Fundamentals of currency trading and how it works

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Trading in any investment market is very difficult, as evidenced by the fact that most novice traders lose money. However, success can be found with enough proper education, practice and experience. So what is currency trading and is it right for you?

The currency market, or forex (FX), is the largest investment market in the world and continues to grow each year. In April 2010, the forex market reached $ 4 trillion in average daily turnover, an increase of 20% since 2007.

By comparison, there is only $ 25 billion in daily volume on the New York Stock Exchange (NYSE). The market may be large, but until recently the volume came from professional traders, but as currency trading platforms have improved, more retail traders have found the forex suitable for their purposes. investment.

Key points to remember

  • Forex exchanges allow 24/7 currency pair trading, making it the largest and most liquid asset market in the world.
  • Although it is the largest market in the world, a relatively small number (around 20) of currency pairs are responsible for the majority of the volume and activity.
  • Currencies are traded against each other as pairs (e.g. EUR / USD) and each pair is usually quoted in pips (percentage points) up to four decimal places.
  • Currency prices fluctuate depending on the economic situation of the countries concerned, geopolitical risk and instability, and trade and financial flows, among other factors.

How it works?

Currency trading is a 24 hour market that is only closed from Friday evening to Sunday evening, but 24 hour trading sessions are deceptive. There are three sessions which include European, Asian and American trading sessions.

While there is some overlap in sessions, the major currencies in each market are traded primarily during these market hours. This means that some currency pairs will have more volume during certain sessions. Traders who stick with dollar-based pairs will find the most volume during the US trading session.

Answers to Top 5 Currency Trading Questions

Pairs and pips

All currency trading is done in pairs. Unlike the stock market, where you can buy or sell a single stock, you have to buy one currency and sell another currency in the forex market. Then almost all currencies are quoted to the fourth decimal place. A pip or a percentage point is the smallest increment in the trade. One pip is usually equal to 1/100 of 1%.

Currency is traded in lots of different sizes. The micro-lot is 1,000 units of a currency. If your account is funded in US dollars, a micro lot represents $ 1,000 of your base currency, the dollar. A mini lot is 10,000 units of your base currency and a standard lot is 100,000 units.

A pip (percentage in points) is the smallest increment in the trade. One pip is usually equal to 1/100 of 1%, or the number to the fourth decimal place. Most currencies are quoted to the fourth or fifth decimal place. The exceptions to this rule are currency pairs which include the Japanese Yen (JPY) as the quote currency. These pairs typically evaluate to two or three decimal places, with a pip being represented by the second decimal place.

Retail traders or newbies often trade currencies in micro lots because one pip in a micro lot only represents a 10 cent movement in price. This makes losses more manageable if a trade does not produce the desired results. In a mini lot, one pip equals $ 1 and that same pip in a standard lot equals $ 10. Some currencies move up to 100 pips or more in a single trading session, making potential losses for the small investor much more manageable by trading in micro or mini lots.

Much less products

The majority of currency trading volume is limited to just 18 currency pairs compared to the thousands of stocks available on the global stock markets. While there are other pairs traded besides the 18, the eight most commonly traded currencies are US Dollar (USD), Canadian Dollar (CAD), Euro (EUR), British Pound (GBP) , Swiss Franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and Japanese yen (JPY). While no one is saying that currency trading is easy, having a lot less trading options makes trading and portfolio management easier.

What moves the currencies?

An increasing number of stock traders are interested in currency markets because there are many forces that move the stock market that move the currency market as well. One of the most important is supply and demand. When the world needs more dollars, the value of the dollar goes up and when there are too many in circulation, the price goes down.

Other factors like interest rates, new economic data from the largest countries and geopolitical tensions are just some of the events that can affect currency prices.

The bottom line

Just like everything that happens in the investment market, learning to trade forex is easy, but finding the winning trading strategies takes a lot of practice. Most forex brokers will allow you to open a free virtual account that will allow you to trade with virtual money until you find strategies that will help you become a successful forex trader.


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