HomeForex BasicsCURRENCY TRADING BASICS

CURRENCY TRADING BASICS

Investment markets instantly take away money from those who hope 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 forex 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 dollars, with the growth in the volume of operations amounted to 20% over the past 4 years.

For comparison, on the New York Stock Exchange (NYSE), the daily volume of transactions is “only” 25 billion dollars. Until recently, only professional traders had the opportunity to trade in investment markets, however, the introduction of new trading platforms 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 since there are dealers in each time zone who buy and sell currency during their working day. There are 3 main trading sessions that provide round-the-clock operation: European, Asian and American.

During each of the sessions, the currencies of the countries in which exchange trading is currently taking place are most popular. For example, the most volatile trading in currency pairs with the dollar occurs during the American session. The volume of one trading operation is measured in lots. Micro lot – 1000 units of currency. If the account currency is American 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

Currency trading instruments are currency pairs. Unlike the stock market, in which individual stocks are bought and sold, operations with currency pairs are carried out in the foreign exchange market, that is, one currency is sold at the same time and another is bought. For example, if a trader buys a pair of EUR / USD, 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 in micro-lots. A 1-point movement for a micro lot is only 10 cents, so traders can effectively control losses in the event of a failure. For a mini lot, the movement by 1 point is $ 1, for a standard lot – $ 10. The movement of some currencies can exceed 100 points in one trading session, so small investors are able to effectively control losses only when using micro or mini lots.

The limited number of liquid trading instruments.

Most of the trading volume of the foreign exchange market is accounted for only 18 currency pairs, in contrast to the stock market with thousands of trading instruments. The most operations are in 8 currencies: American dollar (USD), Canadian dollar (CAD), Euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and Japanese Yen (JPY). Foreign exchange trading is hard work, but a limited number of liquid trading instruments greatly simplifies the process of trading and portfolio management.

The nature of the price movement of currencies

The pricing of trading instruments in the foreign exchange and stock markets is of a similar nature, which is why 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 value of the dollar rises, and vice versa. Also, the value of currencies is affected by interest rates, new economic data, geopolitical situations, and other events.

Summary

Learning the principles of foreign exchange trading is not difficult, but finding profitable trading strategies requires practice. Most brokers give their clients access to free demo accounts, thanks to which novice traders can search for effective trading strategies without any financial costs.

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