Why trade Forex?
- Market is open 25/5
- No Commission
Unlike the stock market the FX market has no or little fees. You don't have to pay a fee every time you enter a trade
- Nobody can 'pump and dump' the market
$5,000,000,000,000 (5 trillion) is traded in the Forex market every single day! This means no single entity can influence how to market reacts.
- Low start up costs
You don't need a tonne of money to start trading. I would recommend a minimum of $1,000 so you have enough margin for your trades
- Free brokerage charting software
Most Brokers have a downloadable charting software which you can download for free. When you first open an account I would recommend FXCM, I've never had a problem with them. Their Marketscope software is perfect for a novice. When you get a little more comfortable with trade, I would then go onto eSignal for a more professional look. eSignal does cost quite a bit of money so I wouldn't buy it unless your results reflect the cost.
How Do You Actually Make Money In The Forex Market?
In the Forex market you buy and sell currencies.The object of Forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.
For example:
- You buy (long) 10,000 GBP at the GBP/USD (the cable) exchange rate of 1.50000 ($15,000)
- A week later, you exchange your £10,000 back into USD at the exchange rate of 1.55000 ($15500)
- You earn a profit of $500
How to Read a Forex Quote
Currencies are always quoted in pairs, such as GBP/USD or AUD/USD. The reason they are quoted in pairs is because in every foreign exchange transaction, you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:
When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.51258 U.S. dollars when you sell 1 British pound.
Long/Short
If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price. In trader’s talk, this is called “going long” or taking a “long position.” Just remember: long = buy.If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price. This is called “going short” or taking a “short position”. Just remember: short = sell.
What Is a Pip?
“PIP” stands for Point In Percentage. More simply
though, a pip is what we in the FX would consider a “point” for
calculating profits and losses.
When trading a mini lot (10k units of currency),
each pip is worth roughly one unit of the currency in which your account
is denominated. If your account is denominated in USD,
for example, each pip (depending on the currency pair) is worth about
$1. In a micro lot, or 1k trade, each pip is worth roughly 1/10th the
amount it would be worth in a mini lot, so about $0.10.
Foreign Exchange 'Lingo'
Major and Minor Currencies
The eight most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD) are called the major currencies or the “majors.” These are the most liquid and the most sexy. All other currencies are referred to as minor currencies.Base Currency
The base currency is the first currency in any currency pair. The currency quote shows how much the base currency is worth as measured against the second currency. For example, if the USD/CHF rate equals 1.6350, then one USD is worth CHF 1.6350.In the forex market, the U.S. dollar is normally considered the “base” currency for quotes, meaning that quotes are expressed as a unit of 1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British pound, the euro, and the Australian and New Zealand dollar.
Quote Currency
The quote currency is the second currency in any currency pair. This is frequently called the pip currency and any unrealized profit or loss is expressed in this currency.Pip
A pip is the smallest unit of price for any currency. Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit, that is, EUR/USD equals 1.2538. In this instance, a single pip equals the smallest change in the fourth decimal place – that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent.Notable exceptions are pairs that include the Japanese yen where a pip equals 0.01.
Bid Price
The bid is the price at which the market is prepared to buy a specific currency pair in the forex market. At this price, the trader can sell the base currency. It is shown on the left side of the quotation.
For example, in the quote GBP/USD 1.8812/15, the bid price is 1.8812. This means you sell one British pound for 1.8812 U.S. dollars.
Ask/Offer Price
The ask/offer is the price at which the market is prepared to sell a specific currency pair in the forex market. At this price, you can buy the base currency. It is shown on the right side of the quotation.For example, in the quote EUR/USD 1.2812/15, the ask price is 1.2815. This means you can buy one euro for 1.2815 U.S. dollars. The ask price is also called the offer price.
Bid/Ask Spread
The spread is the difference between the bid and ask price. The “big figure quote” is the dealer expression referring to the first few digits of an exchange rate. These digits are often omitted in dealer quotes. For example, the USD/JPY rate might be 118.30/118.34, but would be quoted verbally without the first three digits as “30/34.” In this example, USD/JPY has a 4-pip spread.Transaction Cost
The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade. Round-turn means a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair. For example, in the case of the EUR/USD rate of 1.2812/15, the transaction cost is three pips.
The formula for calculating the transaction cost is:
Transaction cost (spread) = Ask Price – Bid Price
Margin
When you open a new margin account with a forex broker, you must deposit a minimum amount with that broker. This minimum varies from broker to broker and can be as low as $100 to as high as $100,000.Each time you execute a new trade, a certain percentage of the account balance in the margin account will be set aside as the initial margin requirement for the new trade based upon the underlying currency pair, its current price, and the number of units (or lots) traded. The lot size always refers to the base currency.
For example, let’s say you open a mini account which provides a 200:1 leverage or 0.5% margin. Mini accounts trade mini lots. Let’s say one mini lot equals $10,000. If you were to open one mini-lot, instead of having to provide the full $10,000, you would only need $50 ($10,000 x 0.5% = $50).
Leverage
Leverage is the ratio of the amount capital used in a transaction to the required security deposit (margin). It is the ability to control large dollar amounts of a security with a relatively small amount of capital. Leveraging varies dramatically with different brokers, ranging from 2:1 to 500:1.Now that you’ve impressed your dates with your forex lingo, how about showing her the different types of trade orders?
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