The forex market is ever-changing and complex to say the least, so it can be very difficult for a novice trader to begin making money without the proper education. Perhaps the most important aspect of trading is the fluctuation of exchange rates, which are basic comparisons between the value of two currencies. For example, if 1 USD equates to 6.5 Swedish Kronor, then the written exchange rate would be 1USD=6.5SEK. The entire profession relies on the tiniest fluctuations between currencies, which is why it is necessary to understand how these fluctuations work and how they can be used for your benefit.
Understanding Exchange Rates
In order to understand how and why exchange rates fluctuate you need a basic understanding of economics in general. The value of a nation's currency can be affected by a plethora of factors, many of which are often overlooked, including political events, governmental policy changes, public debt, interest, trade terms, inflation and overall political and economic stability. Thus, people are constantly on top of global financial affairs as they are reported in the news, because a seemingly insignificant story can lead to a substantial profit if properly interpreted and acted upon in a timely manner.
Understanding Forex Pairs
Exchange rates indicate the current market value of currency pairs, with some of the most popular trading pairs being: EUR/USD, GBP/USD, USD/JPY, USD/CHF, EUR/JPY, USD/CHF, EUR/GBP, and USD/CAD. The first currency listed in a pair is called the base currency, and is the currency used to purchase funds in the second currency listed (the counter currency, also referred to as terms currency or quote currency depending on context). If the exchange rate changes favorably after the base currency is converted into the counter currency, when the funds are reverted back into the base currency a profit is earned. I.E. A trader converts 1USD into 6.5 SEK, then if it quickly fluctuates to 1USD=6.0SEK, when the funds are reverted to USD, a total profit of 0.5 SEK is earned. (These examples are not indicative of typical market conditions or rate fluctuations, and are only used to draw basic illustrations for novice).
Utilizing Forex Charts
Forex charts are excellent resources for comparing a broad spectrum of pairs simultaneously, letting a trader decide which pair would be most profitable with more efficiency. At first glance these charts appear to be highly complex, however using the following tips you can begin to understand them with minimal experience. Forex charts do not display exchange rates as they would typically be seen in a converter (I.E. 1USD=6.5SEK). Instead they simply list the name of the pair followed by the current market price. Thus, the aforementioned pair would be listed as USDSEK followed by the number 6.5, indicating that 1 USD can buy 6.5SEK. The volume, also referred to as face value or trade size, is the amount of base currency being traded. When you choose a pair based on the statistics of a chart, it is important to note that you want the base currency to strengthen against the terms currency. Although there is a lot more to interpreting charts, this is the basic concept used by traders.
Upon entering the market most people are met with confusion, and an overwhelming sense of frustration without the right guidance. Utilizing courses and taking advantage of the abundance of educational material available on the web is the best way to avoid these negative emotions and transfer your energy into a positive and profitable mindset.