Understanding Foreign Exchange Trading
By Space Coast Daily // January 5, 2021
Are you new to Foreign exchange trading? This write-up would introduce the concept and show you the nitty-gritty of trading in a way it is easily understood.
Trading and Foreign Exchange Made Easy
Before this day, foreign exchange trading involved trading a country’s currency for another. An individual seeks a broker or bank before his trip for this transaction. This exchange would enable him to change his currency to that of the country he intends to travel to.
Ideally, foreign exchange is trading a currency against another. The currencies involved are known as pairs. The brokers predetermine these pairs. Trading is based on the differences between both pairs.
The foreign exchange market is where this trading takes place. It is a large and lucrative market. Here, time is an important factor. When to hold, when to sell, or buy are crucial aspects of foreign exchange trading. These decisions could produce either positive or negative results.
Easy Facts About Foreign Exchange Trading
▪The market operates five days a week round the clock. Buying or selling can take place during this period.
▪There are different dealers through which you can execute a trade.
▪Accessibility is open to all. Before this time, it was a concept for large companies, governments, etcetera. Today anyone with an internet connection and device can access the market via a broker.
▪A trader is someone who buys or sells a particular currency.
▪Foreign exchange trading doesn’t involve a physical exchange of real money.
▪The foreign exchange market is electronic.
How Is the Foreign Exchange Market Different?
Some differences exist between the forex market and other markets. Other markets here are the stock market, options market, futures market, etcetera. Here, there are fewer rules or guidelines. Investors are not kept in a box. The market allows for flexibility because there isn’t a central body that controls the market.
Another difference is the absence of fees or commissions for trading. Other markets have such fees in place. Also, traders are not restricted or limited. A trader can buy as much currency as he can afford. Getting in and out of the market is possible because the foreign exchange market is liquid and is open 24 hours.
Illustration of a Trade
As earlier said, the market is responsible for the value or exchange rate. Examples of currency pairs are USD/CAD, EUR/USD, etcetera.
For instance, the U.S dollar versus the Canadian dollar, USD/CAD would have a price such as 1.2569. This price implies that a trader can purchase a USD for 1.2569 CAD. When an increase occurs, and the price goes up to 1.3336. a trader buys that same USD for 1.3336 CAD.
Take note that the USD exchange rate has gone up. A trader now needs more CAD to buy a USD, creating profit for a trader with USD. At a foreign exchange market, the currencies are traded in lot sizes. We have micro, mini, and standard lot sizes. 1000, 10,000, and 100,000 worth of a currency represent micro, mini, and standard lots sizes, respectively.