Those who approach Forex Trading as a novice, without experience and knowledge of financial markets, must fulfill a preparatory task. Before starting a complex training path, learning to use platforms, and grasping analysis techniques, they must memorize certain terms and understand some concepts. These represent the foundations of Forex Trading, hence the aforementioned preparatory nature.
Exchange Rate
This is the basic concept of Forex Trading.
The term exchange rate simply refers to the relationship between two currencies, i.e., how much one currency is worth relative to the other. Specifically, the amount of the second currency needed to buy a single unit of the first currency. To clarify, in the EUR/USD pair, the first currency is the euro, and the second currency is the dollar. Suppose the exchange rate is 1.10. This means that 1.10 dollars are required to purchase one euro.
Currency pairs are defined using ISO codes, which are abbreviations. As we have seen, the ISO for the euro is EUR, and the ISO for the dollar is USD. There is no particular rationale in determining the ISO, although often the first two letters indicate the nationality of the currency (e.g., JPY stands for JaPanese Yen): it is necessary to memorize them.
Bid and Ask
When trading (with most brokers), investors sell at one price and buy at another price. The reasons behind this dynamic are quite complicated and go beyond what we could define as "basics": it is a moderately advanced concept.
In any case, the price at which one sells is called the Bid; the price at which one buys is called the Ask. When opening and closing trades, i.e., in the normal activity of seeking a surplus, these two prices must be considered.
Spread
The concept of spread is closely linked to that of Bid and Ask. In a nutshell, the spread is the difference between the Bid and Ask prices. It is expressed in pips, which is the unit of measurement for the exchange rate or, better said, the smallest fraction of a currency unit by which a pair can move.
Now, it is evident: the spread always harms the user, eroding profits. It's all physiological, let's be clear: it is the broker's source of income. It's important to specify: a legitimate source of income. Obviously, the interest is to trade with the lowest possible spreads, so when choosing a broker, it is important to consider this crucial parameter.
Going Long and Going Short
One of the advantages of Forex Trading is the ability to profit in all market phases, regardless of conditions. You can profit when the market is growing, and you can profit when the market is depressed. The merit of this lies in the possibility of going short, i.e., selling more or less freely. Going short, therefore, means exactly: selling. Going long, on the other hand, means buying.
Leverage
Leverage is certainly not exclusive to Forex Trading, but it is still a resource that is often used in this activity. Leverage, in simple terms, is a kind of multiplier that the trader can apply to their order. It allows for a fictitious, but in a sense real, increase in the starting capital.
For example, if a leverage of 10:1 is used, it means that the trader, by putting 100 euros "on the table," can trade as if they had invested 1000 euros. The potential winnings, therefore, increase tenfold. The same, of course, happens with losses. For this reason, leverage is defined as a double-edged sword. Conventionally, all leverage ratios above 1:50 are considered "excessively risky."
Trading Hours
More than a term, this is a dynamic that is almost exclusive to Forex Trading. The currency market, in fact, is open "almost always," specifically 24 hours a day, 5 days a week. In short, it is closed only on weekends. This represents a strong signal of discontinuity compared to other markets, which are bound by the hours of stock exchanges. Forex traders, on a theoretical level, have many more opportunities for profit. From a practical point of view, however, they cannot ignore the hours of the stock exchanges, since a large part of the market movers and liquidity comes from the exchanges or is caused by what happens there.
Therefore, it is important to remember the trading hours of the stock exchanges.
- Sydney: from 11 PM to 8 AM
- Tokyo: from 1 AM to 10 AM
- London: from 9 AM to 6 PM
- New York: from 2 PM to 11 PM
