|International Currency Money for Forex Trading (Photo credit: epSos.de)|
Basically, forex trading is quite simple because it involves buying one currency with another. If a trader buys a currency with another and the exchange rates of the two currencies move in the favour of the trader, the forex trader can buy back the original currency at a profit.
Trading in the forex market is based on a bid/ask system. The difference between a seller’s asking price and the buyer’s bid is called a spread. The smallest increment in the exchange rate is known as a pip and is usually one one-hundredth of the US cent. Commissions are not charged by forex brokers. However, brokers mark-up spreads to 3-20 pips and keep it as their fee.
Forex trading is all about exchange rates. To monitor changes in currency exchange rates, traders need to analyse forex charts, which show trading activities within a certain timeframe. There are several types of forex charts but the most common are bar charts and candlestick. Traders should have proper understanding of these charts to spot trends and make smart trading decisions.
How to read a Forex Chart
- Locate a chart to analyse. Charts can be found online or in specific forex markets
- Find the range. Charts are a reflection of short and long term trading. Forex trade beginners can easily read charts with a range of at least a day but not more than one week.
- Identify the chart type. Bar charts have price ranges indicated with vertical bars while candlestick charts have vertical rectangles. Line graphs do not have bars or rectangles. Charts come in different forms and traders can switch to candlestick or bar charts for easy interpretation.
- Locate open and close prices on horizontal “pegs” in a bar chart and top and bottom of rectangles on a candlestick. When the open rate is lower than the close rate, the rate has an upwards trend and the opposite is true.
- Look at the chart as a whole. It will have groups of bars with different colors moving up or down indicating upward and downward trends respectively.
Common Mistakes in Forex Trading
Lack of knowledge
Forex trading is complex. There are many factors that affect currency markets including interest rates, inflation, elections, wars and money supply among others. These cause currencies in affected regions to swing up or down. Traders without knowledge of the countries whose currencies they trade in can make poor trade decisions.
Lack of discipline
One of the most important traits that forex traders should possess is money management skills. Traders with a plan on where to sell in case a trade is losing money can make higher profits.
Getting too complicated
Some people believe that the more complex an investment is, the more profitable it can be. This is not always the case with forex trading. Most traders who benefit from forex trading do the basics.
Some traders also believe they can make high returns every day. This makes them take huge risks in a bid to make more. Eventually, they lose all their money if they invested blindly.
With forex, traders can make huge profits on their investments but with the wrong decisions, they can also incur huge losses. Forex traders who learn the basics can avoid making blunders that will make them lose money.
If you want to learn more about Forex trading and want to understand those seemingly complicated currency charts, you can visit http://www.forexcharts.net/.