You can find whole books on Forex trading and there are many newsletters and websites dedicated to the topic. However, you don’t have to wade through hundreds of pages of content to understand the basics. In this guide, we’re going to give you a crash course in Forex trading. We’ll teach you the basic terminology how to get into it and refer you to good sources if you choose to learn more.
Before you start investing in the forex, you need to understand the terminology first. In forex terms, the base currency is the first currency in the stated exchange. That is also the accounting currency or domestic currency.
A currency pair is the pricing structure and quotation of the currencies traded on the Forex. The first currency in a currency pair is the base currency, while the second is the quote currency. When buying or selling a currency pair, the transaction is done with the base currency. If selling a Euro/U.S. dollar currency pair, you’re selling Euros and buying American dollars.
A PIP is the smallest price change a specific currency exchange can make. Some currencies can only change on a per unit basis, others in quarters or tenths of a currency. Most major currency pairs are priced to four decimal prices, so the smallest change it can make is that last decimal place. This is why you see foreign exchange markets reporting an exchange rate of 1.1203 dollars to the X though you can only own $1.12 personally.
An MM is a market maker; this is an artificial broker that is sometimes called a dealing desk since it processes orders internally, regardless of the market. An ECN is an electronic communications network. You get real-time market data, trade against other traders and financial institutions, but you don’t trade against the broker. STP stands for straight-through processing. An STP can be seen as a hybrid model between an ECN and MM. An ECN STP combines elements of an STP and ECN.
Making Money in Forex
There are two main ways to make money with foreign currency exchanges. The first is by gaining value in trading currency, such as trading $100 for 120 Euros, letting the American dollar devalue, and then exchanging the Euros back for $130 U.S. You’ve now earned $30. You can also use interest rate differentials to invest in a foreign country and earn more than you would if the money sat in a bank account at home.
Different forex trading platforms have different rules, and some have a reputation for selling unrelated services or taking over customer accounts while racking up fees instead of helping the customer. They vary in their minimum deposit. They don’t all offer the same currencies. They don’t use the same toolsets and software. You can learn more about this from the best ECN STP brokers list at InvestinGoal.com.
Anyone can get into the Forex market with the proper know-how and patience. Whatever you do, make sure that you do not jump in it head first and find the right platforms, strategies, and resources to invest in Forex successfully.