Forex trading: understanding the forex market
The foreign exchange market is better known as Forex or FX. Trading in this market has become very popular in recent years. However, this is not the case - Forex trading raises a number of questions. For example: what is the foreign exchange market? Which currency pairs are best to trade? Is currency trading risky? Some of the answers to these questions will be found in this article.
What is the Forex market?
The foreign exchange market is also called the Forex market or the English foreign exchange market. It is simply a market where currencies are exchanged. According to the Bank for International Settlements (BIS), the foreign exchange market is the largest market in terms of total volume, with up to USD 5 trillion traded daily. It is not a physical place, but rather an electronic network where institutions or individuals trade with each other.
The left-hand currency is called the base currency and the right-hand currency is called the quote currency. The second currency indicates the value relative to 1 unit of the base currency. For instance, the formula EUR/USD = 1.4000 implies that EUR/USD trades at 1.4000, i.e., 1 Euro has a value of $1.40. The first currency is always expressed in the second currency. USD/JPY at 110.50 means that one USD is worth JPY 110.50.
What are the best currency pairs to trade?
The best currency pairs to trade effectively depend on your trading style. If you have a short term strategy, for example, if you like to scalp, then the major currency pairs will be most profitable for you because of the low spreads.
On the other hand, for a fundamental trader, smaller currency pairs will be of interest based on long-term analysis. The most profitable currency pairs may be those involving the Australian dollar, Japanese yen or Canadian dollar.
The best forex currency pairs:
EUR/USD: this pair has the lowest spread and is not very volatile.
GBP/USD: this pair is interesting in terms of spreads and possible gaps, but it is quite volatile.
USD/JPY: this pair has low spreads and offers some interesting possibilities.
How to get started trading currencies online?
To start trading currencies online, follow these steps:
- Choose a regulated and reputable broker
- Choose a broker by the quality of execution of trading instructions
- Decide on the trading style that suits you best (scalping, intraday trading, swing trading - you keep your position open for several days)
- Determine the appropriate leverage effect in the stock market according to your strategy and experience.
- Do not invest more than you can afford to lose.
- Choose an intuitive, simple and secure trading platform such as MetaTrader 4.
- Try all the above steps on a demo account, before trading live.
Is online currency trading dangerous?
Like any financial investment, currency trading online is subject to risks. However, there are different methods to control these risks:
- Determine the price of the currency pair at which you want to close a position if developments are unfavourable (for example, if you buy and the price falls, or if you sell and the price rises),
- Determine the size of the trade so that your potential loss should not exceed 2-3% of your capital per trade,
- Estimate your risk/return ratio (loss/profit) before you open the trade. By default you should have a greater potential for profit than loss, e.g. risk 50 pips, but try to make a profit of e.g. 100 pips.
For proper money management and risk reduction it is advisable to start trading on a demo account and try things out on the dirt first. Such an account will allow you to trade in real market conditions, but with fictitious capital, so that you have a complete understanding of the foreign exchange market without any risk.