Forex trading is a very competitive business. It is a zero-sum game, meaning that for a trader to make money, another has to lose it.
Of course, no one wants to lose their money. However, in Forex trading, that is what traders usually do. In fact, over 90% of Forex traders lose and eventually quit. If you do not want to lose and quit, then you should pay attention to the basics.
The Basics of Forex
As an aspiring or newbie Forex trader, you should be conversant with the basics of the trade. If you are not, then the battle is lost. Hence, you should strive to master basic Forex concepts such as currency pairs, bid-ask spread, lot, pip, margin trading or leverage. Here is a comprehensive treatise of the first two of those.
Forex traders trade currencies. They cash in on the fluctuations in their exchange rates. However, currencies are traded in pairs. That is, as you are buying a currency, you are selling another. The first currency in each pair is known as the base currency; the second is the quote or counter currency.
Those currency pairs are often written in abbreviated forms, sometimes separated by a slash. And there is a convention each currency follows: the first two letters represent the country's name, while only the last is for the name of the currency. Hence, for example, there are USD for United States Dollar, NZD for New Zealand Dollars, and AUD for Australian Dollars.
All the currency pairs are grouped into three: major, crosses, and exotics. The major currencies are the most traded currencies in the world, representing the largest market share and generating the most market action. Also, they tend to have the most favorable trading conditions such as tight spreads. Examples include:
As you would have noticed, every of the major currency pairs includes the USD. However, for crosses, this is not the case. Cross currency pairs “cross” popular currencies but exclude the USD. The most popular of them are EUR/GBP, EUR/JPY, and EUR/AUD. Mostly, they contain the euro, the yen, and the British pound.
Finally, exotic currency pairs are made up of a major currency and another currency usually of an emerging or small economy. The emerging economies are the BRIIC, an acronym for Brazil, Russia, Indonesia, India, and China. However, exotics enjoy only a little popularity from traders and so are rarely traded.
Taking EUR/USD as an example, the EUR is the base currency and the USD is the quote or counter currency. The EUR serves as the “basis” for every of the pair's transactions. That is, when you buy the pair, you essentially “wager” that the EUR will appreciate in value relative to the USD. The converse is the case when you sell.
Brokers facilitate Forex transactions. They serve as the intermediary between Forex traders and the Forex market. But how do they earn for their services? Here is how: Forex traders buy at the ask price while we sell at the bid price.
The difference between the two, the bid price and the ask price, is known as the bid-ask spread. And this is the broker's gain.
If you want to enjoy tight spreads, overall competitive trading costs, and the benefits of a standard trading platform, you should sign up for an account with ForexCT, the leading Australian Forex and CFD brokerage services provider.