At its heart, Forex trading is about predicting the price movement’s direction and investing money in it. However, beginners spend a whole lot of time developing skills and a mindset that help them make their predictions more precise and accurate. Analyses of different kinds like technical and fundamental have been deployed for taking the right indication from the market. Oher that them, various eco-socio factors come into play in changing a trend’s direction.
Essential Concepts Beginner Traders Need to Know
We start at the beginning, at the level of fiat currency pairs. What does an investor need to consider when choosing a pair? What are the different scopes projected by different pairs?
Let’s get into the detail.
Here, the Euro is the base, and the US Dollar is the quote. The Euro is the definitive basis of the pair. If the US Dollar falls into a rough condition and shows signs of falling in price, traders should buy this pair. Again, for a rise in the Euro’s value, they should go for selling the pairs.
In both ways, people ensure a profit or avert potential risks.
Here, the US dollar has the position of a base currency. If, by any chance, a person can identify any signals that imply the price of Yen is about to plummet, he should take those signals as strong buying suggestions. When he buys the US Dollar, he is expecting it to gain strength against the Yen.
For conditions where investors convert all their US Dollar to Yen, or somehow the US Dollar weakens, it gives a strong selling signal to the traders. It’s more like dealing with the futures market. Study the future market trading approach and these basic things will become clear.
Investors should oversee the overall market condition to recognize which asset is gaining dominance over which other currencies. All they need to do is to sell the feeble asset to purchase the mightier one.
- The Concept of “Lots”
No one can buy a single grain of rice or corn. They are too tiny to be sold in single units; instead, they are measured as a greater unit and comes in kilograms.
Likely currencies in the Forex market gets traded in “Lots.” Typically, a micro lot represents 1000 units of a currency. 10,000 units make a mini lot while 100,000 units of a currency form a standard lot. However, a different broker may introduce a different set of measuring units.
- The Concept of “Leverage” & “Margin”
Now comes the question thrown around by retail speculators, “How can we trade if we don’t have 10,000 units of a currency?”
An instrument named “leverage” is at such investors’ disposal. With deploying leverage systems, anyone can buy huge lots depositing only a measly amount.
This measly amount is the “margin.” Leverage refers to the overall ratio of the transaction or position size in relation to the invested cash or trading capital used as margin.
For instance, if the leverage ratio is 50:1, the margin amount is only 2% of the bought position. That means one can open a position worth of $10000 only by investing $2000.
So, the margin is the fraction of the overall position size with which a person buys it. Exploiting the concept of leverage and margin, traders can take part in the currency business with a trifling amount of money.
Depending on an investor’s opened position, his broker can charge him with a daily rollover or swap fee for that position’s continuation during the “cut-off time” of the broker. To avoid such payment, traders should always close all their positions before the “cut-off time” starts.
Every trade involves borrowing an asset to purchase another. So, the interest rollover payments have become a typical part of currency trading. For the borrowed asset, the interest has been paid, and for the purchased currency, the interest has been earned.
By comparing one currency’s interest rate to another’s, traders can estimate their potential net loss or profit.