Many people would love to boost their bank balances, and spend a large portion of their lives on the lookout for ways to achieve their ambition. When you’ve reached your optimum job potential, work as many hours as you can, and lack the motivation to retrain and go in search of better paying employment, however, this can seem like an impossible task.
This is why so many people fall in love with forex trading. The perfect form of passive income, it’s flexible, accessible, and can also be highly profitable. Unfortunately, it’s also incredibly complex to master. The currency markets take a great deal of skill and knowledge to negotiate, and this means putting in the hours to learn about them. There are a myriad of terms, tactics, and technologies to get to grips with, and one of the first factors that you need to master is the jargon.
That’s where we come in. If you’re an aspiring forex investor, here are a few terms that you need to know before you unleash yourself on the markets…
#1: Currency Combination
The currency markets revolve around the various pairings that traders choose to invest in, so if you don’t understand this fundamental concept, you’re definitely not ready to start making your mark. Almost any currency can be traded against another, with the only proviso being that a broker must offer it for you to be able to invest in it. The values of these pairings are in a constant state of flux, and they can move dramatically even in the space of a single day. The most common combinations are known as the ‘four majors’, and these tend to be a great starting point for beginners.
In the world of foreign exchange trading, every trader must use a brokerage firm, like ETX Capital, in order to access the markets. Spread refers to the concept that these brokers apply in order to make money for themselves. Essentially, it is the difference between the buying price of a currency and its selling price, and in this variation lays the main profit for the professionals, and also opportunities for you. The aim of the game is to watch the numbers, which will rise and fall constantly. If you can trade the currency you hold for one with a lower number, you will profit in turn, helping you to secure success on the markets and boost your account balance.
You should also be aware of pips. A pip is the smallest unit used on the currency markets. Even the most minor discrepancy in pips between the values of two currencies can spell the difference between profit and loss, so it pays to pay attention to them. In most cases, the pip will be the last digit after the decimal point, although there are some exceptions to this rule, such as the Japanese yen. Always study the whole number when looking at how much a currency is trading at, as even the smallest variation could equate to a moneymaking opportunity for those savvy enough to spot it.
Next up is leverage, and this is an idea that you ought to pay very careful attention to if you wish to limit your forex losses. Leverage refers to a number of credit facilities offered by brokers, which essentially maximise the value of your account balance when you place your trades. The easiest way to explain it is with an example. Lets imagine that you have $100 that you wish to trade. With leverage, you could increase the impact that this money has by 10, 20, or even 50 times, so that the outcome of your trade means that you profit or lose as if you have actually placed $1,000, $2,000 or even $5,000. Although this can massively increase your profits, caution should always be exercised before you use it, as it can severely exaggerate your losses too.
Like credit, margins are a form of leverage that brokers may choose to offer their customers, and they carry risks as high as their rewards. They allow investors to trade far more money than they actually have, in order to give them a chance to massively increase their profits. It is not uncommon for those with $10,000 in their account to wield the power of $500,000 in their trades, all because of their use of margins. The real risk, however, lies not in the possibility of loss, but in the chances of a margin call occurring. A margin call is implemented when the currency markets take fright, and it gives brokers the power to demand that all of the credit they’ve extended is returned to them. This can be extremely damaging for those who are on a losing streak, so the choice to accept margins should always be carefully considered before you take the plunge.
#6: Stop Loss Orders
Whereas leverage and margins can be damaging to a strategy, stop loss orders often prove to be its salvation, and this is why they’re frequently referred to as the ‘traders’ best friend’. Provided that they’re properly executed, they work by limiting the amount of money that you can lose, irrespective of the twists and turns that the forex markets take. In their standard form, a stop loss order will ensure that you remain at a particular valuation between currencies at all times. Their trailing alternative works a little differently, and will protect your profit once it reaches a certain level. Their exact mechanisms are well worth looking into before you start trading, and could prove to be your saving grace if ever your forex fortunes take a turn for the worse.
The forex markets are complex, complicated, and challenging, and it can be hard for novice traders to come to grips with them, but this doesn’t mean that you should be deterred. Mastering these six terms alone will set you in good stead for learning more about the markets, and should give you a strong grounding in the fundamentals. With this foundation to work from, all that you need to do is spend a little more time educating yourself on the essentials, before you’re ready to take the currency markets by storm.