There is no doubt that digitalisation has changed the face of trading. Exchanges and trading in the past involved physical brokers, which cost time and money. However, today, trading has become less exhausting and straightforward. With versatile diversification, you have the freedom to choose from trading types that best suit you. Over the past decade, forex trading has been on the papers. It is becoming desirably popular due to an impeccable response from investors of all spheres. But what is forex trading? Forex trading(fx trading) is when traders can buy, sell or exchange currencies, usually in pairs.
How Does Forex Trading Work?
Forex market primarily involves the exchange of currencies, thereby having a massive net flow of cash in and out. International currencies involved in the trade are of immense significance as they serve an inevitable medium in foreign exports and businesses. For instance, if you live in Sydney and want to buy/import American cheese you need to pay in USD and not AUD.
Similarly, global travellers require currency exchange platforms to survive in other nations. Forex acts as one such prime medium. However, it also allows traders to earn profits from their investments, serving as an income generation source.
Five Essential Forex Terms to Master
Trading, like any other domain, involves several field-specific terms. As a beginner in forex trading, all it takes is to master these terms, understanding their deep-rooted meanings. When you search” what is forex trading?”, some typical definitions popup. While there are various acronyms and alienated terms, here are five titles every forex trader must know to emerge as a successful investor,
1. Currency Pair
The primary difference between forex and other trading type is the inclusion of currency pairs. Forex trade involves buying a currency and selling the other in a pair. On the flip side, stock/commodity trade is unidirectional, where you buy a share and sell the same when the sell signal strengthens.
But why should you do trading in pairs? Forex trade primarily consists of betting on a currency against the other. For instance, when you buy a currency, say USD against another(EUR), you bet USD to perform better than EUR. Thus, your currency pair is USD/EUR.
You need to sell one and buy another out of the two currencies in a pair. So, when you decide to sell the counter currency, you get bid requests. Bidding in forex trading is the price a seller offers to sell the currency pair. On the flip side, the asking price is the price a buyer negotiates or buys the currency pair for. In other words, the bid is the highest price at which the trader sells the currency pair. Ask price is the lowest price a trader buys the currency pair- this is the successful thumb rule.
3. Lot Size
The lot size is simply the size of trade an investor holds in his asset portfolio at a given time. In simpler words, the number of trades a trader does at any given time is the lot size. In forex trading, ‘lot’ is a unit used to measure the transaction amount. It is essential to know the lot value because some brokers direct trade values in this unit!
4. Bulls and Bears
Bullish and bearish trends are common to all types of trade. In forex trading, a bullish signal refers to a price up. On the flip side, a bearish indicator points out a price dip. On a forex trade chart, you will find candlesticks indicating bullish trends marked green and bearish trends marked red.
5. Take profit
As a beginner, you will find several risk management tools specific to forex trading. One such primary tool is the take profit tool which closes the position without manual operation. That is, once you enter a pre-defined goal or a profitable sell price, the tool quickly sells off the asset to gain a risk-free yield as the market is highly volatile.