The Best Advice for a Novice FX Trader

What is a currency pair?

A currency pair in essence is the exchange rate of one currency over another.  When looking at currency pairs you will find that the most frequently/traded currency pairs are; EUR/USD, GBP/USD, USD/CAD,USD/JPY, USD/CHF & AUD/USD.   These pairs generate close to eighty five percent of the overall trading volume generated in the forex market.

If a forex trader decides to go long or buys the Canadian Dollar, he or she is concurrently buying the Canadian Dollar (CAD) and selling the United States Dollar (USD).  On the other hand if the forex trader goes short or sells the Aussie (AUD), he or she is concurrently selling the Aussie (AUD) and buying the United States Dollar (USD).

The currency listed first of each currency pair is deemed as the base currency while the second currency is deemed as the counter/quote currency.   Each and every currency pair is expressed in units of the counter currency needed to get a single unit of the base currency.

What is the Bid/Ask Spread?

The bid/ask spread is the difference between where a dealer will purchase a currency pair from you and where he will sell it.   The spread gives the dealer an opportunity to generate a profit from providing liquidity to investors.  The wider the spread the more expensive is for you to place a trade.

A pip is the smallest price movement of a traded currency.  The term pip stands for percentage in point.  For the novice trader it is extremely important that you understand what a pip is and how a pip affects your trade.   For a majority of currencies a pip is .0001 or 1/100 of a cent.  Many novice traders may think a pip is an extremely low number, however, considering most currencies are traded in lots of one hundred thousand there is potential to either make or lose a lot of money.

The forex market is different than many other markets in that for margin trading you require only a margin deposit.  In contrast other financial markets require the full deposit of the amount traded.  The amount of leverage provided by several brokers goes up to as high as 400:1.  What this means is that you are only required to deposit .25% in balance to open a position.  Typically, most brokers will offer 100:1 which still provides a tremendous amount of leverage.

The novice forex trader should put in a good amount of time crafting their trade prior to jumping into the forex markets.  Understanding leverage and its pros and cons are a must prior to transacting a trade.  You should focus on a strategy and learn what makes the market tick before attempting to risk capital. Once he/she has a good understanding on how things work and the fundamentals the potential profits can roll in.