Everyone wants to know the answer to that question. For beginners, the key is to look at the long haul as opposed to quick wins. Especially if you are very early in your trading career, the last thing you want to do is make some real bonehead decisions and experience some major losses. However, as much as the pros claim that failure builds character, if you have done your homework you stand a better chance at weathering those slow days without a big hit.
Forex trading, where to start?
Before you start running all over the place and trading like a madman, you need to understand quotes and what they mean. Currencies are always traded in pairs. The currency pair includes a base currency and the quote or counter currency. The pairing is crucial as is the way they trade over the course of a day. Here’s where that homework we mentioned will come in handy.
You and all the other traders following the Forex markets have one basic way in order to make a profit. Read this very carefully: traders make a profit by buying or selling certain currency pairs. That’s basically Forex trading in a nutshell. However, in order to make a profit from the volatility of the market, you have to get something right. You have to be successful at anticipating the next movement of the market. Sounds kinda spooky, right?
Well, traders have some nifty tools available to them to help guide them through the volatility. These are tools that spell out fundamental and technical analysis. For example, if your analysis says the price of a currency pair will increase, then your smart move would be to open a long position. To be clear, if your data points to the currency pair you have selected is going to decrease in value you would open a short position.
Forex trading puzzle
Another piece of the Forex trading puzzle is the bid and ask price. This is a big part of that puzzle, actually. The bid price is what the market buys the currency from you at and the ask price is what the market sells the currency to you at. The math will result in a gap of some kind between the two prices. That gap – or spread – is what your broker will charge you. It’s their transaction fee. The spread will vary and some competitive brokers will provide a tight spread (a small gap between the bid and ask price) which chops at your trading price. This means more cash in your jeans and more business for that broker.
One more thing to keep in mind when it comes to spreads is this: major currency pair spreads are usually very small but they tend to increase when the market volatility increases or in times of important news announcements that can trigger a trading frenzy. Regardless of what fuels the Forex trading market, you can make money as a trader if you understand the ins and outs and avoid making bad calls based on emotions rather than factual data.