The best way to get started on the forex journey is to learn its language. Here are a few terms to get you started:
- Forex account: A forex account is used to make currency trades. Depending on the lot size, there can be three types of forex accounts:
- Micro forex accounts: Accounts that allow you to trade up to $1,000 worth of currencies in one lot.
- Mini forex accounts: Accounts that allow you to trade up to $10,000 worth of currencies in one lot.
- Standard forex accounts: Accounts that allow you to trade up to $100,000 worth of currencies in one lot.
- Ask: An ask (or offer) is the lowest price at which you are willing to buy a currency.
- Bid: A bid is the price at which you are willing to sell a currency.
- Contract for difference: A contract for difference (CFD) is a derivative that lets traders speculate on price movements for currencies without owning the underlying asset.
- Leverage: Leverage is using borrowed capital to multiply returns. The forex market is characterized by high leverages, and traders often use it to boost their positions.
Remember that the trading limit for each lot includes margin money used for leverage. This means the broker can provide you with capital in a predetermined ratio. For example, they may put up $50 for every $1 you put up for trading, meaning you will only need to use $10 from your funds to trade $500 in currency.
Basic Forex Trading Strategies
The most basic forms of forex trades are long and short trades. In a long trade, the trader is betting that the currency price will increase and that they can profit from it. A short trade consists of a bet that the currency pair’s price will decrease. Traders can also use trading strategies based on technical analysis, such as breakout and moving average, to fine-tune their approach to trading.
Depending on the duration and numbers for trading, trading strategies can be categorized into four further types:
- A scalp trade consists of cumulative positions held for seconds or minutes at most, and the profit amounts are restricted in terms of the number of pips.
- Day trades are short-term trades in which positions are held and liquidated on the same day. The duration of a day trade can be hours or minutes.
- In a swing trade, the trader holds the position for a period longer than a day, like days or weeks.
- In a position trade, the trader holds the currency for a long period, lasting as long as months or even years.
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