Learn The ABC of Forex Trading
To understand how currency trading works, you should first know that currencies trade in pairs at a specific rate set by the market. For example, if EUR/USD quote is 1.009, then one Euro will buy 1.009 US dollars.
A currency pair contains two currencies: Base and Quote Currencies
“Base currency is the first currency on the left.”
“Quote Currency is the second currency on the right.”
In our example of the EUR/USD currency pair. EUR (EURO) is the base, and the USD (US dollar) is the quote currency.
Demand and Supply in Forex/Currency Trading
In Forex/currency trading, demand and supply are two fundamental concepts. The first refers to the amount of a particular asset available for sale, while the other refers to the number of buyers willing to purchase it.
Both factors affect the value of a currency. These forces affect the exchange rate and the price at which it can buy a currency.
In other words, the demand and supply of a currency are in constant motion, causing the price to rise or fall. The rising demand will push the currency’s price higher, while the decreasing supply will force the currency lower.
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Price slippage in Forex Trading
Price slippage in currency trading happens when an order executes at a price different than anticipated. It occurs most often when the market is volatile and there is a lot of price movement. A reputable forex dealer will always try to execute an order at the next best price, but sometimes slippage can occur.
There are some steps you can take to minimize price slippage
- Avoid trading around major news announcements, as this is the time when most of the slippage occurs
- You can also extend your stop-losses before a significant event.
- You can trade during the most active trading hours when liquidity is the highest and there is a high probability of completing a trade.
Leverage – Currency Trading for Dummies
In currency trading, leverage is an integral part of the trading process. It allows you to trade more with less money. As an example, if you had $100,000 to trade, you would be required to pay $1,000 in the margin to your broker. This amount would be the leverage you would use to trade with a currency pair of the same value.
Forex traders use higher leverage than equities traders. They can leverage up to 100 to 500 times their capital. It can cause very high profits, but it also carries high risks. Leverage in currency trading requires a high level of risk management.
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Currency Lots – Micro-lots VS. Mini VS. Standard lots
There are three primary types of lots in currency trading: standard, mini, and micro. Standard lots are ideal for large trades. Traders with smaller equity prefer using mini and micro-lots. The difference between standard and micro-lots is the quantity of the trade.
Each micro-lot represents 1,000 units of the base currency, and it is one-hundredth of a standard lot.
A Mini lot contains 10,000 units of the base currency, which is one-tenth of a standard lot.
A standard lot contains 100,000 units of the base currency in any Forex pair
Essentially, micro-lots traders use small lots when they have a small investment or are not comfortable trading large amounts of money. Traders with significant investment sizes use mini and standard lots to amplify profits. Standard lots are more expensive than micro and mini lots, so you need to know the difference between different lot sizes.
Always adopt proper risk management practices to avoid losing money regardless of which lot size you trade.
Note: You can trade with different lots on a demo account lot size and currency pair work best for you.
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Risk management in Forex Trading – How to Trade Forex For Beginners
Risk management is a fundamental part of currency trading. The key to successful trading is appropriate risk management. It includes not overusing margin and only risking a small percentage of your trading capital per trade.
Most beginners cannot manage their risk correctly and end up with losses. Without strict money management, you cannot sustain your trading success.
To avoid losing money, traders should use technical indicators that help them make better trading decisions. Traders can also use a rule of thumb that tells them when to sell their position and when to keep it open.
Traders should also consider the position size when buying and selling decisions. It is a crucial aspect of trading, but traders often ignore it. Always remember! Proper risk management will help any trader become successful.
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