Think Forex Trading is Confusing? Here's What You Need to Know - Fxtradingtools.com

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Think Forex Trading is Confusing?

Forex stands for Forex Exchange and refers to the buying or selling of one currency in exchange for another. It's the most heavily traded market in the world because people, businesses, and countries all participate in it. When you go on a trip and convert your US dollars for euros, you're participating in the global foreign exchange market.

Before you enter your first trade, learn about currency pairs and what they signify.

• In the Forex market, currencies always trade in pairs. When you exchange US dollars for euros, there are two currencies involved. For every foreign exchange transaction, you must exchange one currency for another. This is why the forex market uses currency pairs, so you can see the cost of one currency relative to another. The EUR/USD price, for example, lets you know how many US dollars (USD) it takes to buy one euro (EUR).
• The Forex market uses symbols to designate specific currency pairs. The euro is symbolized by EUR, the US dollar is USD, and so the euro/U.S. dollar pair is shown as EUR/USD. Other commonly-traded currency symbols: Australian dollar=AUD, British pound=GBP, Swiss franc=CHF, Canadian dollar=CAD, New Zealand dollar=NZD, and Japanese yen=JPY.

To find out how many euros it costs to buy one U.S. dollar, flip the pair to USD/EUR. To find out this rate, divide 1 by 1.3635 (or whatever the current rate is). The result is 0.7334. It costs 0.7334 euros to buy one USD based on the current market price. The price of the currency pair constantly fluctuates, as transactions occur around the globe, 24-hours a day during the week.  

Learning forex trading involves getting to know a small amount of new terminology that describes the price of currency pairs. Once you understand it and how to calculate your trade profit, you're one step closer to your first currency trade.

• Many currency pairs will move about 50 to 100 pips (sometimes more or less depending on overall market conditions) a day. A Pip (an acronym for Point in Percentage) is the name used to indicate the fourth decimal place in a currency pair, or the second decimal place when JPY is in the pair. When the price of the EUR/USD moves from 1.3600 to 1.3650, that's a 50 pip move; if you bought the pair at 1.3600 and sold it at 1.3650 you'd make a 50-pip profit.
• The profit you made on the above theoretical trade depends on how much of the currency you purchased. If you bought 1,000 units (called a micro lot) each pip is worth $0.10, so you would calculate your profit as (50 pips * $0.10) = $5 for a 50 pip gain. If you bought a 10,000 unit (mini lot), then each pip is worth $1, so your profit ends up being $50. If you bought a 100,000 unit (standard lot) each pip is worth $10, so your profit is $500. This assumes you have a USD trading account.

One of the best ways to learn about forex is to see how prices move in real time and place some trades using fake money by using an account called a paper-trading account (so there is no actual financial risk to you). Several brokerages offer online or mobile phone app-based paper trading accounts that work exactly the same as live trading accounts, but without your own capital at risk.

Understanding the above concepts will help you grasp what's happening when you see a forex pair rising or falling on a chart. If you do the math on the difference in pips between two price points, it will also help you see the profit potential available from such moves. For more on starting out in forex trading, see Minimum Investment? and How to trade?. Both these articles provide more examples of how profit is realized in the forex market, as well as introducing new concepts, such as leverage.