Forex trading simply refers to the global trading in Currencies. The forex trading volume is the largest in the world of all the commodities traded. Everyday, about $3.2 trillion worth of trades occur in the world’s forex exchanges. Most forex trading is speculative in nature where traders and market participants are betting on the prices of currencies, the main centers for currency trading are Sydney, Tokyo, London, Frankfurt and New York. This worldwide distribution of trading centers means that the forex market is a 24-hour market. The most commonly traded currencies are the so-called “majors” Euro, US Dollar, Japanese Yen, Dutch Mark, Australian Dollar, Swiss Francs, British Pound, and Canadian Dollar, and others.
Foreign exchange markets are generally traded on margin, this does not mean that one must trade on margin, if one has enough trading capital, they may prefer not to trade on margin. But trading on margin allows individuals with small trading capital to trade in currencies; nevertheless one must understand that losses encountered in margin trades are the same as those encountered in non-margin accounts. Some companies may require 1% margin, meaning that if you want to trade one million dollars, you have to deposit 1% of that in your trading account, which amounts to $10,000. Your first step in trading currencies would be to open a margin account. Brokerages companies have their minimum for opening accounts, so your best bet is to contact each brokerage company and ask for their minimum deposit account requirement.
Entering your Forex Trade
Depending on your level of experience, you can enter your trades through the help of live brokers, who generally charge more in commissions or you may trade online, once your trading account is opened. The advantage of trading online is that you may trade anytime even when regular exchanges are closed, except on the weekends.
Use of Stop Loss Orders
When trading on Forex markets, you may enter a trade and also signify where you want your trade to be filled or your exit price often known as stop-loss order. When you choose to exit from your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds. All currency accounts are marked to the market on daily basis, meaning your gains and losses are reflected on your accounts instantly. Currency markets offer some advantages, they are highly liquid. Liquidity is the ability of an asset to be converted into cash quickly and without any price discount.
Use of Leverage
Currency trading firms offer more leverage to traders than any other market in the world. Many firms may offer you up to 200 to 1 leverage, this in simple terms means that for about .5% movement in the market, you could potentially gain or loose 100% in the total value of your account. The point to note here is that high leverage works both ways, you could make lots of profits, but can also loose lots of money depending on the direction of the market. Unlike stocks, only global macro events or interest rate changes affect the currency markets.
As seen from this Forex trading basics, enormous opportunities exist in the currency markets. It nonetheless requires skills and knowledge to trade successfully. As with other investments, currency trading involves profits and losses. Before trading in the forex markets, one must get all the required knowledge and information because as many opportunities exist for gains so also are losses. I hope this article has helped in some way to explain some of the basics of Forex trading.