Currency Trading for Dummies
By: Anne Durrell
Here is a quick lesson in currency trading for dummies.
Currency Trading for Dummies Lesson One
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The object of currency trading is to exchange the currency of one country for that of another. When the price of your original currency changes, you exchange those funds back again to your original currency. The difference between what you paid to make the first trade and what you received in the second trade is your profit.
Currency Trading for Dummies Lesson Two
The forex market can be very volatile. This means the market can change the values of a particular currency quickly either up or down. The potential for making quick profits in just a few minutes is very real, but so is the potential for making a loss. It’s important to take some time using a trial account or a demo account to understand how and when to set a ‘stop loss’ point and a ‘sell trade’ point.
This means you simply buy the currency you want to trade, but at the same time, you set a lower price that tells your trading account how far you’re willing to let the value fall before you sell out and cut your losses. You also set a higher price that tells your trading account when to sell out and realize your profits.
These simple actions can help you to automate some aspects of your currency trading strategy.
Currency Trading for Dummies Lesson Three
Understanding the pricing for currency trading can be a little tricky if you haven’t seen how it works before. When you look at a currency exchange site, you’ll notice that you’re not just dealing with one currency. You’re dealing with pairs of currencies at any time.
Assuming you want to trade US Dollars for British pounds, the abbreviations for those currencies will look like this:
USD/GBP
When you want to trade your currency back again, the trade will be reversed and the pricing will appear reversed as well. Your closing trade should look like this:
GBP/USD
Currency Trading for Dummies Lesson Four
You might notice that on a foreign currency exchange site, the pricing shows only the value of a particular currency. If the US dollar is worth $1, then the British pound would be worth 0.629325 cents for each dollar you spend.
USD/GBP = 1/0.629325
However, in reverse, one British pound is worth $1.58901 US dollars.
GBP/USD = 1/1.58901
Because the base price is always 1, the pricing spreads are therefore quoted as usually the last three numbers of the currency you’re buying, which is displayed as the second currency in the pair.
This basic Currency Trading for Dummies lesson is just a primer to get you started. Always take some time to understand how the market works and how you can use the tools available in most good trading platforms to help you determine when to place trades.
You may want to check out my other guide on stock trading companies and forex option trading
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