It’s not only stocks or bonds or commodities that are available for trading. International currency trading, also known as forex, is easily accessible to the amateur traders. It wasn’t so until the beginning of this century. Now, many try their skills in this dynamic market.
How forex works
The way most forex trading takes place is via spot transactions. When you buy at spot, you sell one currency and buy the other at prevailing market price. Basically, you bet on one currency’s rising against the other.
Therefore, currency trading takes place in pairs. There are hundreds of currency pairs, and a decent online forex broker will give you access to at least tens of these pairs, often involving major currencies such as US Dollar (USD), British Pound (GBP), Japanese Yen (JPY), Swiss Franc (CHF), Australian Dollar (AUD), and Canadian Dollar (CAD).
How forex quotations work
Some of the major pairs are GBP/USD, EUR/USD, and USD/JPY. In a pair, the first currency known as the Base currency, and the second as the Quote currency. For example, if you see a quote of 1.4500 in a GBP/USD pair, it means it’ll cost you $1.45 to buy 1 Pound.
If you bet on Pound’s rise by buying it, you hope the quote’s value increases to, let’s say, 1.5500. If you sell the pair, it means you’re betting on Pound’s fall and Dollar’s rise, so you want to see the quote go down to, let’s say, 1.3500.
Forex trading lots
Forex trading takes place in lots. The Standard lot represents 100,000 units of base currency. So, if you buy a Standard GBP/USD lot, it’ll cost you 100,000 Pounds. But most currency traders use margin, which means they may need to deposit only a fraction of the cost.
Still, some traders, especially amateurs, don’t like so much risk, so they trade Mini lots, which represent 10,000 units of the base currency. There are even smaller lots such as Micro lots which represent 1,000 units.
What you need to know about risk
Since forex trading is leveraged, often 100-1, it is risky. True, if you’ll use such leverage and your currency goes up by 1%, you’ll double your money. But it can also go in the opposite direction. So, you should avoid using large leverage. In addition, you should place Stop orders that will take you out of a trade that goes wrong before your account gets wiped out.
How to learn forex trading
A great way to learn about forex trading is to open a free demo account where you can practice trading with virtual money. You should also learn technical analysis which, to a large degree, involves looking at charts and other indicators to see how the currencies are trending. You should also understand the fundamentals of the market to see how interest rates, national budget deficits, and other things affect prices.
Why Consider Forex Trading
Trading currencies expands opportunities. You no longer need to rely on the stock market. In a currency market, there’s always a bull run as one currency rises against the other. In the stock market, there can be bear markets when most stocks fall.
Forex trading takes place 24 hours a day, with the exception of weekends. If you work during daytime, you still can trade currencies at evening, while it’s not so with the stocks. What’s more, due to margin, you can bet with more money than you have, although it also requires that you be careful.