It is possible to trade in foreign currency or Forex as it is known today. For retail investors, there are different types of accounts that may be opened. These include standard lots, micro lots, and mini lots. For first-time traders, a micro account is ideal and may be started with a very small amount. If you have already been trading stocks online, you will be able to find it easy to learn foreign currency trading.
Terms you need to know about Forex trading
There are a few terms you need to gain clarity about before you begin trading in foreign currencies.
Base currency
Any Forex pair consists of two currencies. The first one quoted is known as the base currency, which is the domestic currency of the country you are trading in.
Quote currency
The second currency which forms part of the Forex pair is called a quote currency or a counter currency. For instance, in a USD/CAD pair, CAD or Canadian Dollar is the quote currency.
Cross-currency pair
In foreign currency trading, there is a set of currencies which are traded. This excludes the U.S. dollar. One currency is exchanged for the other one and this is called cross-currency pair.
Trading Forex
The purchase or sale of a currency is always performed on the base currency. The monetary value of any change in the value of a currency will vary according to the trade and the currency being traded. You also need to choose the lot size which is generally in increments of 10,000. The best thing about trading currencies is the absence of commissions. Before you make a trade, ensure to consider the value of the currencies you are trading and the cost of a small change in the value of the same, and even the exchange rate, be it for US dollars or the Japanese yen. The difference in prices of two currencies is known as a “spread” and the spread is how your broker will make money in trading.
You need to understand the value of both currencies before you start trading. Track the market and learn about the change in the same over a period of time. The gain or loss will depend on the change in the value of the currencies. Once you understand the currency movement and the way trades are carried out, you will be able to participate in foreign currency trading with ease.