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Forex Trading
Forex trading involves buying one currency while selling another simultaneously, with the aim of making a profit by speculating on the future direction of the currencies.
The foreign exchange or forex market is a decentralised global market where traders can buy and sell currencies without physically meeting each other. This market determines the current or determined prices of currencies, enabling individuals to participate in the market through brokers like iFX.
Currencies are always traded in pairs, and the forex market sets the relative value of one currency against another. This facilitates international trade and investments and allows economic growth and development beyond national borders.
Forex Terminology:
To navigate the world of forex trading, it is crucial to understand the core terms that form the foundation of this complex market. Here are the key concepts that every forex trader should be well-versed in:
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Bid / Ask price
The bid price is the price a trader is willing to sell a currency pair.The ask price is the price a trader will buy a currency pair.These prices are displayed on the left-hand side of MT4/MT5 in the ‘Market Watch’ section.The difference between the bid and ask price is known as The Spread.
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Bullish / Bearish
Market sentiment gives a view of the performance of a particular market or the stock market overall.When Market sentiment is Bullish, this means the price is going up.When Market sentiment is Bearish, this means the price is going down.An easy way to distinguish the difference is that bulls have horns and toss things in the air when provoked. Prices rising.When bears are provoked, they get on their hind legs and tear things down. Prices decreasing.
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Currency Pair
There are 180 recognized currencies in circulation being used in 195 countries. As traders, we can speculate on the performance of a certain currency by using a range of analyses and research to determine how that currency will perform in the marketplace. How we trade these currencies is based on one currency’s performance against another – Forex Trading. When selecting a currency to trade, you will notice that these come in pairs. Let us use EUR/USD as a case study.If you were to ‘buy’ EUR against USD, you would be betting that the Euro is going to perform more strongly than the US Dollar.
Pairs are categorized into 3 core groups:
Major Pairs – The 8 common pairs all of which contain USD as the base currency or counter currency and one of the following – EUR, CAD, GBP, CHF, JPY, AUD, NZD.
Cross Pairs – These are any 2 major currencies which do not contain the US Dollar as the base or counter currency. These are deemed more volatile than Major Pairs. Examples include GBP/AUD, EUR/CAD, and NZD/CAD to name a few.
Exotics – These are lesser-known currencies which can be extremely volatile in the market. These include South African Rand, Hungarian Forint and Polish Zloty.
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Going Long / Short
Going long or buying a currency means that you expect the price to rise. When a trader is going long on a currency pair, the first part of the pair is bought while the second is sold.
Going short is ‘selling’ one half of a currency pair in the hopes that the price will decrease.
When a trader is going short the first currency is sold while the second currency is bought.
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Leverage
Leverage is, in essence, borrowed money from within a trading account. Trading with
leverage allows a trader to open a position with a high contract size with less expenditure.
High leveraged trading is an effective way to trade your favourite Forex pairs, cryptocurrencies and much more without investing vast amounts of capital.
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Lot Size
A Lot in Forex trading is the size of trade/position that you will open.1 Lot in standard Forex trading on a currency pair is the equivalent of 100,000 units of the base currency of the pair.If we look at EUR / USD, this means that opening a trade in USD would mean the trade size is $100,000.EUR being the base currency.1 standard PIP is worth $10This means a 10 PIP incremental movement in a buy trade, this would represent a $100 gain.
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Margin
Margin is the initial capital that a trader needs to put up in order to open a position. Margin also gives a trader the opportunity to open a larger position size.When trading with margin, the trader only needs to put forward a percentage of the full value of a position in order to open the trade.Margin opens the door to leveraged trading but, be wary, margin magnifies both profits as well as losses.
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PIP
The acronym PIP stands for Percentage In Point.PIP is the smallest movement reflected in an exchange rate on a currency pair. The PIP is the 4th decimal on a price quote for a currency pair. It is used to measure value.
Enhancing your knowledge of these essential forex terminologies will empower you to navigate the market with confidence. Remember to stay informed and continuously expand your understanding of the factors that influence currency price movements.
How the Market Works
The value of currencies in the foreign exchange market is influenced by various factors. Two main forces that drive changes in currency prices are supply and demand. When a currency's value increases, it means the demand for it exceeds its supply. Conversely, when a currency's value decreases, it means its supply surpasses its demand.
- Countries with more exports than imports are likely to see their currency depreciate, as they need to sell their local currency to buy foreign currency for purchasing goods and services.
- Conversely, countries with more imports than exports are likely to see their currency appreciate, as they need to sell foreign currency to buy their local currency for purchasing goods and services.
- Physical Flows: Physical flows occur when foreign entities sell their local currency to buy foreign currency for direct investments, such as joint ventures and acquisitions. An increase in foreign direct investment is seen as a positive indicator of economic health.
- Portfolio Investments: Portfolio investments encompass investments made in global markets, including the forex market, stocks, and treasury bills.
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