Foreign Currency Basics – Learn to Trade

Forex trading is a very dynamic business where people trade in international currencies. The international forex market is the largest trading market in the world where billions of dollars worth foreign currency is traded by financial institutions, banks, brokers and individuals. However, this market is so volatile that it is important for you to be well versed with how the market behaves. This means you should be able to understand the . Otherwise, you could lose your entire investment within a matter of hours.

Why Trade Forex?

As it was already mentioned, due to high liquidity Forex allows to change without any difficulties practically all volumes of one currency to another. Moreover, high liquidity means that a transaction might be closed practically immediately. It is achieved due to two reasons. Firstly, the trading is carried out via electronic means, secondly, every moment the market is full with big number of buyers and sellers that in accordance create the highest demand and equitable supply. However liquidity and volumes are not the only advantages of Forex.

Working with Forex you have a possibility to choose when and how long you are going to work and when and how long you are going to have a rest, fun, to study or communicate with friends and relatives etc. Your profit depends only on you. It does not depend on your boss or your stuff, your business partners, supplies, terms, goods or services. There is seasonality at Forex but it does not influence your profit. You can choose the appropriate profitable tactics for every time period. You do not spend money on advertisement of your goods or services, you do not look for buyers, you are not obliged to certificate or license your production, and all this brings your overhead and commercial expenses to naught.

You will need a PC or a mobile device (laptop, tablet PC) with the net access for your work. This is all. LiteForex will supply you with special software for free. You can work in your apartment, dealing-room, Internet-cafe, to put it simply, in any place with Internet access. With the help of Internet data card you can choose a comfortable place for your work in any place of the world.

Apart from these there is one more advantage of Forex. Having fix profit on a percentage base (for example, 30% per month) your profit in absolute term will grow with the increase of your capital. Mathematicians proved that having a positive (no matter how small it is) mathematical expectancy of trade strategy, with the help of means of money management it is possible to provide an exponential growth of deposit. 

The Forex Market today

10 of years ago when you mention currency trading, people would give you that blank look and despite your honest attempts to explain it, at some point you just give up! Today though, foreign exchange topic is dominating news headlines and spark debates among a lot of investors and curious trader-wanna-be.

During the last decade or so, the forex trading market has grown by leaps and bounds, cutting across different forex markets. Much of this has been possible due to the rapid advancements made in the field of internet technology. Consider this — today you can trade on different foreign exchanges just by sitting in front of your computer and that too from the cool confines of your home. In order to become a successful forex trader it is important to master the essentials.

Currency Pairs

For a better understanding of what a position is, the concept of a currency pair was introduced on the Forex market. Instead of saying, “I bought euro for dollars” or “I sold euro for dollars”, traders use shorter expressions: “To buy euro-dollar” or “To sell euro-dollar” (respectively). Let’s learn more about a currency pair.

Currency pair record is abbreviations (in accordance with ISO 4217 standards) of the respective currencies in a succession (without spaces but sometimes written with the right slash “/”). For example, the euro (EUR) and the US dollar (USD) together make up a currency pair EURUSD (euro-dollar). Purchase of this currency pair means buying euros for dollars. And always, in any case, whatever the currency is included in the pair, the first currency in the pair is bought for the second. Therefore, purchase of AUDCAD means buying Australian dollars for Canadian dollars. Similarly, selling of EURUSD means selling euros for dollars.

It is more professional to say that the first currency in the pair is base and the second one is quote. Therefore, in a pair NZDUSD the base currency is the New Zealand Dollar (NZD), and the quote currency is the US dollar (USD).

How to trade?

The idea behind a trade is identical to other financial investment opportunities. The only startling difference is that you buy one currency and selling another simultaneously. The currencies are quoted in pairs and the exchange rate shows the buying price between the two currencies shown.

What Moves Currencies?

An increasing amount of stock traders are taking interest in the currency markets because many of the forces that move the stock market also move the currency market. One of the largest is supply and demand. When the world needs more dollars, the value of the dollar increases and when there are too many circulating, the price drops. 

Other factors like interest rates, new economic data from the largest countries and geopolitical tensions, are just a few of the events that may affect currency prices.

Types of Markets

Forex is traded primarily via spot, forwards, and futures markets. The spot market is the largest of all three markets because it is the “underlying” asset on which forwards and futures markets are based. When people talk about the forex market, they are usually referring to the spot market.

The forwards and futures markets tend to be more popular with companies or financial firms that need to hedge their foreign exchange risks out to a specific future date.

Spot Market

The spot market is where currencies are bought and sold based on their trading price. That price is determined by supply and demand and is calculated based on several factors, such as:

  • Current interest rates
  • Economic performance
  • Geopolitical sentiment
  • Price speculation

A finalized deal on the spot market is known as a spot deal. It is a bilateral transaction in which one party delivers an agreed-upon currency amount to the counterparty and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, it is settled in cash.

Although the spot market is commonly known as one that deals with transactions in the present (rather than in the future), these trades take two days to settle.

Forwards and Futures Markets

A forward contract is a private agreement between two parties to buy a currency at a future date and a predetermined price in the OTC markets. In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves.

A futures contract is a standardized agreement between two parties to take delivery of a currency at a future date and a predetermined price. Futures trade on exchanges and not OTC. In the futures market, futures contracts are bought and sold based on a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange (CME).

Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterparty to the trader, providing clearance and settlement services.

Unlike the spot, forwards, and futures markets, the options market does not trade actual currencies. Instead, it deals in contracts that represent claims to a certain currency type, a specific price per unit, and a future date for settlement.

Both types of contracts are binding and are typically settled for cash at the exchange in question upon expiry, although contracts can also be bought and sold before they expire. These markets can offer protection against risk when trading currencies.

In addition to forwards and futures, options contracts are traded on specific currency pairs. Forex options give holders the right, but not the obligation, to enter into a forex trade at a future date.

Leverage

This concept is a must for beginner Forex traders. The leverage is the capital provided by a Forex broker to increase the volume of trades its customers can make.

Example:

  • The face value of a contract or lot equals 100,000 units of the base currency. In the case of EUR/USD, it would be 100,000 euros.
  • If you use a 1:10 leverage rate and have 1,000 euros in your trading account, you can trade a currency pair with a $10,000 position size.
  • If the trade is successful, leverage will maximise your profits by a factor of 10. However, keep in mind that leverage also multiplies your losses to the same degree.

Therefore, leverage should be used with caution, regardless of whether we are talking bout trading for beginners or experts. If your account balance falls below zero euros, you can request the negative balance policy offered by your broker. ESMA regulated brokers offer this protection. Using this protection will mean that your balance cannot move below zero euros, so you will not be indebted to the broker.

How does it help?

The international forex markets are a very volatile place to be in since the currency value fluctuates so quickly that it is highly impossible to manually keep pace with it. This is one of the reasons why you should know the basics of the game. There are a number of forex trading reviews that you can go through as they will help you to analyze and understand the fluctuations in different currency markets better.

Otherwise, you can also opt for a reputed forex trading guide which can help you develop the skills required for becoming a successful forex trader. Once you are able to master the basics you will be able to identify any volatile movement in the market and take decisions that will earn you higher returns. Forex trading reviews and guides are very important as they not only develop your skills but they also provide you with different tools to become successful at forex trading.  

Choosing a Guide

There are a number of forex trading reviews and tutorials that teach you about the different aspects of forex trading. It is important that you choose a guide that not only allows you to learn about basics but also enables you to develop an intelligent approach to forex trading.  Most of the forex guides are prepared by expert traders after years of observing the performance of different forex markets across the globe.

Finally, going through various forex trading reviews helps you think with a lot of clarity and make decisions that result in greater profitability.

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