Learning the trading basics in the foreign exchange investment market
Important currency trading basics before investing in Forex
Currency trading is fast becoming a popular way to try and take advantage of the ever-changing global market conditions. But before you jump into something you don’t really understand, there are some currency trading basics you must be aware of.
You probably have at least some exposure to the stock market. You may invest on an individual level, or you may have a 401k plan through your place of employment. You might also understand how the stock market works. But you must proceed with caution because trading currency on the Forex market is not like the stock market. For example, Currency trading does not take place on a regulated exchange. Now that may scare some people. But you can find a reputable dealer that belongs to the (NFA) National Futures Association. That way, if you have some sort of dispute, they are held to binding arbitration.
The stock market has an enormous amount of stocks that you can choose from whereas forex is much more concentrated. Forex also operates on the largest (OTC) market in the world where there are Trillions of dollars in action each day. You should also remember that Forex is an extremely liquid market.
So what should you understand about currency trading? It is simply the buying of one currency in exchange for another currency. It is nothing more than a speculative market. Currencies fluctuate daily and the idea is to recognize strength or weakness in a particular currency and take advantage of it. It would help if you understand what makes a particular currency valuable in the first place.
The allure about trading currencies to average investors is that you don’t need a lot of money to get started. Leveraged trading is how most people trade currencies. Investing $1000 can get you access to $100,000 worth of trading capital by using margin. The margin rate is at 100:1 so for every dollar you invest, you can gain access to 100 extra dollars from the dealer. But be aware that markets move fast and even though you can increase your profits by leveraging your accounts, you can also lose your shirt just as fast. Now this doesn’t mean they will risk losing their money for you so you will have to understand what a margin call is.
There are no broker fees. Dealers are the ones that actually trade for you and they make their money on the bid-ask spread. This is different than a broker charging you a fee to buy and sell stock. This is one of the important currency trading basics you need to know.
The PIP which stands for “percentage in point” is the smallest increment of trade on Forex markets. It is quoted to the fourth decimal point like this: 2.300. So if you have a movement from 2.300 to 2.315 that is a move of 15 PIPs. Most things you buy only use 2 decimals so this is much more precise.
About 85% of the money exchanged on Forex is centered on the 7 main currencies. These currencies include the US Dollar (USD), Japanese Yen (JPY), Euro (EUR), British Pound (GBP), Canadian Dollar (CAD), Australian Dollar (AUD) and the New Zealand Dollar (NZD). Although you can find dealers that will trade in other currencies if that is what you wish.
These are just some of the currency trading basics that you need to know to get started. But before you start throwing cash around, take the time to learn as much as possible because if you don’t you can lose your money quicker than the US government spends it.