Forex, also known as FX, foreign exchange or currency trading, is the world’s largest exchange market, trading an average of $5 trillion every day. It’s a global market where the world’s currencies are traded, and it doesn’t have a single administrative center; FX acts as a decentralized global market. The forex market is the most liquid, and one of the largest market in the world. It does trading over the counter and doesn’t have a central exchange. The trading is similar to stock trading, except that you can trade all day long, five days a week, have access to marginal trading, and you gain exposure to international markets as well.
How to trade in forex?
For instance, imagine a situation where the value of the U.S. dollar is expected to weaken in value, relative to the euro. Being a forex trader, you should sell all the dollars, and buy euros before the above scenario begins. The reverse is also possible. This scenario is similar to stock trading, where traders will buy a stock if they think its price will raise in the future/sell it if the price falls.
Know about exchange rates
The FX market is a global decentralized market, where the relative values of different currencies are determined. Unlike other markets, there’s no centralized exchange or depository, where transactions are to be done. The exchange rate between two currencies will vary based on the country’s economy, and in forex, the exchange rate between two currencies will constantly change.
Just like stocks, bonds, and many other goods, currencies are also traded on an open market. When there’s a fluctuation in the supply and demand, the value of the currency also fluctuates. The value may rise or fall due to:
- An increase in supply/decrease in demand will result in the value of currency to fall.
- A decrease in supply/increase in demand will result in the value of currency to rise.
A great advantage of forex trading is, you can buy or sell any required currency pair at any time, subject to the available liquidity.
What are the elements of forex trading?
Read Quotes – One currency is always compared to the other, and so forex is always quoted in pairs. For instance, EUR/USD at 1.5027 denotes the value of one euro (EUR) for every single U.S. dollar (USD).
What’s a Lot? – The smallest or the minimum allowed trade size is called a lot. An FX account holder has the freedom to place trades of different sizes, as long as they are increments of 1000 units. The standard lot size of a currency is 1000 units.
Pip – A pip is a unit for counting the profit/loss. Most of the currency pairs, except the Japanese yen pairs, are quoted to 4 decimal places. To count “pips,” you need to watch the last decimal point. Every point movement in the quote is calculated as one pip movement.
Margin/Leverage – All the trades in the FX are executed using borrowed money; you can take advantage of the leverage. A leverage of 50:1 will allow you to trade with just $1000 in the market, and you can set aside $20 as a security deposit. You can simply take advantage of even the tiniest movements in between the currencies. Leverages can significantly increase your losses too.
Why trade in forex?
In the past decade, online forex trading has turned very popular. Some of the reasons for its increased popularity are:
- Forex never sleeps. Since different countries are in different time zones, you can trade 24 hours per day, five days a week.
- There’s no “bear market” in forex – you can make/lose money all the time. You can simply buy/sell based on your predictions of the market.
- Low on trading cost. Forex markets standard accounts are made up of low commissions, and super-tight spreads.
- Gives rise to international investments and gives a good exposure.
It’s essential that you get a basic knowledge of forex trading before starting your own trading account.