Forex Trading for Beginners: Familiarize Yourself with the Terminology at the Start

Beginning anything new is always a daunting task that requires perseverance, patience, and a general feel for the initial steps that are necessary.  For a beginner that wishes to learn something about the complex world of foreign exchange trading, the task seems all but impossible at first glance.  There is plenty of information available and a plethora of websites begging for your attention, but where do you start?  Like most any investment medium, the keys for eventual success in forex trading reside in preparation, knowledge, experience, and the ability to control one’s emotions.

Preparation is your primary objective at this point.  It involves reading as much as you can about the topic of forex trading in order to familiarize yourself with the terminology, issues, and principles at the outset so that when you enroll in a free forex course or seek the advice of a professional, the educational material presented will be absorbed since your mind will already be receptive to the information presented.

In order to get you started, here are a few specifics about forex jargon and the market in general:

  • Currency Pair:  The first principle to get your hands around is that currencies are traded in “pairs”.  An active market of buyers and sellers, the forex market, assesses the relative strengths and weaknesses of each country’s respective economy in order to determine an appropriate exchange rate.  In some cases, government officials “peg” of fix the value of the currency versus others in an effort to stabilize their export and import trade.
  • Currency Code:  The International Organization for Standardization (ISO) sets a three-letter code or symbol for every recognized global currency.  For example, “EUR/USD” refers to the Euro and U.S. Dollar currency pair.
  • Major Currencies:  The major currency pairs consist of the U.S. Dollar and each of seven other currencies.  The codes, names and symbols of these eight major currencies are listed below:

AUD – Australian Dollar ( or “Aussie”)

CAD – Canadian Dollar (or “Loonie”)

EUR – Euro (or “€”)

JPY – Japanese Yen (or “¥”)

GBP – British Pound (or “Sterling” or “£”)

CHF – Swiss Franc (or “Swissie” or “S?”)

NZD – New Zealand Dollar (or “Kiwi”)

USD – U.S. Dollar (or Greenback or “$US”)

  • Forex Broker:  Your online forex broker is your access point to the forex market.  This firm has contracted with one or multiple banks in order to trade currencies on the open market.  He will usually provide trading software for you to use with his system to execute Buy/Sell orders on your behalf.  Your agreement will spell out key rules and limitations for your relationship.  It is very important to understand every term and paragraph in this agreement before you begin to risk real money in the market.
  • Demo Account:  Most all brokers will provide one of these accounts for free.  You will be able to practice with “virtual” cash and real time quotes to gain invaluable experience and confidence before risking real capital.
  • Real Time Quotes:  A forex broker will provide quotes to you for buying and selling a specific currency pair.  Since the market changes constantly, these quotes will also change.  An example of a quote for “EUR/USD” might be “1.2655/1.2658”.  The first figure is the “bid” price, and the second figure is the “offer” or “ask” price.  The former is for selling, the latter is for buying, and the difference is the “spread”, the way the broker is compensated.

These few terms will get you started on your “preparation” journey.  Good Luck!

What are CFDs?

What are CFDs? A CFD is a Contract for Difference, which is a way of making money from the movement of share prices in the stock market without the requirement of owning the share itself. Instead of buying the share, you own a contract instead. It is this contract that you buy at one price and then sell at another, either making money, or potentially losing money.

What are CFDs compared to conventional share dealings?

If you deal in shares, you need to own the full value of the shares you are buying or selling. With CFDs, you only need to own a percentage of the share value up front. This is called the Margin Requirement. With equities it starts at 5% of the full value. So if you invest in a 10,000 position, your initial margin would be 500. When you trade on margins, you are able to earn or pay interest on your position. Another great advantage of trading in CFDs is that there is no minimum on the size of the trades you are allowed to place.

What are CFDs main advantages and disadvantages?

Trading in CFDs sounds almost too good to be true, but naturally there are some disadvantages to be aware of and although there is a huge potential for big returns in trading CFDs, you can potentially lose more money that you initially invested.

There are two types of CFDs and these are known as Long CFDs and Short CFDs.Long CFDs are when you believe that the share price or index will rise. You buy CFDs to make a profit when it goes up, or a loss if it should fall instead. In CFD trading, this is known as a Long Position.

Short CFDs refer to making money on CFDs even when you think that the price of a share or index might be in danger of falling. You sell your CFDs at a high price with the intention of buying them back again when the price falls. This is known as taking a Short position.

With long CFDs, the maximum amount of money you could lose would be the notional value of the CFDs you bought. However, the stock market would need to fall to zero before that could happen. With short CFDs, there is potentially no limit to the amount of money you could lose. If the price of your position continued to rise, you would keep losing money until you closed the position.

One main disadvantage is that you might need to make further deposits at very short notice if your positions move in the wrong direction, so you need to have the funds available at your disposal.

Trading in CFDs is not for everyone and before you consider getting involved you should give a great deal of thought to how much you are willing to lose should things go awry. However, CFDs are open ended, so as long as you can continue to keep financing your position, you can keep the contract open for an unlimited period if you are hopeful the position will recover sufficiently.

Become one of the Successful Forex Traders

Successful forex traders are those lucky people who make lots of money trading on the foreign money exchanges. Forex trading is something that many aspire to, but not many actually make a success at. In theory forex trading is very simple, but it takes a certain type of person to be a successful forex trader: and not everybody is that person!

The first big mistake lots of enthusiastic would-be forex traders make is to dive right into forex trading without knowing a thing about it. It might be easy to open a forex trading account, but this does not mean you can immediately start trading in currency and expect to rack up a small fortune. You might think in your naivety that the time is right to buy, but the moment you do the market changes. So you have a panic attack and sell, only to lose money when the market recovers again.

Greed and fear are two emotions that you cannot afford to have when trading on the forex markets. If you are greedy, you will make trades when perhaps you shouldn’t. The thought of letting a deal go and losing money is unbearable when you are greedy and are keen to hit the big time as soon as possible. Unfortunately, this is completely the wrong attitude to have with forex trading.

A successful forex trader is not ruled by his or her emotions. You have to learn when to take a step back and resist the urge to make a deal when it goes against your strategy. You also have to remain cool, even when a deal looks like it is going pear-shaped. If you rush to sell the minute the market moves against you, you will lose money left, right, and centre. Keep fear and greed out of the equation and you will soon see results. Successful forex trading requires a strategy.

Once you have a strategy that works for you, stick to it. Large organizations and educated forex traders have strategies. They make money by playing to a set of rules. If you stick to your rules, there is less chance you will blow it by making a stupid decision in the heat of the moment. The best way to be a successful trader in the forex markets is to pay attention to the markets. Spend time watching how the market reacts to certain stimuli. Once you know the markets well, you will be far better at predicting the trends in future markets. Always limit your risk when trading on the forex markets, preferably to between 1% and 3%.

As your core equity rises, you can raise your risk per transaction for greater profit, but as we have already warned, greed is a one-way ticket to losses in the forex trading markets, so be careful. Becoming a successful trader in Forex requires a great deal of skill. Success will not happen overnight, so patience is the key. Make sure you educate yourself on all aspects of forex trading and you will be in the best possible position to make a killing on the forex markets.

Next Entries »