Learn the Basics of Forex Currency Trading
Buying and selling forex currency is a complex and risky process, but it is possible for you to make a profit if you are successful in predicting price moves. In the foreign exchange market, individual investors, brokers and banks speculate about the value of different currencies. The market is based on a contract, which sees a currency exchanged at a rate agreed upon. It’s important to understand the basic concepts of forex currency trading before getting into it.
Foreign exchange is a global market, based on a contract between a buyer and a seller. It’s a 24-hour market that’s traded by banks, institutions and individual traders. It’s also a place for investors to speculate on the national currencies of countries around the world. It’s also a place for multinational businesses to hedge against the possibility of currency fluctuations.
A currency pair is two currencies that are traded together. The first currency in a pair is known as the base currency. The second currency in a pair is known as the quote currency. The quote currency is usually the United States dollar. The base currency is always worth one unit of the quote currency.
The value of a currency is determined by the interest rate. Central banks tend to raise interest rates when the economy is strong and decrease interest rates when the economy is weak. The value of a currency is also influenced by natural resource prices. If a nation’s economy is dependent on the price of oil, for example, it may be more prone to depreciation. A currency that’s a hard currency, on the other hand, is less prone to depreciation.
When trading currencies in the forex market, a trader needs to know the difference between the quote and base currencies. The price of a currency pair is the price the market is willing to pay to buy one unit of the base currency. When a trader sells a currency, he or she is selling it back to the market for a higher price. A trader who buys a currency is considered to have a long position. The trader buys the currency with the expectation that its value will increase. A trader who sells a currency is called short.
A forex currency pair is also quoted in terms of points. The smallest change in a currency price is a pip. Pips are 1/100 of a percentage. A pip is also called a bid or offer price. A pip is the smallest whole unit measurement of a bid-ask spread in a foreign exchange quote. A pip is also sometimes expressed in terms of bid and ask values.
Most currency pairs are priced to four decimal places, but there are some exotic currency pairs that are expressed to a smaller decimal place. These pairs are less commonly traded, and tend to have larger price swings. These pairs are also less liquid than majors.
Forex is a market that grew in popularity after widespread access to Internet technology in the late 1990s. The market was initially accessed by small speculators, but as the Internet became more widely used, the number of individual traders grew.