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Getting Started with Forex Online Trading

Getting Started with Forex Online Trading

The forex market is an exciting, large, fast-moving financial market.  It appears to be quite easy to understand, as many people already know how foreign currency exchange works.  Most people have experienced it when they have travelled to another country.

Forex Online Trading Market

In the past, this financial market was only open to large corporations, central banks, financial institutions, hedge funds and individuals who had the funds to participate.  The internet and other modern technologies have now made it possible for the average investor to have a slice of this exclusive pie.

Currencies

If you take the time to watch a particular currency, you will notice that its daily movements are normally quite small.  Most currency pairs do not move more than one cent each day.  This represents a change of below 1%.  To compensate for these small changes in value, most traders in the forex online trading arena use leverage to increase their earnings.  Leverage is often as high as 200:1, but 50:1 is the average.  The level depends on the initial amount you have invested, and your broker’s rules.

Trading

Leverage, and the size of this market, alongside the ease of placing transactions, have made this a very popular market to enter.  The positions you wish to place can be opened and shut down quickly at the price as you see it.  There are generally no commission charge or transaction fees involved.  Unlike the stock market, the size of this financial market makes it difficult for one trader to affect the prices.  Currency prices are based on the economic rules of supply and demand.

Each transaction you place is comprised of two trades: the buying of one currency and the simultaneous selling of another.  All forex rates are normally quoted as a pair.  There is a group of about eight currencies that are the most popular for trading and, if you are a newcomer to this market, you should probably choose a pair from these popular currencies.

Quotes

All currencies quotes are indicated in pairs, for example USD/JPY.  The reason for this is that when you purchase a currency, you are normally also selling a different currency.  In this instance, the quote would look something like this:

  • USD/JPY=115.50

This indicates that the currency on the left, the USD, is the base currency and the one on the right, JYP, is the quote currency.  The base currency will always be equal to one unit of that currency, and the quote currency amount is what the one base unit is worth in the quote currency.

In this example, if you are going to buy $1, it would cost you 115.50 yen.  Alternatively if you wanted to sell $1, you would get 115.50 yen.

Long and Short

In the event that you are purchasing the base currency because you think that it will increase in value – and you are selling the currency quoted – you would be entering a long position.  If you wish to sell your base currency and purchase the quote currency, you would be entering into a short position.  In this example, if you intend selling US dollars, you will be going short, and if you want to buy US dollars, you will be going long.

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