Trading in any financial market is extremely tough, as shown by the fact that the majority of new traders lose money. Success, on the other hand, may be found with enough right knowledge, practice, and experience. So, what exactly is currency trading, and is it suitable for you?
In comparison, the New York Stock Exchange has a daily volume of only $25 billion (NYSE). Although the market is enormous, until recently, the majority of the volume came from professional traders; nevertheless, as currency trading platforms have improved, more retail traders have discovered forex to be acceptable for their investment goals.
KEY NOTES
• Forex exchanges allow for currency pair trading 24 hours a day, seven days a week, making it the world's largest and most liquid asset market.
• Despite being the world's largest market, a very small number (20) of currency pairings account for the majority of volume and activity.
• Currencies are traded in pairs (for example, EUR/USD), with each pair generally quoted in pips (% in points) to four decimal places.
• Currency prices vary due to a variety of reasons such as the economic state of the nations involved, geopolitical risk and instability, and trade and financial movements, among others.
How Does It Operate?
Currency trading is a 24-hour market that is only closed from Friday evening to Sunday evening, but the trading sessions are deceptive. The trading sessions are divided into three parts: European, Asian, and US.
Despite some overlap in the sessions, the primary currencies in each market are traded mostly during those market hours. This implies that some currency pairings will see more volume during specific sessions. Traders that stick to currency pairings based on the US dollar will see the greatest traffic during the US trading day.
Pips and Pairs
Currency trading is always done in pairs. Unlike the stock market, where you may buy or sell a single stock, the forex market requires you to buy one currency and sell another. Following that, virtually all currencies are valued to the fourth decimal point.
A pip, or percentage in point, is the smallest trading increment. One pip is usually equivalent to 1/100 of one percent.
Currency is exchanged in various lot sizes. A micro-lot is one thousand units of a currency. A micro lot equals $1,000 of your base currency, the dollar, if your account is financed in US dollars. A mini lot consists of 10,000 units of your base currency, whereas a standard lot consists of 100,000 units.
A pip (percentage in point) is the smallest trading increment. One pip is generally equivalent to one-hundredth of one percent or the number after the fourth decimal point. The majority of currencies are valued to the fourth or fifth decimal point.
Currency pairings using the Japanese Yen (JPY) as the quote currency are an exception to this rule. These pairings are generally priced to two or three decimal places, with the second decimal place representing a pip.
Because one pip in a micro lot indicates just a 10-cent price change, retail or novice traders frequently trade currencies in micro-lots. This makes it easier to control losses if a deal does not provide the desired outcomes.
One pip in a tiny lot equals $1, whereas one pip in a standard lot equals $10. Some currencies can fluctuate up to 100 pips or more in a single trading session, making possible losses far more bearable for the small investor by trading in micro or mini amounts.
Significantly Fewer Products
When compared to the hundreds of equities accessible in global equity markets, the majority of currency trading volume is restricted to only 18 currency pairings. Although additional currency pairings are traded in addition to the 18, the eight most often traded currencies are the 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). Although no one would claim that currency trading is simple, having fewer trading alternatives simplifies trade and portfolio administration.
What Causes Currency Movement?
Because many of the dynamics that move the stock market also move the currency market, a growing number of stock traders are becoming interested in currency markets. One of the most important is supply and demand. When the globe need more dollars, the value of the dollar rises; when there are too many on the market, the price falls.
Other variables that may impact currency values include interest rates, fresh economic statistics from the major nations, and geopolitical concerns.
In conclusion
Learning about currency trading, like anything else in the investment market, is simple, but discovering profitable trading techniques requires a lot of practice. Most forex brokers will let you establish a free virtual account and trade with virtual money until you uncover techniques that will help you become a great forex trader.