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Forex Trading Basics

Forex is short for foreign exchange. The forex market is a place where currencies are traded. It is the largest and most liquid financial market in the world with an average daily turnover of 6.6 trillion U.S. dollars as of 2019. The basis of the forex market is the fluctuations of exchange rates. Forex traders speculate on the price fluctuations of currency pairs, making money on the difference between buying and selling prices.

What is Margin?

Margin is the amount of a trader's funds required to open a new position. Margin is estimated based on the size of your trade, which is measured in lots. A standard lot is 100,000 units. We also provide mini lots (10,000 units), micro lots (1,000 units) and nano lots (100 units). The greater the lot, the bigger the margin amount. Margin allows you to trade with leverage, which, in turn, allows you to place trades larger than the amount of your trading capital. Leverage influences the margin amount too.

What is Leverage?

Leverage is the ability to trade positions larger than the amount of capital you possess. This mechanism allows traders to use extra funds from a broker in order to increase the size of their trades. For example, 1:100 leverage means that a trader who has deposited $1,000 into his or her account can trade with $100,000. Although leverage lets traders increase their trade size and, consequently, potential gains, it magnifies their potential losses putting their capital at risk.

Forex Market Hours

Due to different time zones, the international forex market is open 24 hours a day — from 5 p.m. Eastern Standard Time (EST) on Sunday to 4 p.m. EST on Friday, except holidays. Markets first open in Australasia, then in Europe and afterwards in North America. So, when the market closes in Australia, traders can have access to markets in other regions. The 24-hour availability of the forex market is what makes it so attractive to millions of traders.

Currency Pairs

In forex trading, currencies are traded in pairs. The first currency in the pair is called the base currency, while the second is called the quote currency. The price of a currency pair represents how much of the quote currency is needed to purchase one unit of the base currency. Major currency pairs include EUR/USD, USD/JPY, GBP/USD, and USD/CHF.

Types of Forex Orders

There are several types of orders in forex trading:

Market Order: An order to buy or sell immediately at the current market price

Limit Order: An order to buy or sell at a specific price or better

Stop Order: An order to buy or sell once the price reaches a specified level

Stop-Loss Order: An order designed to limit a trader's loss on a position

Take-Profit Order: An order to close a position at a specified profit level

Fundamental vs. Technical Analysis

Fundamental Analysis: This approach involves analyzing economic indicators, interest rates, political stability, and other macroeconomic factors that affect currency values.

Technical Analysis: This method focuses on historical price data and chart patterns to predict future price movements. Technical traders use indicators like moving averages, RSI, and Fibonacci retracements.

Risk Management

Successful forex trading requires proper risk management strategies:

Always use stop-loss orders to limit potential losses

Never risk more than 1-2% of your account on a single trade

Maintain a favorable risk-reward ratio (at least 1:2)

Diversify your trading portfolio

Keep emotions in check and stick to your trading plan