This article provides new traders with insight into different basic factors of the foreign exchange trading market.
There are various factors about the foreign exchange trading market that make it utterly unique to any other trading market. In order to be an effective trader you must be aware of these factors.
Times, funds and internet connections
Unlike the stock market, the foreign exchange trading market operates on a 24 hour trading timeframe from Monday to Friday. This allows traders to trade from any location at any time of day that is most convenient for them. The matter of location is irrelevant as all forex trading is conducted online; all that is required to trade is a reliable internet connection and computer.
Once again, unlike the stock market, the foreign exchange market is decentralised. This means that there is no centralised exchange for foreign exchange trading. This is due to the online nature of the market with all trades being executed via an interbank system. Previously, this market was reserved for large corporations; however, this decentralisation and online access has introduced small traders to forex.
The foreign exchange market maintains the largest trading volume worldwide because so many entities require foreign exchange to trade. It is often necessary for large, multinational companies to transfer funds from headquarters to international branches, and this requires currency exchange services. It is also seen that central banks in different countries will sell and buy currencies. This transaction makes up a large portion of foreign exchange trading activity.
Benefits for the smaller foreign exchange trader
As is mentioned, the online format of the market has increased the number of smaller players on the market. Here are some benefits retail traders can expect from the foreign exchange market:
- You do not require large initial amounts of trading capital to trade on the market.
- Constant fluctuations in currency price movements create opportunities for profitable trades.
- Trading risk can be controlled via risk management plans and methods.
- The profits achieved depend on your forex trading strategy and risk management policies, giving you a degree of control.
Currency pairs and trading
All foreign exchange trading is completed using foreign currency pairs. In each trader you are exchanging one currency for another currency. The currency rates are quoted to you by a forex broker and are shown as a ratio. For example, if you are trading a US dollar/Australian dollar currency pair then it would be represented as USD/AUD=1.1115. This means that you will required 1.1115 Australian dollars to purchase one US dollar. If the currency value changed and the quote presented as USD/AUD=1.1118, this would mean that you would require 1.118 Australian dollars to purchase one US dollar. In forex terms, one would say that the rate has changed by three pips. If you were trading with this pair then you would make either a profit or loss based on the price movement.
Foreign exchange trading risks
Foreign exchange trading risk levels are high in the forex market as it involves speculation. In order to avoid making large losses, traders are advised to implement risk management methods. This includes setting a limit to the amount you are willing to lose in a bad trade. The rule of thumb states that you should not risk more than 2% of your trading capital, any more and you are gambling with your money. It is important not to play with funds you cannot afford to lose.