You might have already interacted with the foreign exchange market without even knowing it—whether through buying imported goods like clothing or shoes, or exchanging currency while traveling. In this section, we'll explore forex CFD.
Forex trading can feel overwhelming for beginners because it can seem complex at first. The main challenges often involve understanding key concepts, such as currency quotes, shorting an FX pair, and familiarizing oneself with trading jargon. This guide will walk you through the important fundamentals to help you start with confidence.
Forex Trading Terms
Before diving into the mechanics of forex trading, it’s useful to understand some key terms:
Base Currency: The first currency listed in a currency pair in forex trading. It represents the currency that you are buying or selling in relation to another currency, which is known as the quote currency.
Variable/ Quote Currency: The second currency listed in a forex currency pair and indicates the amount needed to buy or sell one unit of the base currency (the first currency in the pair).
For example, in the currency pair EUR/USD:
The base currency is EUR (Euro).
The quote currency is USD (US Dollar).
The exchange rate tells you how much of the quote currency (USD) is needed to buy one unit of the base currency (EUR). So, if the EUR/USD rate is 1.10, it means 1 Euro is equal to 1.10 US Dollars.
Bid/ Sell Price: The highest price a buyer is willing to pay for one unit of currency. This is shown when opening a sell trade and is typically displayed to the left of a deal ticket.
Ask Price: The lowest price a seller will accept for one unit of currency. Shown when opening a buy trade, it’s usually displayed to the right of a deal ticket.
Spread: The difference between the bid and ask price, which includes the market spread and any additional broker fees.
Pip: A point or “percentage in point,” representing the smallest price movement in a currency pair (usually the fourth decimal place).
Lot: The trade size. A standard lot is 100,000 units of the base currency.
Leverage: allows traders to open positions with only a fraction of the trade's full value. It amplifies both profits and losses, as gains or losses apply to the entire position, not just the initial amount invested.
Margin: The deposit required to open a leveraged position, similar to a security deposit.
Margin requirement: The capital needed to maintain open positions, with funds not tied up in trades. The more trades you have, the more capital you may need to keep your account funded to avoid a margin call.
Margin Call: Occurs when your account balance, including any gains or losses, falls below the required margin level, potentially leading to position closure.
Overnight Funding/ Swap Fee: When trading CFDs, you use leverage, borrowing funds beyond your initial deposit to open a position. To maintain your position overnight, an overnight funding adjustment, also known as a swap fee, will be applied to cover funding costs
Liquidity: Measures how easily a currency can be traded without impacting its price significantly. Major currency pairs tend to be more liquid and less volatile.
Volatility: Refers to the degree of price movement in a currency. Liquid pairs often have lower volatility, while illiquid pairs may experience sharp price shifts.
Market sentiment: The overall attitude of traders towards a market. It can be bullish (optimistic about growth) or bearish (pessimistic about decline).
Getting Experience Safely
For beginners, forex trading can be financially risky. However, demo accounts provide a simulated environment to practice trading without real money. Many brokers offer demo accounts where users can trade with virtual funds, building skills and testing strategies in a risk-free setting.
