Currency trading for dummies
The Forex market is the largest and most active currency and financial market in the world. Its daily turnover exceeds 5 trillion. This is more than the turnover of all national stock markets combined. Many people call Forex an exchange, but this is not entirely true. Unlike stock exchanges, Forex works around the clock, because the world’s banks are located in different time zones. In addition, Forex is not tied to any particular place – it is a virtual market, and you can trade on it from anywhere in the world.
Who Trades Forex?
Each of the Forex participants has his own goals and objectives:
– national banks conduct interventions to stabilize the exchange rate of their currencies;
- – importers and exporters come to Forex to exchange proceeds for their national currency or to buy foreign currency;
- – commercial banks have their own business in this segment, which consists in setting currency quotes for buying and selling. The difference in the price of buying and selling is called the spread of quotes, which is their income;
- – speculators use Forex as a source of solid income for those who know how to trade on the difference in exchange rates. You need learning to trade currency to make a lot of profit.
Central banks can intervene in foreign exchange markets. Although the volume of their transactions is usually not very large, the impact of these transactions can be quite significant.
The reason for this influence is that foreign exchange market participants view the actions of the central bank as an indicator of future economic policy that can influence changes in exchange rates.
Other government agencies can also trade in foreign exchange markets, but compared to central banks, their transactions are less regular.
The United States’ central bank, the Federal Reserve System (US Federal Reserve or FED), has the greatest influence on world currency markets. It is followed by the central banks of Germany and Great Britain.
How do foreign exchange markets work?
The purchase and sale of foreign currency is carried out in many financial centers, the largest of which are London, New York, Tokyo and Singapore.
The global volume of trading in foreign currencies is reaching enormous proportions, with a sharp increase over the past few years. Currency trading training contributed to this growth.
Direct communication between the main centers of buying and selling currencies, carried out using telephones and computers, allows each individual world market to work around the clock. Economic news immediately spreads around the world and provokes the activity of participants in the foreign exchange market.
Foreign exchange traders can act right from home if an unexpected night call brings them news of important events in the financial centers of other continents. Special devices allow traders from Hong Kong, Toronto, London and other cities to continuously monitor the quotes of the world’s leading currencies.
There are 3 categories of the Forex market: spot, forward and futures.
Spot currency market:
In the spot market, a deal is settled at the time of its conclusion. For example, if you bought euros at 15:00 today, then this currency will be in your account immediately.
Forward Currency Market:
A forward transaction involves the conclusion of a transaction to buy or sell a currency pair in the future at a predetermined price. For example, suppose you entered into a forward contract at 15:00 today. This means that at some point in the future you must buy and the seller must sell the agreed amount of euros at the agreed rate. Based on the conditions, such a deal will be profitable for you if the rate increases in the future, because get the agreed amount of euros cheaper than now.
Futures market of currencies:
Settlement on a deal with a futures contract, like a forward one, is carried out in the future. The main difference is that a futures contract sets a clear date for its execution in the future. Such an agreement is binding. It can also be resold to a third party.
What are base and quote currencies?
Why are the names of the traded instruments doubled? Because one currency is sold and the other is bought in any transaction. This is the backbone of any currency trading for beginners.
The first currency in a pair is the base currency. It is its value that is displayed on the chart of the currency pair.
The second currency in the pair is quoted. In units of this currency, the base value is considered.
The most traded pairs on Forex are 7 major currency pairs, they are called majors. Major currency pairs account for about 85% of the total market volume. Then there are minors – currency pairs made up of roughly the same popular currencies, but with a lower trading volume. And the third in terms of trading volume is closed by the category of exotic pairs – the national currencies of other states. There is also a subcategory of cross pairs or cross rates – this includes currency pairs, none of which are US dollars.
Although foreign exchange transactions allow the use of any two currency units, most interbank transactions involve the exchange of currencies for US dollars. This happens even when the bank’s goal is to sell one currency and buy another. For example, a bank wishing to sell Swiss francs and buy Israeli shekels usually sells its francs for dollars and then uses those dollars to buy shekels. Although this procedure may seem complicated, it actually turns out to be less costly for the bank than directly finding the owner of the shekels willing to exchange them for francs.
What drives the Forex market?
The exchange rate is changing every minute – it is on this fact that the idea of playing on Forex is based. An example from the currency trading tutorial: If you buy a euro for $ 1.2 and the next day it rises in price to $ 1.3, you can sell it and make a profit of $ 0.1. Of course, in the case of using small amounts, the income is small, therefore, one can speak of tangible earnings in Forex only when at least tens of thousands of US dollars are invested.
Exchange rates are influenced by various factors: economic indicators and policies of national banks, political changes, force majeure (for example, natural disasters, accidents at large enterprises, terrorist attacks and even weather conditions), as well as rumors, sentiments and expectations of market participants. Despite all this, Forex is relatively stable, since a fall in one currency always entails a change in the course of another, and an experienced trader can take advantage of this with considerable benefit for his wallet.
How does news coverage affect trade?
According to its influence on the Forex market, all news is divided into three main groups:
1) The most important news can cause a sharp rise in the exchange rate or literally completely bring down the market. As a rule, this kind of news includes reports of bankruptcies, defaults, terrorist attacks, global catastrophes, etc.
Immediately, we note that such factors have the maximum influence on exchange rates, but at the same time they lose their strength very quickly. Therefore, after the release of such news, transactions on the market must be opened without delay and for a short period of time, i.e. without waiting for the rollback to start.
2) The next group of news affecting the market is important news. This is news that is predicted and you can find out about their release in advance thanks to the economic calendar. This group includes publications of all kinds of indices: inflation, unemployment, consumer prices, the final indicators of economic development.
This newsgroup either reverses the trend movement or confirms it and makes it possible to achieve a fairly long-term market trend. With this newsgroup in mind, it is best to trade in the long run.
3) A newsgroup of moderate influence is events that cannot fundamentally change the market situation and the price. Such news can only either slightly weaken the trend, or confirm its direction.
Each trader has his own opinion as to where the price will go. And there can be only three options for movement at the moment: up, down, flat. The volume of the transaction depends on how strong the trader is in his decision. The more confidence – the more volume.
Market sentiment is the ratio of buyer to seller transaction volumes.
If the total volume of transactions prevails for the purchase – the market is “bullish”, for the sale – the “bearish”.
Market sentiment shows us the distribution of the percentage of buy and sell volumes in the total pool of deals. Based on this indicator, we can conclude how many traders currently believe that the market will go up or vice versa – down.
There are many techniques for determining market sentiment in Forex trading. Among them are analyst polls, collection of statistics from exchanges, etc.
As you know, many factors influence the exchange rate. Let’s designate the fundamental factors:
- the state of the market for goods – the economic life of a country or region, supply and demand, productive forces;
- monetary policy of the Central Banks, which affects the size of interest rates and interest in the currency;
- the state of the labor market – indicates the rate of economic growth of the country, characterizes commercial activity;
- business activity – production, commercial activity, sales and demand for goods and services;
- external and geopolitical factors – known political risks, spontaneous social risks, natural risks, and so on.
Credit rating is an opinion on the level of credit risk that must be taken into account during learning currency trading. Credit ratings are one of the tools that an investor can use to make a decision to buy or sell.
The ratings contribute to the development and smooth functioning of capital markets. In turn, capital allows entrepreneurs to create and develop businesses, regional and municipal authorities – to build roads and hospitals, representatives of the real sector of the economy – to build factories and create jobs.
The ratings reflect an independent opinion on the creditworthiness of members and allow investors to make the most informed decisions. The ratings reflect only one aspect necessary for making an investment decision – creditworthiness, and in some cases, also the level of debt recovery in the event of a default.
What is the spread when trading Forex?
In order to understand what a spread is on the exchange, it is enough to imagine any trading operation. For example, buying clothes with further resale. The difference between the price originally paid and the money received in the course of speculation in everyday life is called profit or income.
The spread on the Forex exchange is the difference in buying and selling each currency from a pair. In fact, this is the trader’s direct initial loss, which must be covered in the course of further trades.
What is Leverage in Forex?
Every trader sooner or later comes across the concept of leverage, margin and collateral. Moreover, having grasped the essence of the issue, traders are divided into two camps:
- The first high leverage is associated with the imminent loss of the deposit.
- Others find this tool helpful.
Leverage increases the collateral funds given by the trader to open and maintain a position.
In this case, the role of the broker is to provide the trader with the necessary amount of funds on the terms of margin trading. Thus, the main principle of margin trading is to provide leverage.
What is Forex Margin?
Forex margin is a cash collateral that is provided to a brokerage company in order to obtain a loan for a certain period of time. With the help of this loan, transactions are concluded, and a participant in exchange trading has the right not only to purchase, but also to sell assets. To understand what margin is in Forex, first of all, you need to know that it is directly related to leverage. This allows beginner and intermediate players to work with large lots.
For a trader, margin is the ability to open deals in various instruments (stocks, futures, currency pairs, options), the cost of which is many times higher than the capabilities of his trading account.
What is a Forex pip?
A Forex pip is the smallest step by which the value of a currency increases or decreases. In currency trading it is often called a pip or point.
Many traders ask the following question: how much is 1 pip and how to count correctly? For most currency pairs, one pip is the movement in the fourth decimal place.
Find out how to manage your risks
An investor has the opportunity to increase his funds, but he also risks losing future profits and, even more, investment capital. The deviation from the expected profit size determines investment risks in the financial market. Risk management methods are applied before and after opening positions.
Currency trading for dummies recommends setting a protective stop loss for each position. Stop loss is the point at which a trader leaves the market in order to avoid an unfavorable situation. It is recommended to use this tool to prevent large losses during opening a position.
In order to properly manage your investment funds, you must decide how much money you can afford to lose if the trade ends unfavorably for you, even before you open a position.
Review your strategies
The next key element of risk control is the risk of the entire account. If the trade turns against you, at what point do you stop and rethink your strategy? Will it happen when you lose 30% of all your money, 50% or 80%, or when you lose everything? Evaluate your market analysis methods and see if there is a need for further improvement or even change.
Also, check if your lot size is too large for the size of the entire account.
Risk management and money management go hand in hand, if you manage your funds successfully, you mitigate risks accordingly, and if you control risks well, you thereby protect your funds.
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