Every day, the Foreign Exchange market, also known as FX, gets new traders. Most people get into Forex because they believe that trading currencies are an easy way to make fast money. Such people make the mistake of getting into the FX market without first educating themselves about how it works. Even the most experienced traders keep learning and bettering themselves. So, it is essential to get the best training possible. Here is a beginner’s guide to trading currencies in the Forex Market.
What is Forex Trading?
The term Forex trading describes people who engage in the active exchange of foreign currencies for financial benefit. Forex trading can take two forms; speculators and hedgers. Speculators are people who buy and sell currency to profit from the currency’s price movement. Hedgers are those looking to protect their accounts against an adverse move in their current position. The FX market is a centralized place that facilitates the buying and selling of different currencies. This takes place over the counter instead of on a centralized exchange.
FX trading is prevalent. The rise of the internet led to the popularization of FX trading since brokers could now offer individual retail traders access to this asset. The internet-enabled retail traders to access the market and online trading platforms to facilitate the trade. Online currency trading exploded due to five reasons;
- Easy access
- Continual trading opportunities
- High liquidity
- Ease of short selling
The primary thing that attracts people to join the FX market is that you do not require a lot of start-up capital. The Forex market requires you to open an account with an initial deposit of $50 to $100. This little amount is the unprecedented amount of leverage available in Forex trading, up to 1000:1 leverage in some jurisdictions. The amount of leverage is further enhanced because Forex brokers offer to trade in mini and micro-lots. The mini-lot is one-tenth (1/10) of the size of a standard lot, while the micro lot is one-one hundredth (1/100) of a standard lot. This allows traders to put a small margin deposit to take a trading position.
How Does Forex Trading Work?
The FX market is the largest and most liquid. It is open 24 hours a day from 10 p.m GMT on Sunday until 10 p.m GMT on Friday. You can also trade from almost any country. Government, banks, and individuals need foreign currency every day. So, these parties come together to buy and sell currencies, creating the market and the prices you see on your trading screen. Every country has a currency. For instance, the United States has the US Dollar, and the Eurozone has the Euro. The exchange rate can be floating or a basket of currencies. Floating means that the currency is free to change from one moment to the next or pegged to another currency. A basket of currencies means that the value of the exchange rate is at a fixed rate. The FX market involves buying a currency and selling another. As such, exchange rates are always quoted in pairs. The price of a currency pair is always quoted using the same convention. The first currency in the pair is called the base currency, and it is always worth 1. The second currency is called the quote currency and shows how much of the quote currency you will exchange for 1 unit of the base currency.
You have two opportunities when it comes to trading in the FX market. You can either open a buy position or a sell position on the currency pair. If you think EUR will increase in value against the USD, the price on the display screen will go up. as such, you can buy the EUR/USD currency pair or “go long.” What you will do here is to buy euros and sell dollars. You are now a proud owner of euros, and you can wait until the EUR/USD price to go up, and you can sell the euros back for a better rate and make a profit. If you believe that the EUR is likely to weaken against the USD, you can sell the EUR/USD or “go short.” You will belong dollars and expect the EUR/USD price to fall. Whether you make a profit or not depends on whether you made the correct prediction.
Trading currencies in the Forex market means speculating the upward and downward price movements of a currency pair. You will buy the pair if you expect the base currency to strengthen against the quote currency, and you would sell short if you expect it to do the opposite.
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