It can be so frustrating when all you want is to make money trading currencies when you don’t understand how currency pairs work.
I personally didn’t know so many things about currency trading when I started, and I can tell you that for sure, it was so frustrating.
But why must you know a thing or two about currencies before you start trading on a real account in Olymp Trade?
The answer is plain and simple.
If you don’t make it a point to learn all you can, you will just be throwing your money down the drain when/if you decide to go live.
That’s because you won’t know what to do with which currency pair to make profits.
Did you just begin trading currencies in the recent past and are finding it difficult to trade?
Then here is a post to demystify everything about Forex or Currency trading for you.
It is a beginner’s guide to currency trading, and so I have made it as simple to understand as possible.
Feel free to ask questions in the comment section if you don’t understand anything.
What is Currency Trading?
Currency trading, also known as Forex trading, is the act of trading one currency for another.
The currency market is traded over the counter and is connected electronically between banks, brokers and traders.
That way, it is accessible to all those parties who profit from changes in exchange values between currencies.
The major players in the currency market are banks, which are the market makers, then other financial institutions followed by individual traders.
The currency market is the most liquid in the world, meaning it’s actually the largest market.
And guess what, over five trillion US dollars are traded daily.
What that means is that there is a share for everyone who decides to trade.
If you know what you are doing and how to do it, you cannot leave empty-handed.
The currency market is open 24/5.
This means that the market is open on weekdays and closed during weekends.
You can therefore trade currencies online anytime from Monday to Friday and walk away with enough profits for the week, as you anticipate more the next week.
How Currencies are traded.
Currencies are traded in pairs called currency pairs.
We mentioned that currency trading involves trading one currency for another, and here is the true application of that, when currencies get traded in pairs.
For example, EUR/USD is a currency pair which represents exchanging the Euro for the US Dollar.
AUD/USD, similarly, means that you are exchanging the Australian Dollar for the US Dollar.
That goes on for any other currency pair, meaning any currency pair you see represents exchanging one currency for the other.
Here are the major currency pairs traded in the currency market:
How to Read the Prices.
So how do you read the prices of currency pairs?
Like for example, you might have seen something like this:
- GBP/USD at 1.1821
- USD/JPY at 112.34
If GBP/USD reads 1.1821, it means that 1 Euro is worth 1.1821 US Dollars.
Similarly, if USD/JPY reads 112.34, it means that 1 US Dollar is worth 112.34 Japanese Yen.
That goes on for any other currency, where the price means that one value of the base currency is worth the indicated price value of the other currency in the pair.
You must have heard about the Pip, right?
But what exactly is a Pip in currency trading?
Pip is the short form for Price Interest Point, and such is the smallest value increase of a currency pair.
You can actually read the pip value by observing the price of a currency pair.
For most currency pairs, the pip value is represented in the 4th decimal place of their price.
This exempts currency pairs with the Japanese Yen in them, whose pip value is represented in the 2nd decimal place of their price.
For instance, if GBP/USD now reads 1.1821 and an hour later reads 1.1827, it has increased by 6 pips during that period.
The increase in price is the difference between the current price (1.1827) and the earlier price 1.1821.
Similarly, if USD/JPY now reads 112.34 and an hour later reads 112.39, it has increased by 5 pips during that period.
What if GBP/USD which was reading 1.1821 now reads 1.1842?
How many pips has it gained?
21 pips of course.
What about USD/JPY which was reading 112.34, but now reads 112.22?
How many pips has it lost? 12 pips it is.
The term spread is commonly used in currency trading.
Spread is the difference between the Bid and Ask.
But what are Bid and Ask?
If you have keenly observed the price chart, you must have seen two lines accompanying each other as the price proceeds.
One upper line reads a higher value of the price while the lower line reads a lower value of the price.
The higher line is the Ask while the lower line is the Bid.
This is it in brief.
A bid is a Price you can sell the currency pair right now, while Ask is the price you can buy the currency pair right away.
Now, the spread is the difference in value between those two lines or values.
Spread is actually what your broker gains from you when you place a trade.
Types of Orders in currency trading.
On the order ticket, there are different types of orders you can choose from, because not all of you want a market execution every other time.
Here are the various order types:
- Market Order – it means you want to enter the market right away at the current price.
- Limit Order – it means you want to enter the market when it comes to your desired level before reversing in the opposite direction.
You set a buy limit order to enter a trade if the market trades low enough to a desired low level before reversing upwards.
Conversely, you set a sell limit order to enter a trade if the market trades high enough to a desired high level before reversing downwards.
- Stop Order – it means you want to enter the market when it comes to a desired level before continuing in that direction, the complete opposite of a limit order.
You set a buy stop order to enter a trade when the market trades high enough to a desired high level before rallying upwards.
Conversely, you set a sell stop order to enter a trade when the market trades low enough to a desired low level before rallying downwards.
- Stop Loss Order – it means you want to exit the market when it goes against you.
A Stop-loss order protects you from blowing up your account because you risk only a small part of your account.
- Take Profit Order – it means you want to exit the market at a desired level when it goes in your favor.
It helps you take the accumulated profit and protects you from the market going against you before you can gain.
Currency Trading Sessions.
Currencies are traded in sessions called Forex sessions.
Each Forex session is open for 8 to 9 hours every day and has a pool of currency pairs related to it.
During the time when a certain Forex session is open, the currency pairs related to it have the highest volatility.
High volatility presents so many profitable trading opportunities.
It is when the market moves significantly that traders profit markedly.
Here are major Forex sessions and when they are open:
- Sydney – 21:00 to 06:00 GMT.
- Tokyo – 23:00 to 08:00 GMT.
- London – 07:00 to 16:00 GMT.
- New York – 12:00 to 21:00 GMT.
The London session is the most volatile, followed by the New York session, then the Asian session.
You should therefore anticipate trading when the London and New York sessions are open.
Ensure you trade currency pairs related to the sessions.