Dear Reader,
This is the second day of our course and last time we talked about
the basics of what Forex is, but lets take some time on some of the
"whys" and the definitions of very common words used by traders.
The cool thing about brokers in Forex is that you don't have to pay
fees. There are no government fees, commissions, clearing fees,
exchange fees, etc that you would find in other markets that have
brokers (like stocks). The reason they can get away without having
to have fees is the bid-ask spread. There are no middlemen. Spot
currency trading eliminates the middlemen, and allows you to trade
directly with the market responsible for the pricing on a
particular currency pair.
If you ever traded futures, you have noticed that they have a "lot
sizes". All that really means is you're required to buy so much. If
you wanted to get in on silver futures, you'd have to buy 5000
ounces. That would eat up the savings and make it very hard for the
little guy to get involved. Doesn't work that way in Forex. You can
setup mini-accounts at brokers with as little as $250 and make
small trades.
Now that we've gone through a little more of the benefits, I wanted
to take the time and discuss terms that will be used by me in later
lessons of this course, but terms you will also hear from experts
in the field.
Base currency is the first currency you buy in a currency pair. For
example, CAD/USD rate, CAD is base currency.
Quote (or counter) currency is the second currency in a currency
pair. For example, CAD/USD rate, USD is quote currency.
Long Buy is buying the base currency and selling the quote currency.
Short Sell is selling the base currency and buying the quote
currency.
A bid is the price the dealer is willing to buy the base currency
in exchange of the quote currency.
The "ask" is the price the dealer is willing to sell the base
currency in exchange of the quote currency. The spread in this case
would be the difference between the bid and ask price.
Pips are the smallest decimal points in a currency. If the CAD/USD
is 1.0056, then 1 pip = 0.0001
Leverage is something a broker gives you that allow you to trade
more volume. If you put in $1000 and the leverage is 10x, you're
able to trade $10,000.
The margin call happens if the money in your account falls below a
specific level that your broker will make a margin call and sell
all your positions at a loss. To prevent his from happening you
should have a loss limit or only invest 10-20% of your balance.
Stop Loss is a function that allows you to set a limit of your
losses. If the market goes bad on you over the limit, your
positions will automatically be cancelled.
That's a lot of different terms to understand. Don't worry about
memorizing them and don't get discouraged. You'll figure them in
time.
I'd recommend you get a copy of Forex Autopilot because we will be
starting to use it tomorrow. You can always use the demo feature,
so you don't have to use real money while we learn this.
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