This currency trading tutorial is intended to give you a basic understanding of the FOREX market.
The topics that you need to understand before you start trading are introduced. Before you are ready to begin trading you must obtain a thorough understanding of these topics.
When you open an account with your broker, you will only be required to deposit a small amount of the trading capital you will be using. Your broker will lend you the largest part of your trading capital.
This use of leverage will increase the level of exposure you have in the market. This can multiply your gains as well as your losses.
It is important to pay close attention to this and use stop-loss-orders to help limit your risk.
Currencies trade in pairs.
Some of the most common pairs are the EUR/USD(euro/dollar), USD/JPY(dollar/Japanese yen), GBP/USD(British pound/dollar) and the USD/CHF(dollar/Swiss franc).
The base currency is the first one listed in the pair. This is the currency that will be purchased. It will be purchased with the quote currency, the second one listed.
For example if the EUR/USD is quoted at 1.1, it means that you can buy one euro for $1.11. If a pair is listed 1.46 GBP/USD it means that each British pound will cost $1.46.
Currencies have a bid and an asking price.
The price you pay for the currency is the asking price. The price at which you can sell your currency is the bid. You may be able to buy EUR/USD for $1.11. If you turn around and try to sell the same contract you may only receive $1.09. The difference between the two prices is the spread, or brokers commission.
In order to make a profit from trading it is obviously necessary to decide accurately which way currency prices on the base currency will move in relation to the quote currency.
If you believe the Euro will move higher in relationship to the dollar you would purchase the euro at the current exchange rate with the dollar. An example is 1.11EUR/USD. You will buy the euro at $1.11 because you think the euro will move up and you can sell it at $1.20 in the near term. If however you think the euro is too high against the dollar, you would sell the euro. An example is 1.21 EUR/USD. You would sell the euro at $1.21 with the intention of buying it back at maybe $1.11 in the future to close the position.
Currency traders follow a trading strategy (usually)
Another currency trading tutorial may suggest that you use either technical analysis (reading charts) or fundamental analysis (reading news/economic reports) to make your trading decisions.
This tutorial suggests that you are better off being familiar with both.
You may decide to put more weight on one or the other but having a good feel for both will improve your trading results. By understanding the fundamental issues in the market that cause prices to move up and down you will be better able to predict future price changes.
By having a high degree of knowledge on how to use technical analysis, you can use stop-loss orders to help you limit your exposure to trading risks. You will be able to identify price trends easier as well. If you can use technical analysis along with the fundamental analysis your chances of success will be increased by a large margin.
While this currency trading tutorial has introduced you to this exciting market, you now need to gain a higher level of understanding of the topics discussed here. This is a complex and competitive market, so take your time before jumping in headfirst. One way to do that is to try trading with a free demo account like those offered here.