Important Things to Know When Trading in Forex
Forex trading refers to the buying and selling of currencies against other currencies. Forex traders aim to benefit from changes in the exchange rates of one currency against the other and they track changes in the relative strengths of various currencies over time. For instance, they speculate on whether the value of the Japanese Yen will increase or decrease vis-à-vis that of the US Dollar.
The global forex trading market is worth more than 5 trillion dollars daily, with traders located in different parts of the world contributing to it. As a matter of fact, not only is this market highly liquid and volatile but it also has more trades than any other market. Retail forex traders have plenty of opportunities to earn money from the many trading opportunities that arise as a result of global political and financial events. There will always be good trades available irrespective of whether the market is rising or falling since traders can just go short in a falling market and go long in a rising market. Finally, forex trading can be done at any time of the day or night because financial markets are open at some part of the world at any given time.
Why Investors Prefer Leveraged Forex Trading?
Leveraged forex trading offers multiple advantages starting with the fact that traders can control a large position without having to put in a great deal of money. Furthermore, they find that dealing costs stay attractively low because of tight spreads. However, this can also result in massive losses if trades don’t go as envisioned.
How Exactly Does One Trade in Forex?
Forex values are always quoted in pairs since it compares one currency against another one. If one is trading Euros against US Dollars then the first currency is called the base and the second one the quote. Traders will have to assess whether the base will go up or down against the quote. In fact, traders can also speculate on the direction that the market will take in the future. They can take a long position (buying) if they believe that the currency will increase in value or take a short position (selling) in case they believe it will decrease. In other words, movements in forex prices are caused by appreciation or depreciation in a currency’s value.
If the current price of EUR/USD is 1.11 it means that 1 euro is equal to 1.11 dollars. In case this number becomes 1.18 then it means that the Euro has strengthened vis-à-vis the Dollar. In case the number drop to say 1.08 then it means that the UD Dollar is strengthening against the Euro.
There are a great many currency pairs to choose from and they are categorised into three groups based upon their popularity. Major currency pairs include USD/JPY, USD/EUR, and AUD/USD. Minor currency pairs include EUR/JPY, AUD/NZD, and EUR/SEK. Minor currency pairs aren’t traded very heavily but they are extremely volatile. Finally, there is the Exotics category that includes rarely traded currency pairs such as EUR/SGD, USD/MXN, and EUR/TRY. These pairs have wider spreads and are rather illiquid.
When to Buy and Sell?
Traders would purchase a currency pair in case they estimate that the base currency will strengthen against the quote or that the quote will weaken against it. They will then profit from every pip (point) that the Euro rises in value against the Dollar. However, if the value goes the other way then the trade will result in a loss. Selling happens in the same way.
Caution is Key When Doing Trading in Forex
Overall, forex trading is a very good way to earn money as long as one understands the market properly and doesn’t take unnecessary risks.