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8 Forex Trading Term Definitions
Brokers are the institutions that facilitate
trades for the individual investor. There are many brokers
out there, so it is important to do lots of due diligence before
choosing a forex broker. Companies that are registered with
the Commodity Futures Trading Commission are a good place to
start.
Demo
Accounts are pretend accounts offered by forex brokerages
for a limited time prior to opening a real account. The beginning
investor is encouraged to take advantage of this opportunity
to learn the ropes of forex trading, while also learning how
to use the software and research tools of that particular broker.
These accounts are typically good for 30 days, and simulate
the trading of currencies on the forex market by using real-world
data. The balance is continually tracked by the software to
give the trader an idea of how he is performing.
Fundamental
Analysis is a method by which traders use economic,
political, and other data to make informed decisions about
when to buy and sell currencies. This system of analysis differs
from technical analysis in that it attempts to study outside
influence on the forex market, rather than just price action
and patterns.
Hedging is the act of insuring against losses while trading
in the forex market, using a variety of methods including options
and futures contracts. By paying a small fee for one of these
two derivatives, forex traders can negate any losses incurred
by a fluctuation in the exchange rate. The derivative is typically
purchased on the opposite denomination, with the denomination
that was bought in the original investment.
Spread is the difference between the asking price and the
selling price of a currency at a given moment. It is with this
differential that currency brokers make money, so choosing
a brokerage with a tight spread helps the trader to maximize
his gains by keeping his money from winding up as the broker’s
profit.
Technical
Analysis is a process by which forex traders use
past and present price behavior to try and project into the
future to figure out where the price of a currency will go.
There are many different ways of calculating technical analysis
indicators, but they are all based on the idea that there are
patterns in the price movements of trading instruments that
are due to group psychology, which has changed little over
time. By performing certain calculations on recent prices,
traders hope to recognize patterns as they are unfolding so
they can capitalize on the predicted price movements. Indicators
include: Bollinger Bands, Moving Average Convergence / Divergence,
Relative Strength Index, and many others.
Triggers are signals to the trader that it is a good time
to either buy or sell. There are many different types of triggers
that are derived from technical analysis tools, but most involve
plotting lines on price charts by using some combination of
moving averages. The interaction between the different lines,
such as when they cross, sometimes indicates whether it is
a good time to make a currency trade.
Yield
Spread is the difference between the primary interest
rates of two countries. This information is important when
trading on the forex market because interest rates greatly
influence currency prices. When there is a large differential
between interest rates, money often flows from the country
with the lower rate to the country with the higher rate, increasing
demand for that country’s currency and raising its price relative
to the other currency. By paying attention to the yield spread
between two countries, one can get a pretty good idea of what
is going on in the forex market with that currency pair.
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