Forex Basics – Watch this Before You Start Trading!

In this latest section of our How toTrade Forex course we're gonna start looking at currency pairs.

What theyactually are and how traders try and profit.

Hello I'm David Jones fromcapital.

com and this is the next step in our complete course on how to tradeForex.

So we now, today, are going to look at some ofthe.

.

some of the basics, some of the real basics.

What is a foreign exchange pair?What does it mean? What are the price movements? How do we talk about pricemovements and at a really basic level: how do traders try and profit.

So nowwe're just really setting the scene for what the foreign exchange markets areall about.

So let's get started.

Let's take a look at what some typicalcurrency quotes look like so we've got four here.

Pound US dollar – 1.

3200.

Euro US dollar 1.

1400 Euro pound, eurosterling – 0.

8800.

And dollar Japanese yen 110.

00.

What does this actually mean? Let's go back to pound US dollar.

So 1.

32 – this means that one pound would buy 1.

32 USdollars.

And of course we can work our way down at the time of recording, EURUSD was 1.

14.

One euro would buy a dollar and fourteen cents.

Euro sterling: so the euro was worth 0.

88 of one pound.

So eighty eight pence.

And finally thisone here – dollar Japanese yen 110.

One dollar would buy a hundred and ten Japanese yen.

And of course these.

.

these rates will fluctuate throughout the trading day andcurrencies are a 24 hour market.

Let's take a look at price changes.

So ifyou've heard price changes talked about in currency markets, you've probablyheard “the market moved 100 points” or “100 pips”.

So they're prettyinterchangeable, this terminology.

Let's walk through and see what we mean so.

Let's take pound US dollar.

Starts the day at 1.

32.

So one point three two zero zerois how it's usually quoted.

So a pound is worth a dollarand 32 cents.

By the end of the day the exchange rate has traded up to 1.

3300.

So now a pound is worth a dollar and 33 cents.

So theexchange rate change is a rise of 0.

01.

And I've got that number clearly by taking away where it endedtoday – 1.

33, taking away from where it started the day 1.

32.

Sowe've seen a change of 0.

0100 But in forex terminology that'sa hundred point move , okay.

So it is of course a 0.

0100 move, but when we're talking about foreign exchange, we look at how many decimal places it's quoted to.

The pound US dollar is quoted to four decimal placestraditionally.

So this move here is a hundred point move.

Let's take a look atone more.

Dollar yen (USDJPY) starts the day at 110.

So one dollar buys you 110 Japanese yen.

Finishes the day at 109.

50.

So thedollar has dropped against the yen.

The change in this example from 110 to 109.

50 is 0.

50.

But again in currency trading terminology we callthat a 50 point or 50 pip move because dollar yen (USDJPY) is quoted to two decimal places.

0.

50 is referred to as afifty point move.

And let's take a look how the traders profit from this.

Well ifour trader buys ten thousand pounds when GBPUSD is 1.

32, a trader isspeculating that the pound will go up.

But at the same time the dollar willfall against the pound.

So when we're buying, it's the first quoted currency we're speculating is going to rise.

If we're buying pound u.

s.

dollar (GBPUSD), we thinkthe pound is going to rise and the US dollar is gonna fall.

So if the trade ends up being closed above 1.

32 – there's gonna be a profit.

Because we bought at 1.

32.

If we close this trade GBPUSD below 1.

32 -there will be a loss.

Margin trading using leverage means the trader only hasto initially deposit – for this example of 10, 000 pounds – GBPUSD, around 333pounds to open this trades.

But this makes a lot more sense if I show you onthe platform, so let's jump on the trading platform.

So here's the tradingplatform at capital.

com.

I've set up an order ticket here, just to walk throughthe numbers we just looked at.

So in terms of size 10, 000 pounds (that's thesize of this trade I'm setting up), so to do that trade, the margin required is 334pounds.

So I could have a 10, 000 pound position and only tie up 334 pounds.

Inthis example we will talk about margin and leverage (and) the risks and the rewardsin a later video in this course.

So what I've put in here, buy when the price is1.

32 and then, just to scroll down, close when the price hits 1.

33.

So you can seeit shows my profit if I bought at 1.

32 10, 000 pound US dollar (GBPUSD) and closed whenthe price is at 1.

33.

In this example a hundred point move in my favour for10, 000 GBPUSD would deliver a profit of 76 pounds.

So you can see it down there.

And of course the other way of looking at it – if I bought at 1.

32 and came out ahundred points lower – then I'd lose 76 pounds.

Okay, so it gives us an idea ofour potential risk and our reward and for this trade we tie up 334 pounds tocontrol that 10, 000 pound position.

So that's how currency traders will try andprofit from the moves and how you can in thevarious markets that we're going to look at during this course.

So we've looked athow foreign exchange pairs are made up and how we classify the movements andhow traders will try and profit.

You know it is possible to have significantprofits during the day and of course the risk of significant losses because ofthis leverage factor – trading on margin.

We will talk about that in a fewepisodes time.

The risks and the rewards and how to manage it.

Next time aroundwe're going to take a look at the events that actually move foreign exchangemarkets, whether it's news, news announcements, government numbers, market sentiment surprises.

All of this sort of stuff.

So we look at what we need to bewatching when we're trading foreign exchange.

We'll start wrapping up thislesson just here but first of all before we finish off don't forget tonever miss out on any of the content when we load up new lessons just makesure you are subscribed by clicking on the subscribe button and the alarm bellnotification thing.

If you click on that you get a push off YouTube wheneverwe've put up new content.

To follow along when I'm using the trading platform, we're going to be using the trading platform a whole lot more when we startlooking at technical analysis and trading techniques.

So if you don't havean account with us you can open an account by either going to capital.

comand opening an account online or if you download the capital.

com app fromwherever you get your apps from.

You can open an account through that but forthis next step into the world of trading Forex we'll wrap things up there.

So untilnext time from me David Jones and capital.

com – good luck with your trading!.