Currency Trading for Dummies

If you’re just starting out with the idea of making money from trading Forex, you’ll need to consider taking a crash course or finding information about currency trading for dummies. When you know the basics, you’ll find it much easier to minimise your losses and figure out how to pick likely winning trades, but before you can begin any kind of currency trading for dummies course, it’s vital you understand how the Forex market works.

Learning to trade on the foreign currency exchange can be a great way to earn extra money from home, or even to replace your full time income completely. The basis behind currency trading is to sell one currency in exchange for that of another country. When the pricing of each currency changes enough to represent a profit, you sell the foreign currency back for your original base currency. Your job is to try and make a profit from these rapid fluctuations in currency values.

Below is a quick lesson in currency trading for dummies to get you started.

How Currency Trades are Quoted

When you buy or sell foreign currencies, you’re quoted exchange rates. These give you the value of one currency relative to another at any given time. The Forex market is notoriously volatile, so keep an eye on the exchange rates, as they’re liable to fluctuate several times throughout your trading day.

In most cases, you’ll see your exchange rate quoted to 4 decimal places, with the exception of the Japanese Yen, which is quoted to 2 decimal places.

So your base currency will be the first figure shown in your quote and the currency you’re buying will be the second currency figure shown.

For example, if you’re thinking of selling Australian dollars and buying US dollars, your quote would look like this:

AUD/USD

Of course, you’d see it in numbers, which would be the values of each currency relative to the other, like this:

1/0.8757

This means 1 Australian dollar will buy you 87.57 cents in US dollars. Because the 1 in this pairing is automatically assumed, you’ll often only see a bid price written down as 0.8757, as you already know your original base currency will be at 1.

However, while this might represent the value, this isn’t always the type of number you’ll see when you’re looking at regular Forex trading quotes. You’ll see a spread of numbers listed alongside the trading pair you’re thinking about.

On most Forex trading platforms, you’ll see it written something like this:

AUD/USD 0.8757/61

Bid and Ask Price

You see, when Forex brokers accept your trade, they don’t charge you any commissions or trading fees for placing your trades. Instead, they make their money by adding a few pips to the price you’re quoted. This is called a ‘spread’.

You might see the bid price for AUD/USD is 0.8757, but the ask price might be listed as 0.8761. The bid price and the ask price are never the same, with the ask price always being a little higher.

This spread is the tiny increment added to each trade by a Forex broker as payment for facilitating and executing your trade on your behalf.

Forex Trading Pips

A pip is short for the term ‘price interest point’, and it is shown as the tiny increments after the decimal place. If your original bid price for buying USD is 0.8757 and the pips rise to 0.8767, that’s a rise of 10 pips.

When you consider the size of your initial trade amount, those small increments can actually add up to a large profit.

Before you jump into the lucrative world of foreign currency exchange trading, be sure to take some time to learn forex trading basics. Invest in quality courses and take advantage of working demo accounts to get a feel for how quickly the market can move. You’ll find that your knowledge will quickly extend beyond the basics of currency trading for dummies.

Related posts:

1. Currency Trading Rates
2. Forex Currency Trading
3. Currency Trading Australia
4. Foreign Exchange Currency Trading