Total Basics of Forex Trading

When I started this blog, I skipped some of the ultra basics of forex trading. But since there are many beginners now visiting the rapid forex blog, I wanted to explain some of the most basic concepts.

If you're just discovering the wonderful world of forex trading online, then this is a post that you'll want to take the time to read this.

The Total Beginner Basics of Forex Trading

The Foreign Exchange (Forex) market is where banks, investors and speculators exchange one nation's currency for another.  The Forex has been around since the early 20th century, but it was not until well after the beginning of the computer revolution of the 1990's where independent investors (like you and I) had access to invest small amounts of money in the Forex.

The Forex is like the stock market in one critical way (among others); to make money in forex trading you must buy low and sell high.

You may do this in two ways.

1. In the stock market, the traditional way is to buy a position and sell it after it goes up in value.  You can also do this with forex trading online.
2. The second way to make money with forex trading is to sell-short a stock and then later try to buy it back at a lower price.  In stock market investing there are severe restrictions and dangers to selling short.  The beauty of the Forex market is that there is no distinction between buying and selling short. This is because all transactions are dual-faceted.

Currencies are always traded in pairs. A typical pair is EUR/USD (Euro over US dollar).

The first currency is the base currency.  The second currency is the counter currency or quote currency.

The first currency is the base.  So you must view it as the amount of the second currency needed to buy one unit of the first currency. If you want to buy the currency pair you are actually buying the EURO and simultaneously selling the USD.

If you were going to sell the pair you would simply be selling the base currency (EURO) and buying the USD.  Whether you are buying or selling the pair is just a matter of which one you are buying or selling.

The good news is that you don't have to remember which one to buy or sell, simply think of the whole pair as one item and you are buying or selling the whole pair.

An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought-back the equivalent amount to effectively close the position.

Pips in Forex Trading

Currency pairs are carried out to 4 significant digits.  The change of the currency pair by one one-hundredth of a percent is called a pip.  So if the currency was trading at 141.53 – a one-pip increase would be 141.54.

Similarly, an increase of one pip could also be 1.6138 to 1.6139.  A fall of one pip would be a move from 1.2345 to 1.2344.  This is just lingo, in the stock market a point is when the stock increases or decreases by $1.

.