You can't successfully trade on the Forex market without a thorough understanding of how the market works. It also helps to understand the terms that you will encounter while trading. From there, you can start building a foundation of knowledge that includes more advanced concepts and Forex strategies.
This Forex trading tutorial will give you that foundation. Once you understand how trades are made and what types of trades are available, you can learn more about Forex strategies and start testing them out in a Forex trading room, such as eToro or Forex Broker Inc.
Processing a trade without checking and understanding the spread is like giving a used car salesman your credit card without inquiring about the cost of a vehicle. The spread is ultimately the price tag on your trade, and there are three terms that you must understand for that price tag to make sense:
You will often see the bid and ask prices stated like this: 1.4661/1.4664. These numbers are measured in points which are referred to as Points in Percentage, or pips. The first number is the bid price, and the second number is the ask price.
The difference between the bid and ask price is what the broker initiating the trade will earn. Many brokers will advertise that they charge no commission or hidden fees, but they are earning money through the spread. You will notice differences between spreads offered by different brokers, so it is worth your time to search for the most advantageous price.
When determining whether the spread is to your advantage, ask yourself one question: If I were to purchase at the current ask price and immediately sell at the current bid price, would I earn a profit? If you would earn a profit, then you may want to make the investment.
If you would lose your investment at the current spread, then you know that a fast trade for profit isn't possible at the time. You could still purchase the currency, but you would have to hold onto it until the spread turned in your favor. This is where the risk of the Forex market comes into play. If you have analyzed the market and believe the currency's ask price will increase, you may decide to take that risk.
Once you establish a trading account, you will have the option of trading larger sums of money than you actually have sitting in your account. There are two terms that you need to understand:
The margin is the broker's assurance that you can cover at least part of any funds that you may lose while trading. Consider it the minimum running balance for your account.
Leverage is often expressed like this: 100:1. This example would mean that your broker will allow you to trade $100 for every $1 currently in your account. This allows you to make larger trades without making the full investment upfront. When the odds turn in your favor and you earn a profit, you will pay the broker back for the funds extended on your behalf at the opening of the trade. If you take a loss on a leveraged trade, you will owe your broker money.
There are five main types of orders that you can place on the Forex market. 1) Basic market orders are placed by Forex firms for the best possible price. If you ask a broker to sell a particular currency for a specified price, you are involved in an entry order (2)
In most cases, you will trade 3) Good-Until-Cancelled orders, otherwise known as GTC orders. Every order is good until you cancel it regardless of what direction the market turns. You need to watch every order closely in order to sell at the most advantageous moment with this type of order.
If you want to limit your risk, you can create a 4) stop-loss order. You set a price at which the system will automatically sell the currency. This prevents you from losing a lot of money if the value of that currency falls too low. 5) Take-profit orders (T/Ps) are the opposite. You set a profitable price point at which the system will automatically sell a currency, earning you a profit.
Now that you understand spreads, you basically understand how to trade on the Forex market. This section of the Forex trading tutorial will give you specific steps that explain the trading process:
Some trading platforms offer more charts and tools for analysis than others. You can learn more about analysis strategies after absorbing the information presented in this Forex trading tutorial for beginners. You may also want to watch a Forex trading tutorial video to make sure you have a solid foundation of knowledge before entering this volatile market.