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Forex Trading Outline for Beginners

Updated on May 10, 2013

Forex has become the most trusted method of trading for investors. In fact, these days more investors are choosing forex over stocks, indices and commodities. The basic reason behind this is the forex is a very unique market and has its very own different factors that affect the prices and the forex environment. The concept of forex is very simple at the core. You just have to trade in a pair of currencies. The most popular currency pair in the market is the USD/EUR pair. You can choose any pair that you like. Just make sure that you are quite aware of the history and future market risks of currency as well.

You simply have to buy one currency of the pair and sell the other, depending on the market trends. The value of each of the currencies keeps on changing depending on a number of factors. You will have to keep a close watch on how these trends are developing and invest your money like. The trading has many time frames. You can either invest in super short term, short term, long term and super long term investments. This means that you can either trade minute by minute or by the hour. You can even go for daily or weekly processes as well. It all depends on the type of trading that you do. Mostly, the old school traders who want to keep their money safe in the long term go for longer trading durations. On the other hand, the ambitious traders go for shorter term trading. However, the risks are more in short term trading.

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Though the markets are called 24 hour weekday markets, there are mainly three trading sessions that are at work, the first is the Asian market, followed by European and US market. You can trade during any time that you like. However, it is always better for you to trade in the currencies of your choice during the transitionary periods. That is when European markets are about to close and the US markets are about to open and so on with the other two transitionary phases. This would help you in making the correct decision about the flow of your currency. It is very helpful as it is during these transitionary times that one gets to know which way will the currency pair swing and if you get preliminary indications of how the markets would go about, you will easily be able to define your trade for the day.

You must make sure that you always have to trade currencies in pairs. You can easily trade on one stock in the stock market but in forex, you have to choose a pair. Therefore, you must ensure that you deal in at least one of the currencies that belongs to the area that you live in and the times of transition that you can handle better than others. For example, if you live in Europe then you can invest either in the Asian currencies (if your go for early hour trading) or the USD if you want to trade in the later hours.

This is very essential a point to understand for those who are investing in the currencies. Another very important thing to take care of is the Pips. The pips are generally the smallest increments that you can trade in forex. One pip is equal to a hundredth part of a percent. Therefore, you have to take care of this concept as well. You must also make sure that you understand the concept to mini lots and micro lots. Mini lots are generally moving in lots of $1 while the micro lots are another tenth of these lots. This means that the movement will hardly be 10 cents at a time. However, for those who want to trade safely, investing in micro lots is a good idea.

There is another thing that you should be aware about. The stock market is very versatile and there are thousands of stocks that you can trade in. Even the commodity and indices markets are more horizontally spread as compared to the forex market, which is mainly confined to a few currency pairs. Moreover, only 18 of these currency pairs are mostly traded in. The currencies of US, Canada, Switzerland, Japan, New Zealand and Australia are the ones that make the most money on the forex market as they are traded more than others.

You must deeply study about the factors that affect the movement of currencies. Normally, when the currency is more in demand its prices would rise according to the simple principles of demand and supply. However, if the political structure of the country is unstable or if the economic reports by any or all of the biggest economic organizations like the World Bank etc. change, then the prices would also change accordingly. Therefore, a forex trader is the most aware and informed traders of them all.

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