Let Us Introduce You to the World of the Financial Markets!
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Let us introduce you to the world of the Financial Markets!
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Often, people jump into the foreign exchange market without taking the time to learn the basics and all the dynamics involved in it. It is nearly impossible to achieve long-term, sustainable trading success without first having a clue how the market is structured and how it works. The most important foundation in the foreign exchange world is correct information.
Forex is by far the largest financial market with a daily transaction of $6 trillion, It is a very liquid industry, meaning there is no shortage of demand and supply, there are always buyers and sellers, Foreign Exchange [Forex] is bigger than the stock market and the binary option market All the Forex transections are conducted over the counter, meaning that the available buyers and sellers are the ones that determine the price.
The Forex market is open 5 times a week for 24 hours and the only time it does not operate it's during the weekend.
PARTICIPANTS IN THE FOREX MARKET
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There's so much money in the Forex market so it is an emphasis that there will be participants, different types of participants, they are as follows:
FINANCIAL COMPANIES ●-
INVESTMENT/HEDGE FUND ●-
CENTRAL BANKS ●- ●-
COMMERCIAL BANKS ●- FIRMS/COORPORATION
●- RETAIL TRADER/INDIVIDUAL TRADER
Forex is actually paying attention on how a certain currency or country's economy is in relation to the other country, Forex is very volatile, and the price changes from time to time. Sometimes
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the rand is R11 against the dollar, sometimes it is R13,33 against the dollar and sometime it even reaches R14,02 against $1,that is volatility.
CURRENCY PAIRS
Currencies are traded as pairs, for example: USD/CAD, this is the United States dollar being traded against the Canadian dollar
[Currency that is your left is called a Base Currency]- [Currency on your right is a quote/counter currency. Base currency is what you buy and quote/counter currency is what you sell
In this case of USD/CAD we buy USD & we sell CAD.
ANOTHER EXAMPLE:
GBPUSD=1.60845
When looking at a currency pair, the currency named first (on the left) is referred to as the base currency and the second one (on the right) is known as the quote currency. The price represents how many units of the quote currency are needed to buy one unit of the base currency. In other words, in the example below, it would cost US$1.51258 to purchase 1GBP.
The currency price represents the current value of the base currency in relation to the quote currency, If the price of currency pair rises, the base currency value has strengthened against the quote currency value, and the opposite of this when the pair declines, the base currency has weakened against the quote currency.
We buy when the currency gains strength and sell when the currency lose value in fx A trader can trade a variety of different currency pairs, limited only by which pairs each broker provides.
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CURRENCY PAIRS ARE CATEGORISED IN 3'S
MAJOR CURRENCY PAIRS
CROSS CURRENCY PAIRS
EXOTIC CURRENCY PAIRS
MAJOR CURRENCY PAIRS
The majors are the most traded currency pairs hence they are the most liquid compared to the other groups mentioned, they usually provide more good trading opportunities, they hardly consolidate or range like most currency pairs. Only the currencies shown below are called majors only if they are paired against the dollar, e.g. USDCHF,EURUSD & USDCAD etc. …
Majors include:
• US Dollar-USD • Japanese Yen-JPY • Euro-EUR • British Pound-GBP • Swiss Franc-CHF • Canadian Dollar-CAD • New Zealand Dollar-NZD • Australian Dollar-AUD
Major currency pairs are typically the USD pairs for example
-EURUSD GBPUSD AUDUSD USDJPY USDCHF
CROSS CURRENCY PAIRS Cross currency pairs, also known as “crosses”, are currency pairs that do not Include the U$ dollar. The most popular cross currency pairs consist of all the other major currencies against each other.
• EUR/JPY • EUR/GBP • EUR/CHF • EUR/AUD • GBP/CHF • GBP/JPY • CHF/JPY • AUD/JPY • NZD/JPY • EUR/CAD • CAD/JPY
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EXOTIC CURRENCY PAIRS
They are the least traded currency pairs and they are very much less liquid and slow and they are very risky, a beginner is recommended not to trade exotic until they have equipped enough knowledge about them, they have a very huge spread and people with small accounts are advised not to focus on them. PAIR • U.S. Dollar vs South African Rand • U.S. Dollar vs Turkish Lira • U.S. Dollar vs Mexican Peso • U.S. Dollar vs Singapore Dollar
HOW TO BUY AND SELL IN FOREX
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You place a buy order when you predict that the market will move up, if the trend goes in your favor you will profit, we buy when the currency gains strength, we will see the market trend moving up. You place a sell order when the currency loses strength or value, we will see the market trend moving down. When the currency is on demand there will be a lot of buyers and when the currency has been overbought it will move around the supply area/zone we will have to sell it.
LONG/BUY-When someone says they went long it means they bought the pair. SHORT/SELL-When someone says they went short it means they sold the pair.
We buy low and sell high, that is the safest thing to do, selling low can be very risky more especially as if you're still a beginner, that goes for buying high too, the reason behind this is because you cannot sell something that has been oversold and you cannot buy something that has been overbought.
Move with the trend all the time, never go against the trend, you don't sell when you supposed to be buying and you don't buy when you supposed to be selling, that is moving against the trend.
PIP-PRICE IN POINTS
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PIP stands for “percentage/price in points”.
It is the move a forex pair can make, the more the pair moves the more pips moves
An example: If USD/JPY move from these units 1.22030 to 1.22001 it means that the trend moved by 29 pips
1.22030-1.22001=0,00029
USD/JPY 1.22030THESE ARE PIPS WHERE WE HIGHLIGHTED GREEN
LOT SIZE :
When you walk into a store you can only buy one box(half dozen) 6 eggs inside the box, the very same concept is also being used in Forex, buying something that is in a singular form but has multiple units within it.
There are Standard lots, Mini lots and Micro lots.
Standard lots are the heavy ones, their volume starts from 1.00.The units within 1.00 standard lots are 100,000. Mini lots, their volume starts from 0.10, the units within 0.10 are 10,000. Micro lots, their volume starts from 0,01, the units within 0,01 are 1000.
EXAMPLE: - Trader Menzi wants to buy 3000 units of the EUR/USD currency - Essentially he wants to buy 3 x micro lots = 3 x 0.01 - The volume he wants to buy = 0.03
The value of a pip is determined by the lot size
Thabiso orders a product in bulk from a supplier may be offered a lower price than someone who buys a single product, so, for an institutional trader trading in heavy standard lots, the value of each would be from a minimum 1 PIP movement which is = $10.
Most retail traders trade mini and micro contracts. The standard lots are usually traded by large independent traders who have good account size or institutional traders such as banks. This is usually because of the amount of capital they have available, but we do advice retail traders not to use heavy lots but mini and micro lots to manage risks.
SPREAD: The spread is closely associated with the pip and has a major importance for you as a trader. Spread is the difference between the bid and ask price. The ask is the price at which you buy and the bid is the price at which you sell.
• BID/SELLING PRICE • ASK/BUYING PRICE
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Suppose the EUR/USD is quoted at 1.4502 bid and 1.4505 ask. In this case the spread is 3 pips. The pip spread is your cost of doing business here. In the case above it means you sustain a paper loss equal to 3 pips at the moment you enter the trade. Your contract has to appreciate by 3 pips before you break even. The lower the pip spread the easier is it for you to profit.
When you execute a trade, it will always begin on a -negative that is when the spread being deducted by your broker before you even start seeing profit.
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