Exchanging foreign currencies might look very complicated if it’s a world you’re unfamiliar with. But when you look closely and try it out for yourself, you begin to realise that it’s pretty easy to understand. The global currency markets dictate exchange rates and values. The difference between any two currencies is constantly changing. And this change is what you’re betting against when you get into forex trading.
When you first get started in forex trading, you have to understand how it works. You always put your money on currency pairs. You bet against one currency increasing or decreasing in value against the other. There are many different currencies pairs that you can choose between. You can understand them all better by setting up a forex demo account and playing around for a while. This allows you to play in real time but without spending money.
It’s usually best to stick to currency pairs that you have some kind of understanding of. If you know nothing about Asian currencies, for example, you should probably stay away from them to begin with. Most people start by trading their own currencies because they know and understand it to some extent. You can progress and research other currency pairs later on if you want to learn more.
Ticks and Pips
On the forex markets, currency values are much more precise than we are used to in everyday life. They use smaller increments, and this is what you will have to get used to if you want to succeed in forex trading. The small decimal place to which the currency is calculated is known as the pip. These allow for greater accuracy, and are usually calculated up to the fourth decimal place. You get a narrower spread when you have this level of accuracy.
You will also have to familiarise yourself with ticks when you start this kind of investing. The actual movement that the price of a currency makes is known as a tick. These might not be as clear to understand straight away because a tick is not directly to the movement in a pip. So, a jump that is 4 pips could appear more or less than that in the actual decimal number displayed on the screen. It’s most important to understand pips though because this will denote the difference between the buy and ask prices.
Volume and Leverage
The volume refers to the size of the trade that you make. You buy currency in units, and these are usually in the tens or hundreds of thousands. The actual size of it will be referred to as the volume though. It’s a very simple term but confuses some beginners.
Leverage is something that is very important to understand. This is a form of borrowing that you can partake in. It allows you to buy more than the amount you initially invested. The problem comes if you use high leverage and then end up losing money. When the investment you make is more than the capital, you are effectively being lent money. And some forex platforms will require you to repay that debt. That’s why it’s best for beginners to stay away from high leverage.