If you’ve been on the internet in the past few years, you’ve probably heard of forex trading. Forex is short for foreign exchange, which is the process of selling one currency and buying another in its place. It is one of the most popular forms of trade in the world, with a daily trade volume of $6.6 trillion in 2019. 

Forex trading is useful for a number of reasons, including tourism, business and commerce. However, it is a complicated subject, so this beginner’s guide to forex trading will be a great help if you’re thinking of entering the world of FX trading. 

The Basics Of Foreign Exchange (FX)

A lot of people think foreign exchange trading is an easy way to make some fast cash. However, that couldn’t be farther from the truth. Trading currencies requires intimate knowledge of how the financial markets work and how best to deal with certain situations. 

Forex Markets

Forex markets are the places where individuals or institutions trade currencies. There is no building, company or organization that deals with currency trading. Instead, this currency trading is happening twenty-four hours a day, five days a week all over the world in different banks, institutions and retailers. The internet and computer networks keep traders connected from all over the world, so you don’t have to get out of the house to get into FX.

Lots, Pairs And Pips

The great thing about FX trading is that you don’t need to have massive capital to get started. Lots of FX trading outfits even allow you to start out with a capital of $50 or $100. Traders typically exchange currency in lots. A micro-lot represents 1,000 basic units of whichever currency you are trading. On the other hand, a mini lot and a standard lot represent 10,000 and 100,000 units of your currency of choice respectively. 

To put it plainly, if you’re trading US dollars, your standard lot is going to be worth USD 100,000.

So, what are pairs? This one’s easy. Currency is typically traded in pairs. You sell US dollars and buy the pound sterling or buy US dollars and sell the euro. It’s different from how the stock market works where you can buy or sell an individual stock. 

A pip is the lowest division in trading. Essentially, it goes up to four decimal points or the 1/100th fraction of 1%. This is important because most of the currencies you’ll see will be represented by a value that goes to four decimal points.

Base Currency And Quote Currency

You’ll often see currency pairs denoted as USD/GBP or EUR/USD. This typically denotes a base currency and a quote currency. The one that comes first is the base currency and is typically worth one unit. The other currency is the quote currency and represents how many units of that currency are worth one unit of the base currency. 

While it is perfectly legal to trade any currency in the world, you’ll only be able to try your hand at trading the currencies that your trading company offers.