If you are new to currency markets you might be asking yourself what is forex trading.
Understanding the fundamentals can ensure long-term success.
Forex trading can be a lucrative business for investors but it can also deplete your investment account if you assume it is an easy undertaking. Almost every investment is seldom a walk in the park but you can succeed if you get the right understanding of the principles. The forex market is among the largest markets and it hasn’t shown any signs of slowing its growth. Almost all new traders ask themselves what is forex trading?
What is forex trading? Currency pairs and pips
In the forex market, all the trades are conducted in pairs as opposed to stocks where you are allowed to sell or buy a stock of your choice. Here, you can only buy a certain stock then sell its pair. The pricing is done in four decimal points and as such, a pip represents the smallest possible increment in trade. Basically, one pip represents 0.01 of 1%.
The first currency of the pair is often referred to as the base currency while the corresponding currency is known as the quote currency. Therefore, the price for each pair denotes the worth of a base currency in relation to the quote currency. To illustrate, if GBP/USD is priced at 1.3562, then GBP is worth $1.3562.
Newbie traders tend to prefer micro lots since a single pip is equal to ten cents change in the currency price. As such, it is easy to mitigate the losses in the event where a certain trade isn’t favorable. At the same time, one pip in a mini lot represents a $1 while it translates to $10 if you are using a standard account. At times, it is possible to have 100 pips in a single trade which means you have a potential to make huge profits or losses if the market moves against you. Are you still asking what is forex trading? You can find more answers here, or you can take a forex trading course!
The role of news in forex markets
News, as well as macroeconomic events, are constantly affecting the forex market. Therefore, if you are asking what is forex trading? It is essential that you keep tabs on the emerging news that might have an impact on the currency market. Basically, even traders that rely on technical methods, you will definitely benefit from being aware of news events.
Any trader is faced with a choice before the news, during the announcements as well as after the release. As a rule of thumb, learning traders should avoid participating in new trades when expecting high impact news. Every time you realize that a price is nearing the take profit; you should close the trade before the news hit the ground. When the market volatilities are attributed to pending news events, you need to make sure that your stop losses are as tight as possible to protect your investments.
After every news release, the markets can be volatile and difficult to predict. To be on the safe side, desist from taking any trades within an hour of the release. But after this time, prices will stabilize and you can make profits again.
Contributed content
Founder Dinis Guarda
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