Fundamentals of Forex Trading
Investment markets instantly take money away from those hoping to make money quickly and easily. The success of trading in the investment market is highly dependent on the knowledge and practical experience of the trader. What is currency trading and is it right for you? The foreign exchange market, or forex (FX), is the world’s largest investment market. As of April 2010, the daily volume of transactions in the forex market reached $ 4 trillion, with an increase in the volume of transactions of 20% over the past 4 years.
By comparison, the New York Stock Exchange (NYSE) has a daily trading volume of “only” $ 25 billion. Until recently, only professional traders had the opportunity to trade in the investment markets, but the introduction of new trading platforms has radically changed the situation, as foreign exchange trading became available to private investors.
How the foreign exchange market works
The foreign exchange market is open for trading around the clock from Monday morning to Friday evening, as there are dealers in each time zone who buy and sell currencies during their business hours. There are 3 main trading sessions that provide round-the-clock operation: European, Asian and American.
During each of the sessions, the most popular are the currencies of the countries in which exchange trading is currently taking place. For example, the most volatile trading in currency pairs with the dollar occurs during the American session. The volume of one trade is measured in lots. Micro lot – 1000 currency units. If the account currency is US dollars, the micro lot is 1000 dollars. A mini lot is 10,000 units of currency, and a standard lot is 100,000 units.
Currency pairs and points
The trading instruments of the foreign exchange market are currency pairs. Unlike the stock market, where individual shares are bought and sold, operations with currency pairs are carried out on the foreign exchange market, that is, one currency is sold and another is bought at the same time. For example, if a trader buys a EUR / USD pair, he buys euros for dollars, if he sells, he buys dollars for euros.
Almost all currencies are quoted with an accuracy of 1/10000. Thus, the minimum currency movement is 1 point, or one ten-thousandth decimal place.
Beginners and private traders usually trade micro lots. A 1 pip move for a micro lot is only 10 cents, so traders can effectively control losses in case of unfortunate events. For a mini lot, the movement by 1 point is $ 1, for a standard lot – $ 10. The movement of some currencies can exceed 100 pips in one trading session, so small investors are able to effectively control losses only when using micro or mini lots.
Limited number of liquid trading instruments
Most of the trading volume of the foreign exchange market is accounted for by only 18 currency pairs, in contrast to the stock market with thousands of trading instruments. Most transactions are in 8 currencies: the American dollar (USD), the Canadian dollar (CAD), the euro (EUR), the British pound (GBP), the Swiss franc (CHF), the New Zealand dollar (NZD), the Australian dollar (AUD), and the Japanese yen (JPY). Forex trading is hard work, however the limited number of liquid trading instruments greatly simplifies the process of trading and portfolio management.
Nature price movement currencies
Pricing of trading instruments in the foreign exchange and stock markets has a similar nature, therefore, the popularity of the foreign exchange market among stock traders is constantly growing. The pricing of trading instruments in the foreign exchange market is based on the laws of supply and demand. If the demand for dollars rises, the dollar rises, and vice versa. Also, interest rates, new economic data, geopolitical situation and other events affect the value of currencies.
It is not difficult to learn the principles of foreign exchange trading, but finding profitable trading strategies takes practice. Most brokers provide their clients with access to free demo accounts, thanks to which novice traders can search for effective trading strategies at no cost.