Basics of Currency Trading
Even the most experienced trader can get confused with the amount of knowledge that is available on the subject and finds the need to read about the basics of currency trading. The currency market is very different from stocks or other forms of investments. It is a 24-hour market and the trader decides when and how to trade. There are a few basics that must be kept in mind before you begin to trade.
How is the trading done?
Trading is done using a pair of currencies like USD/JPY et al. The value of the currencies keep changing. Trading is similar to other markets with a difference. Here, you are buying currency and selling another currency at the same time.
The first currency of the pair is the one that is used to buy the second currency. When you are trading in USD/JPY, the number of JPY that can be bought using one USD will determine your profit or loss. The reverse is also true. If the price of the USD is expected to rise, then buy it using JPY and sell it at a profit. If your analysis turns to be wrong, then you may also suffer a loss.
What is Bid/Ask Spread?
To buy and sell currency, you must quote the rates using bid price and ask price. The bid price is the amount that you are bidding to buy a currency and the ask price is the rate at which you will sell it.
What are Pips?
Pip is the abbreviation for price interest point. It is the movement of currencies and is calculated up to 4 decimals.
What is leverage?
When you are investing in the currency, you need to make a deposit of only 25% or sometimes only 1% of the investment. Your broker will deposit the rest of the amount. For example, if the investment is $100,000, your initial deposit will be $1000.
What is Fundamental and Technical Analysis?
These are two tools used by traders to analyze the market before investment. The technical analysis follows the trend of the market in the past days and it believes that it will continue. In contrast, Fundamental analysis follows the theory that the market changes according to the news and international current affairs.
Apart from these, there are four important points to remember that will always stand you in good stead.
- When your system of trading is complicated, it will become difficult to keep track of all the elements. Keep it simple and easy.
- Remember to use a mixture of fundamental and technical analysis.
- Trade in small amounts to ensure that you do not lose heavily.
- Use discipline while trading in currency. This will help you to minimize your losses and invest your profits wisely.
It is important to understand all these before you start trading. Start with these basics and then move on to more advanced issues.