Online Currency Trading Explained
What is Currency Trading?
In simple terms, currency trading is the buying and selling currencies on the foreign exchange market with intent to make a profit. The forex market is the largest investment market globally and remains to grow annually.
How does it work?
The rate at which one currency can be exchanged for another is called the currency exchange rate and it is also quoted in pairs like EUR/USD. As we all know, exchange rates fluctuate constantly due to different factors such as inflation, industrial production and other external factors.
Pairs & Pips
When trading in FX, all trading is done in pairs, e.g. EUR/USD, USD/GBP and so on. You cannot trade one currency for another, it does not work like the stock market where you can buy or sell a single stock.
A pip is an acronym for “percentage in point” or “price interest point”. Since most currency pairs are priced out to four decimal places, the pip change is the last decimal point which is thus equivalent to 1/100 of 1%. An example is the smallest more USD/CAD currency pai can make it $0.0001.
There at 18 currency pairs that are known to be the most traded pairs in the market until today. This does not mean that there are only 18 currency pairs on the market but the eight currencies most traded are the U.S. dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and the Japanese yen (JPY). This is not to say that currency trading is easier however when you have fewer options to trade with, it makes it easier as a junior trader to begin with as opposed to thousands of stocks available on the equity markets.
What Moves Currencies?
Other than external factors such as a recession, geopolitical tension or interest rates, the largest factor that move the stock market as well as the currency market is supply and demand. The more the world needs the dollar, the higher the value of the dollar becomes and when there are too many circulating, the price decreases.
Why Currency Trading is Not for Everyone?
As someone who trades on the foreign exchange market, is important to note that it comes with a high level of risk which may not be what everyone is looking for. Prior to making any foreign exchange trades make note of your investment objectives to see if they fit and consider what your risk appetite is like. If you are not willing to trade at high risk, it is advised to steer away from the FX market. When you are not educated well enough on the topic, there is a chance you could lose all of your initial investment so make sure to invest wisely to not go over the capital budget you set aside for these trades.