The Basics of Forex Trading and the Key Concepts

To start trading in forex, you first need to look at some of the basic components of forex trading; factors like exchange pairs, price movements, and the mechanism for profit for traders. The forex market is the largest financial market in the world. More than 6 trillion dollars are traded on various foreign exchanges every day.

Hence, there are a lot of opportunities to make profits. Forex trading is completely legal. However, there are always some illegitimate players in the market, and sometimes there are scams. In the unfortunate event that you fall for one, there are effective ways to get money back from a forex scam. Private organizations with their teams of consultants can work with you to help get your money back.

Read on to get a better understanding of the basics to stay safe.

Currency Quotes

Here are some common currency quotes. 

GBPUSD 1.3300 

EURUSD 1.1500

EURGBP 0.9800 

USDJPY 115.00

So what do these numbers mean? Going from the first quote to the last –  

1 Pound buys 1.33 US Dollars 

1 Euro buys 1.1500 US Dollars 

1 Euro buys 0.98 Pound sterling

1 US Dollar buys 110 Japanese Yen 

These rates go up and down throughout the day since the forex market operates 24 hours a day, seven days a week. So how do these prices change?

Price Changes—Points or Pips

When forex traders talk about price changes, they talk in terms of points and pips. Traders may say that the market changed by 200 points or 200 pips. Pips and points mean the same thing, and using either is a matter of preference. Let’s say that the GBPUSD pair starts the day at 1.3100 and finishes the day at 1.3200. Hence, the rise in the exchange rate for this pair is 0.0100, i.e., 1.3200 minus 1.3100. This 0.0100 change equals 100 points, or pips, on the foreign exchange.

In determining the number of points moved, you need to look at the number of decimal places. In the GBPUSD pair, the rates are quoted up to 4 decimal places. Thus, in the example above, the rate has moved 100 pips.

In another example, the USDJPY pair starts at 100 at the beginning of the trading day. At the end of the day, the rate drops to 99.50. In this case, the rate has dropped by 0.50. Since this pair is quoted only up to 2 decimal places, we will call this a 50 pip fall in the rate.

How Traders Profit From Trades

If you buy £10,000 when the GBPUSD pair is at 1.3300, you are essentially speculating against the dollar. At the same time, you expect that the pound’s value will rise. Whenever you buy a currency pair, you are speculating that the first currency in the currency pair will rise. You are also hoping the second quoted one is going to fall. Thus, in the example above, if the trade closes above 1.3300, you will stand to make a profit, whereas if the trade closes below 1.3300, you will lose.

Whenever you trade in Forex, you always do it through margin trading. In the example above, you would take a leveraged position of £10,000 with only £333. With a leveraged position of £10,000, you would gain about £76 if the position closed 100 pips above where you had speculated. On the other hand, if the position closed at 100 pips below, you would lose £76.

Margin Trading Dangers

The amount of leverage you can have will depend on the platform and the market you are operating in. The standard leverage is about 1:200. So if you were to make a trade of $100,000, you would need to put in $500 of your funds. With $500, you could control a position of $100,000. Some brokers even offer leverage of 1:500 due to client demand. With such high leverage, there are higher opportunities for profit. However, they come with an equal amount of risk. If the trade goes against you, it will come with an equivalent loss. And the $500 that you have put up for such a high volume of trade could get wiped out within seconds. Thus, you also need to use mechanisms such as stop loss to protect your equity.

These are some of the basics of forex trading. The only way to get better at trading is to keep making as many trades as possible. But always remember to take measured risks.