Five Essential Lessons In Forex Trading Basics

The currency trading market is the biggest market in the world and anyone can participate in it. The first thing you must understand is that the forex market is similar to double edged sword; you can get insanely high profits, but you also can get complete loss in a very short time. That’s why having solid forex trading basics is extremely important for anyone who wants to participate in forex trading.

The Principle: You Always Sell and Buy Simultaneously

One of the most complicated ideas for those who aren’t familiar with forex trading is the concept of “sell high buy low” to gain profit. In other words, you “sell” first, then “buy” afterwards. Just how could I sell something if I do not have anything in my possession?

It will be better to describe it with examples, so here it is:

You may have seen this before: GBPUSD = 1.5341. It means 1 GBP = 1.5341 USD.

– If you buy EURUSD at 1.3578, it implies that you RECEIVE 1 EUR and PAY 1.3578 USD. Quite simply, you buy EUR and sell USD at the same time.

– If you sell EURUSD at 1.3578, it means you PAY 1 EUR and RECEIVE 1.3578 USD. In other words, you sell EUR and buy USD simultaneously.

The Concept of Pips

A “pip” (percentage in point) is the smallest movement that a currency pair can have. Example: present GBPUSD is 1.7657, then it moves up 1 pip, it’ll turn into 1.7658. To put it simple, you just need to watch the decimal number. Generally, 1 pip is 0.0001, but there are cases such as USDJPY where 1 pip is 0.01.

Let me provide another example:

– GBPUSD is 1.8700, then it moves up 4 pips, thus: 1.8700 (4 x 0.0001) = 1.8704.

– USDJPY is 101.35, then it moves up 20 pips, tus: 101.35 (20 x 0.01) = 101.55.

The Concept of Leverage

Leverage is a system that enables common people who don’t have lots of capital to be involved in currency trading. Basically, your broker “lent” you the capital that you need to support your trades.

Illustration: with 1:300 leverage and USD 500 deposit, you can trade 300 x 100 = USD 150,000 worth of currencies. Look into the facts of a forex broker with competitive spread and leverage on a review of FBS .

The Concept of Lots

In currency trading, you trade in “lots”. Commonly, the regular size for a lot is 100,000 for any base currency. Basically, if you get 1:400 leverage and deposit USD 1000, you can trade 1000 x 400 = 400,000 (4 lots) worth of currencies. Depend on your broker, they can also provide you with 10,000 lot size.

The Concept of Profit and Loss

It’s the same as any other trades in the world, you will want to buy at low price and sell at high price. The only difference here is you can sell first when the price is high, then buy later when the price has dropped. As I have described above, it is possible because you always buy and sell at the same time.

The profit/loss formula for every currency pair with 4 decimal (such as EURUSD) is:

(pip difference x 0.0001) x lot size x lot volume

Notice:

– Pip difference is sell price – buy price

– The result is in the right side of currency pair. Example: if the currency pair is USDJPY, the result is in JPY.

Example:

Buy 1 lot of EURUSD at 1.4500, then sell it at 1.4550

Pip difference: (sell price – buy price)/0.0001 = (1.4550 – 1.4500)/0.001 = 50 pips (profit).

Profit = (50 x 0.0001) x 100,000 x 1 = USD 500.

Mastering forex trading basics might seem difficult, but it can save you and tour money in the long run. Here’s a way to make it easier: open a practice account in an online forex broker, then get a step by step forex trading lesson that you can apply immediately in the practice account. That way, you can grasp the concept more easily. Look into currency trading course for totally free step by step course that cover the essential basics of currency trading.

If you willing to learn as you involved in real trades, check out the details of a program that enable you to do it safely at a review of Bob Iaccino Trader Outlook.