Basic Forex Principles Explained!

The Forex market is the largest market and is also the most liquid market. It has certain principles that you should follow. The thing is that getting started, or even pursuing a career in Forex trading isn’t easy. There are countless elements that you need to acquire knowledge of, because if you don’t, then the one thing that you will acquire is that of pure failure! All in all, to be able to trade successfully in the Forex market, you must consider the following aspects:

Significance of Forex Trends

Forex trends typically tend to provide investors and dealers with the most necessary aspect of trade, which is information. The high and lows of the market are precisely and accurately found from trend lines and thus, trends act as a present and future guide for investors. Trends help to calculate support and resistance levels that act as pivotal points for deciding purchase and sale times of currency. With the help of trend lines, investors can understand their entry and exit points in the Forex market. The most valuable information that the trend lines provide are the unwarned movements in the market depicted by their sharp turns in the pattern.

Different Types of Forex Trend lines

There are different forms of trend lines that are used in terms of carrying out a basic Forex market analysis. All the types always follow the basic trend guidelines that assume that a trend cannot be inferred from two points and the beginning and end of a trend line cannot be chosen upon ones convenience. A simple line drawn between the first data point and a last data point is not a trend. Now, there are three types of trends, simple line trends that can vertical, horizontal or diagonal. There are Fibonacci trend lines that have gained quite popularity nowadays, as they provide an excellent and clear way of understanding Forex market trends. Then there is the pivot trend line that are used to find out fluctuations of the market at previous time frames and last but not the least speed lines where calculations are made in thirds unlike the other three types.

Selecting Currencies

Forex trading currencies should be selected in pairs. Also, there is no such connection between the forex pair you select and the ‘base working currency’ (the currency to handle the forex account and make withdrawals and deposits). If you want to “buy USD”, for the simple fact that it is less than the EURO, and you have speculated that the USD will increase in the near future, then once the rate of the USD has attained the level of your anticipation, you can close the deal and get more EURO against the USD and hence, you earn a profit.

Amount selection

Although Forex trading deals in currencies, but there’s no physical cash transaction in the process. Rather, the Forex deal has a “volume”, which signifies the amount of currencies in the contract. You need to identify the volume of contract instead of purchasing the whole amount. Generally, most of the transactions are carried on common leverage and so you can deal 10,000 euro with much less amount.

Selecting the amount of risk

Risk is always involved with the amount you are investing, because it is the maximum you can lose. At a ratio of 1:100 leverage against 10,000 EURO, you actually put USD 100 at risk.

Stop loss rate in Forex Trading

This rate is the currency exchange rate at which the deal will close automatically when the market attains this rate. In this situation, you would lose USD 100 from your investment. The “stop loss rate” can be defined in a different way but the amount of risk will change accordingly. A direct relationship exists between the “margin” (the risked amount) and “stop loss rate”, which is required for the deal.

Freeze rate

In forex trading, after going through the rate of the deal, you might be all set to go ahead with it, but to be honest; you may need to take a few seconds to think. The freeze rate allows you to think for those few seconds, and allows you to either accept or decline the deal.

Accept

Once you are ready to accept the deal, it is activated. If you are ready with enough money for the  trade to get through, dive in. Now you are in an “open position” in the Forex trade.

These basic concepts and principles of Forex trading are going to help you a great deal once you get started. Just pay attention to them, and you’ll do just fine in the live market!

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