Forex Trading Introduction

What is Forex Trading

The forex market is the largest tradable market in the world. Currently the forex market handles roughly 3.5 trillion USD a day. Forex trading is so appealing because there is 24-hour trading, high liquidity and no commissions. Forex trading historically was the primary function of large banks and institutions, but with the advent of the internet, the everyday trader now has access to the game.

Leverage

Forex trading provides the greatest amount of leverage of any of the world's market. Forex traders can get up to 100-1 leverage. The leverage on the forex market is what makes it very profitable and just as dangerous. Just think for a second, if you were to put on a short position at 100 to 1 leverage and the currency jumps by "x" basis points, your entire account could be wiped out in a matter of minutes. Remember my trading friends, this is a marathon not a sprint. If you get in the game of forex trading, go easy on the margin until you have established a sound trading plan. A safe rule of thumb is to trade 1 pip for every $10,000 in your account.

Currency Pair

When trading the forex, you are trading currency pairs. Currency pairs consist of a base currency and a secondary currency. Whenever you see exchange rates, these are calculated in per units of the base currency. The base currency is always the more valuable of the two. So, if you are trading the Euro/US Dollar currency pair, it is quoted as EUR/USD, because the Euro is currently stronger than the US Dollar.

What are Spreads in Forex

Every tradable vehicle has a spread. A spread is nothing more than the difference between the bid and ask. The bid is what you are willing to pay and the ask is the price you are attempting to sell at. When trading forex, there is generally a spread of 3 to 5 pips. So, if the EUR/USD is trading at 1.8810 by 1.8813, then you would have to purchase the EUR/USD for 1.8813, and if you wanted to immediately sell, you guessed right, you would only be able to sell for 1.8810. Hence, the concept of the spread when speaking of forex trading. Since you had to pay 3 pips to initiate the trade, there are no trading commissions.


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