We sell or buy currencies in the Forex market, i.e., trade in currencies. Now the most common question of beginners is how do we trade in Forex.
To trade in the Forex market is simpler than you might have thought. The trade in the forex process in the Foreign Exchange market is quite similar to what we find in other financial markets — like the stock market.
So, anyone with limited trading experience can quickly pick up the nitty-gritty (nuts and bolts) of the Forex Market. And, even if you struggle, fret not, we are here to make you understand.
We will explain everything relevant to Forex Trading in the most straightforward language and simplify the fancy Forex concepts!
How to trade Forex for beginners
You are already aware that the main aim of Trading in the Forex is to buy one currency for another in the hope that the currency you have purchased will appreciate against the currency you have sold.
Before we go any further, let’s ask what “A currency appreciating against another currency” means.
Simple: to appreciate means to go higher in value.
If a good has appreciated, its value goes up.
We buy a currency on the Forex market, anticipating an increase in value vis-a-vis the currency we have sold.
Forex Trading Example –
Imagine you have bought $100 at the USD/IND exchange rate of 75, which means you spent INR 7,500 to get hold of $100.
Now imagine that IND appreciates to 74 against a dollar a week later.
Let’s calculate the profit:
100*75 = 7500
100*74 = 7400
7500 – 7400 = 100.
A quick glance
Trading in Forex is buying one currency for another in the hope that the currency you have purchased will appreciate against the currency you have sold.
Base currency is the currency against which the price of another currency in the pair will be determined.
The quote currency is the currency whose value is relative to the base currency.
Reading a Forex Trading Quote.
Before we discuss how to read a Forex quote, Let us understand what a quote is.
The estimated price of a service is called itsquote price. If, for example, a pair of shoes is $25, it means its estimated price is $25.
The most important thing in Forex trading for beginners is understanding how to read a Forex quote.
The price of a currency could be determined only in pairs. The reason behind quoting currencies in teams is that buying and selling a currency happens simultaneously in a forex market.
It leads us to a fundamental question: if buying and selling a currency go hand in hand, how would we know which currency is being purchased and which is being sold?
To answer this question, we must wrap our heads around base and quote currencies…
What is the base and quote currency of Forex Trading?
We are sure you must have heard the word base, right? Basement, based, etc., what do these words mean?
The base is something from which you start. Your starting point is your base point. You begin trekking up a hill from your base camp. Similarly, a base currency is a currency that is being used as a reference in a currency pair.
In other words, the base currency is the currency against which the price of another currency in the pair will be determined.
You can define quote currency yourself now. The quote currency is the currency whose value is relative to the base currency. As simple as that.
Let’s take an example to understand it graphically:
CAD/USD = 1.2524
The Canadian dollar on the left is the base currency against which the US dollar has been bid. The US dollar, on the right, is the quote currency, or the currency whose value in the above example has been determined by the base currency.
Conclusion
You now have the answer to a million-dollar question, How do we trade in Forex. However, a trader needs to be smart enough while selecting their forex trading platform.
Knowledge is the key to success. So it is important for you to first educate yourself before putting your money in the forex market.