Trading in any investment market is very difficult as evidenced by the fact that most novice traders lose money. However with enough correct educational practice and experience success can be found. So what is currency trading and is it right for you?
The money market or foreign exchange (FX) is the largest investment market in the world and continues to grow every year with more than $4-5 trillion worth of notional transactions per day. 1 By comparison the daily trading volume of New York stocks is only $25 billion on the New York Stock Exchange (NYSE). The market may be large but Until recently trading volume came from professional traders but as currency trading platforms improve more and more retail traders are finding that Forex is suitable for their investment goals.
KEY TAKEAWAYS
- Forex exchanges allow 24/7 trading of currency pairs making it the largest and most liquid asset market in the world.
- Although it is the largest market in the world relatively few (about 20) currency pairs are responsible for most of the trading volume and activity.
- Currencies are traded against each other in pairs (e.g EUR/USD) and each pair is usually quoted in pips (percentage in pips) accurate to four decimal places.
- Currency prices fluctuate based on the economic conditions of countries involving factors such as geopolitical risk and instability as well as trade and financial flows.
Answered the top 5 questions about currency trading
How Does Currency Trading Work?
Currency trading is a 24-hour market that is only closed Friday night to Sunday night but the 24-hour trading hours are misleading. There are three trading sessions including the Eurasian session and the US session.
Although there is some overlap in trading sessions the major currencies in each market are mostly traded during these market sessions. This means that certain currency pairs will have more volume during certain sessions. Traders holding dollar-based currency pairs will find that the United States has the most volume. trading hours.
Pairs and Pips
All currency transactions are made in pairs. Unlike the stock market where you can buy and sell a single stock you have to buy one currency and sell another in the foreign exchange market. Almost all currencies that follow are priced to four decimal places. A point or a percentage point is the smallest increase in trade. One point is usually equal to 1/100 of 1%.
Currencies are traded in lots of various sizes. A micro lot is 1000 units of currency. If your account is funded in USD a micro lot represents $1000 of your base currency USD. A mini lot is 10,000 units of base currency and a standard lot is 100,000 units.
A pip (point percentage) is the smallest transaction increment. A point is usually equal to 1/100 of 1% or a number to the fourth decimal place. Most currencies are priced to the fourth or fifth decimal place. The exception to this rule is to include Japanese Yen (JPY) as Quote currency. The prices of these currency pairs are usually accurate to two or three decimal places and points are represented by two decimal places.
Retail or novice traders often trade currencies in micro lots as one point in a micro lot represents only a 10-cent change in price. This makes losses easier to manage if a trade does not produce the expected result. In a mini lot 1 pip equals 1 dollar and in a standard lot the same 1 pip Equal to $10. Some currencies fluctuate by as much as 100 pips or more in a single trading session making potential losses for small investors easier to control with micro or mini lot trading.
Far Fewer Products
Most currency trading volumes are limited to 18 currency pairs compared to thousands of stocks on the global stock market. The eight most frequently traded major currencies are the U.S dollar (USD) although there are other trading pairs beyond the 18 Canadian Dollar (CAD) Euro (EUR) Pound Sterling (GBP) Swiss Franc (CHF) New Zealand Dollar (NZD) Australian Dollar (AUD) and Japanese Yen (JPY). While no one would say currency trading is easy there are far fewer options for trading which makes trading and portfolio management easier.
What Moves Currencies?
More and more stock traders are taking an interest in the currency market because many of the forces that move the stock market also move the currency market. One of the biggest issues is supply and demand. When the world needs more dollars the value of the dollar increases and when the world needs more dollars Many circulating prices fell.
Other factors such as new economic data from the largest countries and geopolitical tensions are just some of the events that can affect currency prices.
Why is currency trading called Forex or Forex?
Forex is an acronym for foreign exchange and so is FX. These terms are common shorthand for currency transactions.
Who Invented Currency Trading?
Foreign currency exchange dates back to early human civilizations and the advent of trade routes and commerce. However modern foreign exchange trading actually started in 1973 when the gold standard of foreign exchange was abandoned in favor of free-floating currencies. 2How Are Currency Pairs Quoted?
Currencies are traded in pairs so in each transaction one currency is exchanged for the other at a given exchange rate determined by the market. These pairs look like EUR/USD = 1.08 This means that one euro can buy $1.08 The base currency appears first followed by the quote currency (or relative currency) second. In a direct quote the quote currency is the foreign currency while in an indirect quote the quote currency is the local currency.
The Bottom Line
Like anything in the investing market learning currency trading is easy but it takes a lot of practice to find a successful trading strategy. Most forex brokers will allow you to open a free virtual account that allows you to trade with virtual currencies until you find a strategy that works You become a successful Forex trader.
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