Basics of currency trading
Investment markets instantly take away money from those who hope to earn quickly and easily. The success of trading on the investment market depends heavily on the knowledge and practical experience of the trader. What is currency trading and is it suitable for you? The currency market, or forex (FX), is the world’s largest investment market. As of April 2010, the daily volume of operations on the Forex market reached USD 4 trillion, with the growth of the volume of operations amounting to 20% over the last 4 years.
For comparison, the New York Stock Exchange (NYSE) has a daily volume of “only” 25 billion dollars. Until recently, only professional traders had the opportunity to trade on investment markets, but the introduction of new trading platforms radically changed the situation, as foreign exchange trading became available to private investors.
How the currency market
works The currency market is open for trading around the clock from Monday morning to Friday evening, because there are dealers in every time zone who buy and sell currency during their working day. There are 3 main trading sessions, providing a round-the-clock working regime: European, Asian and American.
During each of the sessions, the most popular currencies are the currencies of the countries where the exchange trading is currently taking place. For example, the most volatile trades on currency pairs with the dollar occur during the American session. The volume of one trade operation is measured in lots. Micro lot – 1000 units of currency. If the account currency is American dollars, the micro lot is 1000 dollars. Mini lot – 10000 units of currency, and standard lot – 100000 units
Currency pairs and points
Foreign exchange market trading instruments are currency pairs. In contrast to the stock market, where individual shares are bought and sold, currency pairs are traded on the currency market, i.e. one currency is sold and another is bought at the same time. For example, if a trader buys a pair of EUR/USD – he buys the euro for dollars, if he sells – he buys dollars for euros
Almost all currencies are quoted to the nearest 1/10000 accuracy. Thus, the minimum movement of currency is equal to 1 pip, or one decimal place after the decimal point.
Beginners and private traders usually trade micro lots. The movement of 1 point for micro lots is only 10 cents, so traders can effectively control losses in case of unsuccessful developments. For a mini lot, the movement by 1 point is 1 dollar, for a standard lot – 10 dollars. The movement of some currencies may exceed 100 pips per trading session, so small investors are only able to effectively control losses when using micro or mini lots.
Limited number of liquid trading instruments
The major part of the currency market trading volume is accounted for only by 18 currency pairs, unlike the stock market with thousands of trading instruments. Most transactions are in 8 currencies: the U.S. dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and Japanese yen (JPY). Currency trading is hard work, but a limited number of liquid trading instruments greatly simplifies the process of trading and portfolio management.
Pricing of trading instruments on the currency and stock markets has a similar nature, so the popularity of the currency market among stock traders is constantly growing. Pricing of trading instruments in the foreign exchange market is based on the laws of supply and demand. If the demand for dollars increases, the value of the dollar increases, and vice versa. Interest rates, new economic data, geopolitical environment and other events also affect the value of currencies
It is not difficult to learn the principles of currency trading, but the search for profitable trading strategies requires practice. Most brokers provide their clients with access to free demo accounts, thanks to which novice traders can search for effective trading strategies without any cost.