Forex Trading: What You Need To Know Before You Start
Everything you need to know before you place your first trade on the forex market.
*Sage FX would like to state that traders should research extensively before following any information given hereby. Any assumptions made in this article are provided solely for entertainment purposes and not for traders to guide or alter their positions. Please read our Terms & Conditions and Risk Disclosure for more information.
So you’ve heard the hype surrounding forex trading and you’d like to jump on the bandwagon? Who wouldn’t? The foreign exchange market is the most active market traded today, with a whopping $6.6 trillion being traded on average daily.
Nowadays, online brokers such as Sage FX offers you the flexibility and ease to do this anytime, anywhere with a touch of a button from your phone or laptop.
Where do you start? What do you need to know before you start investing your hard-earned money in the forex markets?
In this article, we round up the most basic types of forex trading as well as the trading lingo you will need to know before you step into the market. This will help you make the most out of your time and decrease the probability for loss.
Are you ready? Let’s get started!
- What is the Forex Market?
- What are the Different Ways You Can Trade Forex?
- What Terms Do You Need To Understand When Trading Forex?
So, What Is the Forex Market?
In a nutshell, the forex market is where you can trade currencies. You can pocket a profit when you exchange national currencies against one another. You can only do this in pairs with the most popular ones being EUR/USD, GBP/USD and USD/JPY amongst others.
What are the Different Ways you Can Trade Forex?
Did you know that there are three ways you can trade forex? The spot market is the largest market and is the market most people refer to when they mention the forex market. Currencies are sold and bought according to the current price in the spot market. This is determined by a number of factors internationally but is usually a result of economic performances, political activity, interest rates in different economic markets as well as the perception of how a particular currency is set to move in the future.
The forwards and futures markets are the other two ways that you can trade forex. Both these markets are based on the spot market however are quite different to it. In a forwards market you can buy and sell a contract through a dealer. The agreements within this contract can be determined by the two parties.
The futures market on the other hand are contracts that are bought and sold based on size and settlement data found in the public commodities markets and is set and regulated by certain public entities such as the National Futures Association in the U.S.
You want to Trade Forex Online. What are Some of the Terms you Need to Know?
There are certain terms that you need to learn before you place your first trade. We look at the most important ones in the below list:
Forex Term #1: Pip
Pip is short for percentage in point. It measures the movement of the exchange rate and is a number that measures profit and loss. You might hear traders quoting market activity in pips. On Sage FX we use Meta Trader 4 and Meta Trader 5 as our forex trading platform. You can easily download a free pip indicator once logged in. You will then be able to quote your profits like the professionals in no time!
Forex Term #2: Spread
What happens when there is a difference between the selling and the buying price of an asset? This is called a spread and is ultimately how much it will cost you to make a particular trade. You can calculate this by subtracting the selling price from the buying price. Sage FX’s spreads are one of the lowest in the industry with pips going as low as 0.1.
Forex Term #3: Margins
When trading you need collateral or a deposit to be able to trade on the forex market. This is called a margin. How do you calculate it though? Simple. Just divide the overall lot size by the leverage. Most reputable brokers establish rules to safeguard their traders. Sage FX’s margin call is at 100% with a stop out level of 70%. This means that if you reach a margin below 70% Meta Trader will start to close your positions one by one. This will stop you from going into further losses that might go below 0 USD. Your desktop or mobile Meta Trader will also show your margin level, so you know when you are about to reach 100%.
Forex Term #4: Leverage
We’ve already mentioned leverage in the previous term and you might be wondering what it means. Leverage is ratio that defines the margin. The leverage you choose can multiply profits between two traders who are trading the same amount. However, it can also emphasize losses in the same manner so it is best that traders choose their leverage wisely. At Sage FX we love giving you as many options as possible and that is why you can trade with a maximum of 1:500 leverage.
Forex Terms #5: Lots & Volume
You may have already heard the term lots. Lots is the number of units of a financial instrument bought on an exchange. When trading I Meta Trader, you will see the term volume when opening the Order window. This refers to the amount you want to buy or sell. In volume, one lot is equal to 100,000 units. However, when you see volume in the chart this signifies something different. In the charts, volumes is the tick volumes, counting the number of times the price has changed in a particular period of time.
Starting out in this exciting market can be quite overwhelming however we are always here to help. We hope this article helps you take over the forex trading world and reap the rewards this thrilling industry can hold.
Unsure what Sage FX offers you when trading the forex market? Check out our forex trading page to find out all the currencies we offer.