about forex
The once closed-off areas which
were once open only to the “financial elite” are now open to anyone with
nothing more than internet access and a small amount of capital. In the past,
you would have needed a stockbroker account to buy and sell stocks, and you had
to complete complicated forms to do so. You would be charged high commissions,
and executing your orders would normally take long. It would also be very
difficult for someone who was a resident of, say, Nigeria or Indonesia to
buy stocks of a US- or Germany-listed company. Not only would you have
issues with taxes, but also with settlement currencies, i.e. the currencies in
which your funds would be deposited into your business bank account.
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How to Forex Trade for
Beginners
The next question that comes to everyone's mind is: how to
learn Forex from scratch? Can I teach myself to trade Forex? Don't worry, this Forex trading for
beginners guide is our definitive manual for all aspects of
Forex and general trading. By the end, you'll understand the basics of trading
Forex and how to begin.
Trading terminology: Forex
trading notes for beginners
Here's where your Forex
trading notes for beginners can begin. I'm going to start this trading for beginners
guide in the UK by presenting some of the most common terms
you'll come across in trading that you'll need to know.
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1. Spot Forex
This form of Forex trading involves buying and selling the
real currency. For example, you can buy a certain amount of pound sterling and
exchange it for euros, and then once the value of the pound increases, you can
exchange your euros for pounds again, receiving more money compared to what you
originally spent on the purchase.
2. CFDs
The term CFD stands for "Contract for
Difference". It is a contract used to represent the movement in the prices
of financial instruments. In Forex terms, this means that instead of buying and
selling large amounts of currency, you can take advantage of price movements
without having to own the asset itself. Along with Forex, CFDs are also
available in stocks, indices, bonds, commodities, and cryptocurrencies. In all
cases, they allow you to trade in the price movements of these instruments
without having to buy them.
If you are interested in
knowing how CFDs work in greater detail, we recommend the following article
that explains CFD trading for beginners: What is CFD Trading?
3. Pip
A pip is the base unit in the price of the currency pair
or 0.0001 of the quoted price, in non-JPY currency pairs. So, when the bid
price for the EUR / USD pair goes from 1.16667 to 1.16677, that represents a
difference of 1 pip.
4. Spread
The spread is the difference between the
purchase price and the sale price of a currency pair. For the most popular
currency pairs, the spread is often low, sometimes even less than a pip! For
pairs that don't trade as often, the spread tends to be much higher. Before a
Forex trade becomes profitable, the value of the currency pair must exceed the
spread.
5. Margin
Margin is the money that is retained in the trading
account when opening a trade. However, because the average "Retail Forex
Trader" lacks the necessary margin to trade at a volume high enough to
make a good profit, many Forex brokers offer their clients access to leverage.
6. Leverage
This concept is a must for beginner Forex traders.
The leverage is the capital provided by a Forex broker to increase
the volume of trades its customers can make.
Example:
·
The
face value of a contract or lot equals 100,000 units of the base currency. In
the case of EUR/USD, it would be 100,000 euros.
·
If
you use a 1:10 leverage rate and have 1,000 euros in your trading account, you
can trade a currency pair with a $10,000 position size.
·
If
the trade is successful, leverage will maximise your profits by a factor of 10.
However, keep in mind that leverage also multiplies your losses to the same
degree.
Therefore, leverage
should be used with caution, regardless of whether we are talking bout trading
for beginners or experts. If your account balance falls below zero euros, you
can request the negative balance policy offered by your
broker. ESMA regulated brokers offer this protection. Using this
protection will mean that your balance cannot move below zero euros, so you
will not be indebted to the broker.
7. Bear Market
This is a term used to describe the stock market when it
is moving in a downwards trend. In other words, when the prices of stocks are
falling. If a stock price falls deep and fast, it's considered very
bearish.
8. Bull Market
The opposite of a bear market is a bull market. When the
stock market is experiencing a period of rising stock prices, we call it a Bear
Market. An individual stock, as well as a sector, can also be called bullish or
bearish.
9. Beta
A metric indicating the relationship between a stock's
price relative to the whole market's movement. If a stock has a beta measuring
1.5, this means the when the market moves 1 point, this stock moves 1.5 points,
and vice versa.
10. Broker
A broker is a person or company that helps
facilitate your buying and selling of an instrument through their platform (in
the case of an online broker). They usually charge a commission.
11. Bid
The bid is the price traders are willing to pay per share.
It is set against the ask price, which is the price sellers are willing to sell
their shares for. What do we call the difference between the bid and the ask
price? The spread.
12. Exchange
This is a place where trades are made. Two
well-known stock exchanges are the NASDAQ and the New York Stock
Exchange (NYSE).
13. Close
This is the at which an exchange closes and trading stops.
Regular trading hours for the NASDAQ and the NYSE are from 9 a.m. to 4:30 p.m.
Eastern time. After-hours trading continues until 8 p.m.
14. Day Trading
This when traders buy and sell within a day. Day trading
is a common trading strategy. However, if someone day trades, they may
also make long term investments as well (a long-term portfolio).
The following two terms
only apply to share trading:
15. Dividend
A proportion of the earnings of a company that is paid out
to its shareholders, the people who own their stock.
These dividends are paid out either quarterly (four times per year)
or annually (once per year). Not every company pays its shareholders dividends.
For example, companies that offer penny stocks likely don't pay dividends.
16. Blue Chip Stocks
These are stocks in big, industry-leading firms. Many
traders are attracted to Blue chip stocks because of their reputation
for paying stable dividend payments and demonstrating long-term sound fiscal
management. Some believe that the expression 'blue-chip' derived from the blue
chips used in casinos, which are the highest denomination of chips.
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