Since the major developed countries have broken away from the gold standard in the early 1970s and have adopted a floating currency, and the internet technology has proliferated, the foreign exchange trading volume has risen leaps and bounds from about $70 billion a day in the early 1980s to between $4 to $5 trillion a day currently. The daily turnover of the currency market is almost 20 times of that of the world stock markets. The wonderful news is that currency trading is no longer limited to the central banks in the major financial centres, but is available to banks, funds, corporations, and retail customers. Can you guess what Japan and the U.K. have in common? The love of forex trading by the retail investors!
Let us share with you how you can be take advantage of this huge and liquid market.
What is Forex Trading
Before you shop overseas, you use the exchange rate to figure out if the product is more expensive or cheaper translated back into your home currency. Currencies are always traded in pairs, such as the Australian Dollar versus the U.S. Dollar, or the U.S. Dollar versus the Japanese Yen – a foreign currency versus a base currency. Currency or forex trading is the trading of a currency pair with a view to making money. The forex market trades around the clock and is open five-and-a-half days a week. It trades electronically rather than through an exchange. The eight major currency pairs enjoy the highest liquidity.
How Do you Start Forex Trading
There are essentially four ways you can trade forex:
- The spot market: the currencies are traded at current prices, and have tight spreads between the bid (buy) and ask (sell) prices. Online forex brokers like Thinkforex typically provide a platform for spot currency trading as well as free news, charts and tools for your analysis.
- The futures market: professional traders trade currency futures on exchanges, which are well-regulated. A currency is bought or sold against another on a contract at a specified future date in a futures market.
- Options: when you buy a currency option, you can bet on the future movement of one currency against another by the option expiry date using a small upfront premium.
- Exchange-traded-funds: these are the latest financial innovations where foreign currency is traded like a stock on an exchange, but is subject to trading commissions.
The tools used by the currency traders consist of fundamental and technical analyses. When you study the countries’ economic and social policies, political developments, and the central bank actions to analyze their impact on the currency pairs, you are adopting a fundamental analysis. When traders use currency charts and historical trading patterns to predict the future movement of currency pairs, they are using technical analysis, a very popular tool of forex trading.
What Resources Are Available for You to Learn the Craft
The good news is that there are plenty of available resources. When you open a new account, forex brokers like Thinkforex provide a comprehensive knowledge base to help you to understand the jargons and basics of forex trading via online videos, all free of charge. A popular way to educate new traders is through webinars where the online brokers introduce their latest technologies and charting resources on their platforms as well as reviewing and analyzing the market-moving events in the short-term. Trading guides and blogs on various important trading topics are also available for both the novice and professional traders.
The Best Way to Begin – Demo Accounts
No matter how lucrative currency trading is, there are risks involved. After you have done some basic research into the important factors affecting your currency pairs, the best thing you can do is to immediately open a free demo account and start acquiring trading experiences with fake money without risking your real capital. A demo account simulates the real trading environment using live currency quotes. You can employ all the resources on the platform including charts, news, and trade execution to devise and test out your trading strategies. Generally, it is a good idea to trade in the demo accounts for three to six months before you trade with your real money. You should learn to control risks by trading with a similar amount of capital as if you were trading with real money. Leverage in currency trading can be as high as 200 to 1, which means the stake is high. Knowing how much you can lose per trade, how you feel, and how you react to both winning and losing trades are good learning experiences for new traders like you before you start live trading.