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Introduction to forex
What is Forex?
Forex is the buying and selling of one currency against another. Currencies are traded in pairs; for example, EUR/USD.
The first currency of the pair is the base currency and the second one is the counter currency. So, for EUR/USD the base currency is EUR and the counter currency is USD.
Remember that you always buy or sell the base currency over the counter one.
The base currency has always the value of 1, whereas the counter currency changes in value over time.
Base vs. Counter Currency
Let’s assume that the current market price of 1 euro is equal to 1.3568 dollars, meaning that 1 euro gives you 1.3568 dollars if you wish to exchange your money.
In the instance that the value of the euro to the dollar changes from 1.3568 to 1.3700, then you get more dollars. In other words, the euro has strengthened against the dollar, and alternatively the dollar has weakened against the euro.
On the other hand though, if the euro to the dollar changes from 1.3700 to 1.3650, the euro has devaluated against the dollar or the dollar has strengthened against the euro.
Some other currency pairs
In the forex market currencies are divided into three categories: major, minor and exotic. The major currencies are very liquid and highly volatile, such as the euro and U.S. dollar. Minor currencies, such as the Australian dollar and New Zealand dollar, are traded with the major ones; for example, EUR/AUD and NZD/USD. In contrast, exotic currencies are less liquid and do not have market depth, such as the Hong Kong dollar, Mexican peso and Norwegian krone. There are many exotic currency pairs, including USD/HKD, EUR/NOK and GBP/DKK.
Trading strategies should be kept as simple as possible. The majority of traders have the false expectation of becoming rich within a limited time.
If you are consistent with your strategy you can increase your probabilities of succeeding, especially in the long run, otherwise you will gamble and lose.
Therefore, traders’ possess two different mindsets, the short-term mentality and the long-term one.
The majority of traders have a short-term mindset, whereas the minority has a long-term mindset. Investors who trade based on longer time frames generally increase their probabilities for success.
Pitfalls Traders Fall Into
There are many pitfalls traders fall into when trading the markets; pitfalls that require a lot of patience and time to overcome.
The very first pitfall has to do with leverage. When used wisely it can maximize your probabilities for greater profits. The majority of traders though overdo it with leverage, risking too much with a small account balance.
The next pitfall involves the number of trades running simultaneously. Wrong multiple positions can bring devastating results for one's account balance.
Another downside is that many traders aim to identify the so-called trend reversals. The trend reversal methodology is mostly implemented by professional traders and not by beginners.
A further drawback is that traders have the false expectation they can beat the market day in and day out by purchasing a ready-made system.
Moreover, most beginners have the false expectation that they will become rich in no time. Traders can indeed make huge profits, but it requires hard work, time, and above all patience.
Beginners are also unwilling to accept that losses can take place and they fail to set targets, such as placing a stop loss on every trade, to minimize losses.
Last but not least, the most important pitfall of all is not having the right psychology. It is the number one and most crucial factor. Beginners usually lack focus and suffer losses in their attempts to recover adverse trades.