Currency trading has become a popular sport in the financial markets worldwide. It is a complex and competitive market. If you are just starting to look at this as a possible venture you will need to start with currency trading basics. Rest assured that simply understanding the basics is not going to help you make money in the market, it is purely a place to start.
The currency market has gained popularity because it is the largest financial market in the world. It is estimated that over $6 trillion is traded every day. This is a huge volume compared to any other financial market in the world. It is so large because globalization of economies initially necessitated higher volume. However, speculation soon caused the trading volume to explode. The higher volume makes trading easier because there is always a ready buyer or seller.
Currencies trade 24 hours a day somewhere in the world. This takes place 5 days a week. This factor alone has made market participation grow, because you can trade anytime of day or night that you want to during the week. You will be required to deposit only a small percentage of the money you will need to buy the currency. This is because leverage is used as a matter of course in currency trading. Your broker will lean you most of the capital for trading. This increases your exposure to risk. You must manage the risk so that you don’t get hurt by it.
Currencies trade in pairs. Essentially you trade one currency against another. Some of the most common pairs are the EURO/USD(euro/dollar),USD/CAD(US dollar/Canadian dollar), USD/JPY(dollar/yen), GBP/USD(pound/dollar) and USD/CHF(dollar/Swiss franc). The EURO/USD may be listed as 1.45. This means that to buy one euro it will cost $1.45. The currency named first in the pair is the currency being purchased(base), using the second currency(quote). If you think that the euro will move higher you can purchase the euro at $1.45. If you are correct hopefully you can sell it later at a higher price realizing a profit. Currencies trade usually in lots of 100,000. If you are trading the EUR/USD and your broker allows you to use 100:1 leverage, you will need $1,000 for each lot you trade.
It doesn’t matter if a currency price is expected to move up or down. You can purchase the currency if you feel the base price will move higher. If you think the base price will decline you can sell short with the intention of buying the currency back at a lower price later. This all sounds pretty simple. “Buy low and sell high.” “Sell high and buy back low.” How do you determine which way the base currency price will move? Now we have to move beyond currency trading basics.
Professional traders usually use two things to make their trading decisions. Technical analysis is one of those things. Technical analysis involves using charts to plot historic price movements. This is essence shows a picture of how prices have behaved in the past. Since every trader is watching the charts to determine price movements, history tends to repeat itself. Sometimes just hitting a certain point on the chart can cause massive buying or selling of the currency. The other way trading decisions are made is through fundamental analysis. Fundamentals are things like outside economic factors like interest rate changes or money supply changes. These two need to be used in combination in order to trade successfully.
To develop the ‘trading instinct’ you must study the market until you can begin to see what causes price changes. If you can learn to recognize trends from the charts, this will help you make accurate trading decisions. Practicing for a while will help build your confidence and your skill.
Just understanding currency trading basics will not be enough to prepare for a profitable career in the market. You must develop intense knowledge of how money is made in currencies before you begin.