Though forex trading (the exchange of foreign currencies) may seem complicated, the truth is that most people can get started with a new account in as little as a single afternoon.
In no specific order, the eight currencies every Forex trader should know are the U.S. dollar (USD) or “greenback”, British pound (GBP) or “cable”, Japanese yen (JPY), European euro (EUR), Swiss franc(CHF), Canadian Dollar (CAD) or “loonie”, and the Australian/New Zealand dollar (AUD/NZD). Currencies must be traded in pairs, and there are 18 different currency pairs that are conventionally quoted by forex market makers, including USD/CAD, EUR/USD, USD/CHF, AUD/USD, GBP/USD, NZD/USD, and USD/JPY.
Understand the Lingo
A firm grasp of the most commonly-used forex lingo will make your entry into the market much simpler. Some words and phrases you’ll hear over and over again include:
- Base currency: The currency you are holding. If you’re from the United States, your base currency is most likely the U.S. dollar.
- Quote currency: The currency you are going to purchase.
- Bid price: The price that your broker would be willing to “bid” or “buy” the base currency you are holding.
- Ask price: The price that your broker will “ask” you for in exchange for buying your quote currency of choice. The ask price is always higher than the bid price.
- Spread: The difference between the bid price and the ask price. This is just the broker’s commission.
- Pip: The smallest measurable value of currency movement. The word “pip” is an acronym standing for “percentage in point,” and a single pip is equal to 1/100th of 1% of your currency. For example, if the value of the USD rises by a single pip, that means it increased in value by $0.0001.
Choose the Right Broker
Before you begin forex trading, you’ll need to choose a brokerage firm. Your brokerage firm will help you make trades, and many brokers also offer additional financial services.
Working with a reputable broker can mean the difference between profiting from your trades and losing money between the bid and the ask price. Don’t be afraid to thoroughly research and read the reviews of a variety of brokerage firms.
Not all brokerage firms, offer forex trading, so make sure its available before you open an account. Working with a broker that offers multiple outlets for customer service is highly recommended for beginning traders
Avoid Shady Brokers
Sniping and hunting – or prematurely buying and selling near preset points – is used by shady brokers to increase profits. Of course, no broker will admit to committing these acts, and there is no blacklist or organization that reports such activity. Besides, when you are trading with borrowed money, your broker can buy or sell at its discretion, even if you had enough cash to cover.
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