So on the last day of March, we started talking about trading forex. As we mentioned, it is not as easy as opening an account and making money in an instant! So in today’s post, we will take a more in-depth look at how transactions work on the foreign exchange (FX) and how to set up your first forex account. Remember trading forex can be a risky business, so don’t trade with the money that is meant to pay for this month’s groceries. Also, it will take some time to get into the game, so be patient!
Getting Familiar With Forex Transactions
Just to refresh your memory, when trading forex you work with currency pairs. There are the base currency and the quote and it will always display in the form of BASE/QUOTE. Or if you work with real currency, GBP/USD. You will either be buying or selling (going short) the base currency in terms of the quote.
That is the basic premise of trading forex. You play one currency against another one in the hope of making money from it. But still playing around with foreign currency can be a daunting prospect! Many of you may be fearful to enter the FX market because you feel that you do not understand it well enough. Moreover, you think that you do not have the capital to enter this market. Still, others may think that it is akin to gambling and far too risky a way to spend their money. But fear not! We are going to dispel all the myths surrounding the world of forex trading in today’s blog post. However, keep in mind that trading forex is not for everyone and that it does indeed carry an element of risk.
But let us not despair! Keep on reading to find out about trading accounts, brokers and how to start earning money by trading forex!
Clarifying the Unclear
When you first enter the world of forex trading, all of the names and numbers can be confusing. Even some of the concepts are quite unclear for beginners! So before we can continue with our guide to trading forex, we need to clear the air. Here are some of the most common questions relating to FX trading and our answer to those questions:
Do I need physical money of the currency pairs I want to trade?
One of the most common misconceptions about the foreign exchange is the ownership issue. It goes something like this:
“Dear Broker, do I need US Dollars and British Pounds if I want to trade that currency pair?”
A lot of people ask whether they must physically own currencies if they want to trade forex. And even though it may sound like a dumb question, it isn’t. How would someone that knows nothing about trading forex know whether they must own the currencies they want to trade in or not? And some of you that are reading this blog post right now might not even know the answer to that question.
But to set your heart at ease, the answer is: No, you don’t need to own physical currency to be able to trade that currency pair. All you need is a trading account with some credit in it. With that, you can place a buy or sell order on any currency pair you feel like. Basically, if you place a buy order on a currency pair you are betting that the base currency will rise against the quote. And vice versa if you place a selling order.
If you do not buy and sell actual currency, what do you buy or sell?
This is the logical follow-up question to the previous one. So how does it work?
When you are trading forex, you place a bid with units and not with actual currency. In other words, you won’t say that you want to buy $1.00’s worth of Euro. You will rather say that you place 10,000 units of currency on the USD. So if your base currency looks like this: EUR/USD 1.1132 and you place 10,000 units on the USD it means that you are going short or placing a sell order. (Remember, if you say the quote is going up, it means that the base is going down so you go short on the base). And to do this you will place a selling order on the currency pair.
But to get units of currency you will have to deposit actual money into your trading account. And with that money, depending on how much it is, you can place different sized orders on different currency pairs.
Your next question is probably: “How do I start a trading account?”, are we right? All in good time folks, we just need to clarify one last important matter. And that is the matter of the pip…
What is a Price Interest Point or pip?
So far so good? Now let’s move on to how you can actually see how your trade is faring. In terms of trading forex, the unit by which your base goes up or down is known as a pip (price interest point). As a rule, currency pairs are depicted as a number with four decimals, like so: 1.1232. When your currency pair is shown like this, a pip is worth 0.0001. So if your base currency goes up by a pip, it will increase to 1.1233 from 1.1232. Does this make sense to you?
It might be worth noting that the Japanese Yen only goes to two decimal places, e.g. 100.01.
With each currency pair, a pip will have a slightly different value, based on the currencies you are trading with. There are different pip value calculators out there, but for our purposes, we will look at USD based currency pairs. Simply because a lot of the major currency pairs involves the US Dollar.
Trade (or lot) size
Pip value is directly related to the lot size of your trade. This may sound confusing right now, but hopefully, it will all make sense in a minute or two. There are three types of “trade sizes” namely the;
- Micro lot
- Mini lot
- Standard lot
With each of these lot sizes, your pip will have a different value. So with USD based currency pairs the pip value for the different lot sizes are as follows:
- Micro lot – 1 pip is worth $0.10 USD and is depicted as 0.01 by volume or 1000 units of currency.
- Mini lot – 1 pip is worth $1.00 USD and is depicted as 0.1 by volume or 10,000 units of currency.
- Standard lot – 1 pip is worth $10.00 USD and is depicted as 1.00 by volume or 100,000 units of currency.
Other currency pairs will have similar pip values, ranging from $0.65 USD to $1.45 per pip in a mini lot. And here we dispel the first myth, ladies and gentlemen. You do not need to be a millionaire to trade forex because you can start up a micro account with as little as $100.00 (Roughly R1450.00). With this account, you will only be able to trade with micro lots, but it is a start…
You can also start a mini account or a standard account. But for those you will need capital in accordance with the pip values associated with each lot size.
How to Start Your Forex Trading Account
At last, we come to the meat of today’s blog post! How to start up your own trading account. That is probably what all of you have been waiting for, isn’t it? Your patience will be rewarded because we will take you through a step by step process of how to start your demo account. And as a bonus, we will tell you how the trading interface works.
If you want to give this trading forex business a go, click here. Otherwise, open a new tab in your browser and go to the SA Shares homepage. Now right at the top of the page, about two thirds to the right, you will find a tab that reads “Learn to Trade Forex” as per the screenshot below.
If you click on the How to Trade Forex tab, your browser will navigate to a page that looks like this:
Fill in your name, surname, mobile number and email address on this page. Then tick the platform that you prefer i.e. if you work on a Windows computer, tick the MT 5 for Windows box. If you use an iPhone, tick the MT5 for iPhone box and so on. Once you’ve ticked the appropriate box and filled out your details, click on the “GET INSTALLATION LINKS” button.
If you work on a Windows platform, the installation link will download immediately and you will receive an email to explain the installation process. It will look something like this:
After installing the QuickTrade MT5 platform, you can start trading on your demo account!
Demo Trading Account
Your demo account will have R10,000’s worth of fake money in it. With this money, you can start placing buy or sell orders on various currency pairs. When you start out, try to trade in major currency pairs first to see if you understand what’s going on. Once you open QuickTrader, this is what you will see:
The main feature in the QuickTrade interface is the graphs depicting how certain currency pairs are faring. On the top left, you can double click on a currency pair to initiate a transaction.
If you double click on, let’s say the EUR/USD currency pair, you will get a window that looks like this:
Take note of the Volume bar. This is where you can set the volume of your order. Remember the micro-, mini-, and standard lots? Here is where the lot sizes come into play. Your order volume is the number of currency units that you wish to bid on your order. In this case, 0.10 volume means that for every pip that changes, you either make or lose $1.00 USD, depending on the type of order that you placed.
You will also note that there is a difference in the bid and ask price (look at the maroon arrows). This is where the broker makes money. The technical term for the difference between the bid and ask price is “spread”. For every transaction that you make, the broker takes the difference between the bid and ask price. Don’t stress about it as it is common practice among brokers. And hey, they also need to make a living!
Now You Are Ready to Trade!
You now have the basic knowledge that you need to start trading forex! Play around with your demo account for a while. There is a lot of free knowledge that you can find on the QuickTrader platform, so educate yourself and make sure that you keep on earning fake money before you start to trade with real money. Once you are ready to trade with real money, contact us so that we can get you set up and ready to make money! If you have any questions regarding how to trade forex, don’t hesitate to ask! We are here to help.
PS. Once you get into trading forex, you’ll start hearing terms like “Cable” and “Loonie” being thrown around. These are nicknames for some major currency pairs. Here is a list of well-known nicknames, just to make you more comfortable with the FX world:
- Australian Dollar/US Dollar (AUD/USD) – Aussie
- Euro/Swiss Franc (EUR?CHF) – Swissy
- Euro/US Dollar (EUR/USD) – Fiber
- Euro/Great British Pound (EUR/GBP) – Chunnel
- Euro/Japanese Yen (EUR/JPY) – Yuppy
- Canadian Dollar (CAD) – Loonie
- Great British Pound/Japanese Yen (GBP/JPY) – Guppy
- New Zealand Dollar/US Dollar (NZD/USD) – Kiwi or The Bird
- US Dollar/Canadian Dollar (USD/CAD) – Loonie and The Funds
- US Dollar/Japanese Yen (USD/JPY) – Gopher