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The Basics Of Foreign Exchange Trading

This article is about how to enter the foreign exchange trading market and what you should be aware of.

Foreign Exchange Trading Basics

The foreign exchange trading market operates day and night, from Monday to Friday.  When you consider the volume of transactions that take place in this market, it can be considered as the largest financial market.  It is at times quite a volatile market, but extremely liquid.  To enter and trade in this market successfully, you will have to offer up some of your time to keep ahead of economic events, financial news and political events related to the countries linked to your currency pairs.

The forex market maintains the high level of transactions because there are so many entities that need foreign currencies on a daily basis.  Large companies require foreign currency to undertake trade with foreign countries.  A large portion of the market is taken up by central banks buying and selling currencies in order to maintain their foreign reserves or in an attempt to stabilise their domestic currency rate.

Why Trade Forex?

The forex market does not have a centralised exchange as the stock market has.  All transactions are carried out via electronic means and this is what has allowed the market to grow so quickly.  It has made it possible for individual traders to enter the market easily.  There are several reasons why small traders should enter this market.

  • They do not require a very high capital investment to commence trading
  • The high risk levels in the market can be controlled by using the mechanisms already in place
  • The constant fluctuation and movement in the currency market makes it simpler to make a profit
  • The level of profit you can achieve in trading varies, but if you make the effort to implement sound risk policies and strategies, you should make money

How Does The Market Work?

All the transactions in the forex market are done in pairs.  This is because you are buying a currency and selling a currency at the same time.  The rates you receive from your forex broker will be indicated as a ratio.  An example is if you wish to trade the US dollar and the Australian dollar, your quote will be shown as USDAUD=1.0915.  This means that to buy one US dollar, you need to have 1.0915 Australian dollars.  If the value were to change and the quote was amended to read USDAUD=1.0918, it implies that there has been a rate change of three pips.  That movement in pip is the profit you would show if you were trading.

Foreign Exchange Trading Risks

Due to the speculative nature of the market, the risks levels are extremely high.  To avoid suffering huge losses, you need to implement adequate risk policies.  You should set a suitable amount you are prepared to lose in the event that the market moves against your trade.  You should not be tempted to gamble with the funds you have if you are not prepared to lose it or cannot afford to lose it.  If you are showing one loss after another, you should leave the market for a while as this will prevent you from trading on an emotional level.

It is vital that you understand the market completely and obtain adequate experience before you start trading in the live market.

 

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