot to do the mundane tasks so that you can focus more on strategy because the prices stay stable and you don’t risk much.

It is worth noting that currency rates change very little in a day. Thus, many view forex trading as a fairly stable investment. Companies will use it as a form of hedging. If a company is in a new market  and country, it can use forex to protect against potential drops in the host currency.  

What are pips and how are they used to measure forex?

You need to buy a huge amount of currency for any changes to have value. Changes will occur in fractional amounts, perhaps a small part of a pence or dollar. Therefore, to get any return you need to invest in large amounts.  

Pips are a method of measuring this. Most forex currencies are given to a decimal place of four (The Japanese yen is two). Pips are the final decimal place in that figure. So for example, if the USD moved from 1.1001 to 1.1002 it would have moved by one pip.  

What is a spread in forex?

The forex spread is the gap in value between two currencies. It is built into the buy and sell price of every currency pair. The difference between the buy and sell prices is the spread.  

Spread is measured using pips. For example, imagine the selling price of USD is 1.1002. Its currency pair is GBP and is measured at 1.1005. The difference is 0.0003, so the spread is 3. To work out the spread, all you need to do is deduct the bid price from the asking price and you will get the spread.  

Spreads themselves can come in different versions. The most common two are fixed and variable spreads. The one used for your trade will depend on the broker you have chosen.  

Fixed spreads remain the same, whatever happens to the currencies and their movements. You should use them if you are holding a position or are a beginner investor. Variable spreads will increase and decrease, getting further apart and closer together as currencies get volatile. The advantage is they do have the ability to make more revenue, but also can make more losses.  

How do you use signals in forex?

Forex signals are messages and notifications that can assist you when trading. They’ll tell you when to buy and sell your forex currencies. There are two main types, which are manual and automated. A real person who will have expertise and experience in trading provide manual signals. Notifications are sent to you when they see changes in the market.  

An automated signal is done by computer. It will take historical and current data, and then use it with algorithms to try and predict events. No methods are guaranteed to work, but they can be useful for people who don’t have time to watch the markets all the time.