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The currency trading market is the biggest market in the world and anyone can participate in it. The forex market has the capabilities to give you extremely huge profits, yet at the same time it also could get you bankrupt overnight. In other words, you must posses strong forex trading basics to protect your money from total loss and keep generating profits. The Basic: You Always Sell and Buy Simultaneously One of the most complicated ideas for those who aren’t accustomed to forex trading is the idea of “sell high buy low” to gain profit. In other words, you “sell” first, then “buy” later. How could I sell something if I do not have anything in my possession? It will be easier to explain it with illustrations, so here it is: You may have seen this before: EURUSD = 1.3578. It implies that 1 EUR is equal to 1.3578 USD~GBPUSD = 1.5341. It means 1 GBP = 1.5341 USD. - If you buy EURUSD at 1.3578, it means you RECEIVE 1 EUR and PAY 1.3578 USD. To put it differently, you buy EUR and sell USD at the same time. - If you sell EURUSD at 1.3578, it implies that you PAY 1 EUR and RECEIVE 1.3578 USD. To put it differently, you sell EUR and buy USD simultaneously. The Concept of Pips A “pip” (percentage in point) is the smallest movement that a currency pair can have. Example: current GBPUSD is 1.7657, then it moves up 1 pip, it’ll become 1.7658. To put it simple, you need to simply watch the decimal number. Normally, 1 pip is 0.0001, but there are cases such as USDJPY where 1 pip is 0.01. Here is another example: - GBPUSD is 1.8700, then it moves up 4 pips, thus: 1.8700 (4 x 0.0001) = 1.8704~EURUSD is 1.4300, then it moves down 10 pips; thus: 1.4300 - (10 x 0.0001) = 1.4290. - USDJPY is 100.24, then it moves down 4 pips, thus: 100.24 – (4 x 0.01) = 100.20~USDJPY is 101.35, then it moves up 20 pips, tus: 101.35 (20 x 0.01) = 101.55. The Concept of Leverage Leverage is a system that allows common people who don’t possess lots of capital to participate in currency trading. Basically, your broker “lent” you the capital that you need to back up your trades. Example: with 1:300 leverage and USD 500 deposit, you can trade 300 x 100 = USD 150,000 worth of currencies~if you deposit USD 700 and get 1:400 leverage, you could trade 700 x 400 = USD 280,000 worth of currencies. The Concept of Lots In forex trading, you trade in “lots”. Typically, the regular size for a lot is 100,000 for any base currency. In other words, if you deposit USD 500 at a forex broker that offer 1:400 leverage, then you can trade 500 x 400 = 200,000 worth of currencies or 2 lots~Basically, if you get 1:400 leverage and deposit USD 1000, you can trade 1000 x 400 = 400,000 (4 lots) worth of currencies. Depend on your broker, they could also provide you with 10,000 lot size. The Concept of Profit and Loss It is the same as any other trades on the planet, you will need to buy at low price and sell at high price. The only difference here is that you could sell first when the price is high, then buy later when the price has fell. As I have explained above, it is possible since you always buy and sell simultaneously. The profit/loss formula for any currency pair with 4 decimal (such as EURUSD) is: (pip difference x 0.0001) x lot size x lot volume Note: - Pip difference is sell price – buy price - The result is in the right side of currency pair. Example: in GBPUSD, the result is in USD~if the currency pair is USDJPY, the result is in JPY. Example: Buy 1 lot of EURUSD at 1.4500, then sell it at 1.4550 Pip difference: (sell price – buy price)/0.0001 = (1.4550 – 1.4500)/0.001 = 50 pips (profit). Profit = (50 x 0.0001) x 100,000 x 1 = USD 500. Learning forex trading basics is not as difficult as it may seem. An easier way to do it is simply open a demo account, then have a step by step lessons that you can practice immediately at the demo account. By using this method, you'll find it easier to comprehend the lessons and concepts Check out learn to trade forex for free step-by-step course which cover the fundamental basics of forex trading. Furthermore, see my another look at FBS broker for the details of a forex broker with good demo account and competitive leverage and spread.
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