How To Understand Forex Quickly And Shortly
One way to get money on the internet is to invest in foreign exchange or also called forex trading. Dynamic foreign exchange trading, with the help of an internet connection, can be accessed 24 hours by everyone in the world. Make money through forex only with the help of a computer or smartphone and install a trading platform like Metatrader .
Even though it’s so easy to run foreign exchange investments or forex trading, many prospective traders think that forex is very easy. Even not a few people who think forex is like gambling. The prospective trader must spend a little time and energy studying this forex. To become a Bachelor requires time and energy to be able to graduate from college, as well as when you want to become a successful trader.
Before you start learning to invest in forex trading, it would be nice to find answers to some of these questions:
- What currency is suitable for me?
- How can I minimize the risk in each trade?
- What broker is good for me?
- How long do I have to practice with a demo account?
After you find the appropriate answer, then you can continue reading some basic material about forex below.
How To Read “Price Quote”?
To be able to trade forex, it is important for you to understand how to read the price (exchange rate) of each currency pair (Pair). This price quote shows the current price of each available pair. In each trading platform, especially Metatrader, you will see the price window as below:
EUR / USD is a pair of euros and US dollars. There are several commonly traded pairs such as EUR / USD, USD / JPY, GBP / USD and USD / CHF.
We take the example of EUR / USD pair. On this pair EUR as the Base Currency while the USD as the Quote Currency. In the picture above we can see the current EUR / USD price is 1.1563. That means 1 euro is valued at 1,1563 US dollars.
In the ‘Ask’ column shows the selling price currently offered by the broker. That means the Ask price is the price agreed to by the trader when he will buy a pair.
In the ‘Bid’ column, indicate the purchase price offered by the broker. This means that the price of a bid is the price that the trader agrees when he will sell a pair.
Pips are the smallest size in the currency rate and are usually at the fourth decimal in each pair.This pip stands for Percentage In Point. It is called a pip because it represents the value of 1/100 of the currency rate.
As an example:
If the exchange rate for EUR / USD rises from 1.1300 to 1.1350, that means the pair is up 50 pips.
If EUR / USD drops to 1.1150 from 1.1157, that means the pair is down 7 pips.
There is one exception to the calculation of the pair concerned with the Japanese yen, which uses two decimals. As an example:
If the USD / JPY exchange rate rises from 112.30 from the previous 112.20, that means the pair rises by 10 pips.
What are Spreads?
Look again at the example image above, for EUR / USD pair at Ask 1.1156 and Bid 1.1153. The difference between the two prices is known as Spreads. In this example, the spread is 3 pips.
Indirectly, these spreads are service fees for brokers. Outside there are many brokers – forex brokers that offer competitive spreads, starting from 0.2 pips to 3 pips. Usually the maximum spreads for EUR / USD pairs are 3 pips.
What are lots?
‘Micro Lot’ is worth one thousand units of currency, which means the smallest trade you can place is 1,000 units. If you order 1 lot, you will receive as many as 1000 units, whereas if you order 10 lots, you will receive 10,000 units. But keep in mind, 1 standard lot is usually equal to 100,000 units of base currency.
What is leverage?
One of the advantages of investing in forex trading is the leverage feature. Leverage is a function or can also be called a tool that allows you to get purchasing power higher than the capital that you currently have. The standard amount of leverage is 1: 100. That means that $ 1 in your account has a purchasing power of $ 100.
Leverage is like a double-edged sword. If you have not been able to use leverage, it is strongly recommended to use 1: 100 leverage only. Because the higher the leverage is used, the higher the risk you will face later.
What is Margin?
Margin is the amount of money a trader needs as a guarantee to the broker when he will make a forex transaction. If you are selling or buying a pair, there is a ‘margin’ section in your account.That is the money you guarantee to brokers that are related to leverage.
What causes the exchange rate to change?
When an important event occurs such as a change in central bank policy, a political crisis and others will result in significant changes to the demand and supply of certain currencies in the forex market.
Take for example when the US central bank or the Fed raises interest rates, there will be a demand for US dollars. It is this law of supply and demand that determines the US dollar exchange rate to be higher due to the large number of market participants’ interest in the currency. Investors flock to buy dollars, people who sell will realize that demand for US dollars is very high and then they will increase the price of demand (sales).