Foreign exchange Currency Exchange rate. Make sure you don't make this mistake.
When trading currencies, you would buy a currency pair if you believed that the base currency will strengthen against the counter currency, or the quote currency will weaken against the base currency. So, if we think that the Euro will strengthen against the US Dollar then we would place a buy trade or go long. It is important to remember that should the price of the euro weaken against the US Dollar, we would make a loss for every pip it falls.
Alternatively, you would sell a currency pair if you believed that the base currency will weaken in value against the counter currency. If we think the Euro will decrease in value against the US Dollar we would place a sell trade and for every pip the Euro falls against the US Dollar you will make a profit. Should the value of the euro rise against the dollar then you will make a loss for each pip it rises.
Also known as leveraged trading, this means you can put up a small amount of money to control a much larger amount. This means you can leverage your money further but it also means that losses will be magnified as well, so you should manage your risk accordingly — please ensure that you fully understand the risks of leveraged trading.
Commonly traded currency pairs are traditionally divided into three groups related to popularity and liquidity: At City Index, you can trade over 65 currency pairs including majors, minors and exotics. The spreads for these are usually tighter compared to the less traded minor currency pairs. These are not traded as heavily as the major currencies, and so tend to fluctuate more often. Spreads for minor currency pairs also tend to be wider due to the medium sized liquidity in the market, as compared to major currency pairs.
These are currency pairs that are only very rarely traded. Due to the low volumes of trade, exotic currency pairs are illiquid and tend to be expensive to trade with wider spreads. Many traders view exotic currency pairs as having higher risk profiles compared to commonly traded currency pairs.
Forex trading is ideal for investors who want the opportunity to trade on a market that is open 24 hours a day, while at the same time minimizing trading costs and potentially profitting from markets that are rising or falling. However, it contains significant risks to your money and is not suitable for everyone. We strongly suggest trading on a demo account before you try it with your own money. Looking for short term opportunities.
FX prices are also influenced by economic and political conditions, such as interest rates, inflation, and political instability, such conditions usually have only a short-term impact, so FX trades are typically held open for a few days or weeks, rather than over the longer term. Who want to make their own decisions on what to invest in. City Index provides an execution only service.
With help from the internet, a retail market aimed at individual traders has emerged, providing easy access to the foreign exchange markets, either through the banks themselves or brokers making a secondary market. For more on the basics of forex, check out " 8 Basic Forex Market Concepts. Trading currencies can cause some confusion related to risk due to its complexities. Much has been said about the interbank market being unregulated and therefore very risky due to a lack of oversight.
This perception is not entirely true, though. A better approach to the discussion of risk would be to understand the differences between a decentralized market versus a centralized market and then determine where regulation would be appropriate.
The interbank market is made up of several banks trading with each other around the world. The banks themselves have to determine and accept sovereign risk and credit risk , and for this they have many internal auditing processes to keep them as safe as possible. The regulations are industry- imposed for the sake and protection of each participating bank. Since the market is made by each of the participating banks providing offers and bids for a particular currency, the market pricing mechanism is derived from supply and demand.
Due to the huge flows within the system, it is almost impossible for any one rogue trader to influence the price of a currency. This is a positive move for retail traders who will gain a benefit by seeing more competitive pricing and centralized liquidity. Banks of course do not have this issue and can, therefore, remain decentralized.
Traders with direct access to the forex banks are also less exposed than those retail traders who deal with relatively small and unregulated forex brokers , which can and sometimes do re-quote prices and even trade against their own customers. It seems that the discussion of regulation has arisen because of the need to protect the unsophisticated retail trader who has been led to believe that forex trading is a surefire profit -making scheme.
For the serious and educated retail trader, there is now the opportunity to open accounts at many of the major banks or the larger, more liquid brokers. As with any financial investment, it pays to remember the caveat emptor rule — "buyer beware!
The forex markets are the largest in terms of volume traded in the world and therefore offer the most liquidity, thus making it easy to enter and exit a position in any of the major currencies within a fraction of a second.
Leverage in the range of Of course, a trader must understand the use of leverage and the risks that leverage can impose on an account. Leverage has to be used judiciously and cautiously if it is to provide any benefits. A lack of understanding or wisdom in this regard can easily wipe out a trader's account. For more on leverage, check out " Forex Leverage: Another advantage of the forex markets is the fact that they trade 24 hours around the clock, starting each day in Australia and ending in New York.
Trading currencies is a "macroeconomic" endeavor. A currency trader needs to have a big-picture understanding of the economies of the various countries and their inter-connectedness in order to grasp the fundamentals that drive currency values. For some, it is easier to focus on economic activity to make trading decisions than to understand the nuances and often closed environments that exist in the stock and futures markets where microeconomic activities need to be understood.
However, an understanding of a company's management skills, financial strengths, market opportunities and industry-specific knowledge are not necessary in forex trading.
One of the underlying tenets of technical analysis is that historical price action predicts future price action. This makes it the perfect market for traders that use technical tools. If you want to learn more about technical analysis from one of the world's most widely followed technical analysts, check out Investopedia Academy's Technical Analysis course.
For most investors or traders with stock market experience, there has to be a shift in attitude to transition into or add currencies as a further opportunity for diversification. Currency trading has been promoted as an " active trader's " opportunity.