How much of the Foreign Exchange Market do you know? Do you know the basics of the Foreign Exchange Market? What about its working principles? Have you been duly informed on how people trade it and what makes currency pairs move?
The biggest market in the world
Foreign Exchange Market is the biggest market in the world, and trillions of dollars are being traded around the globe daily. It is appealing to all traders regardless of if they are trading in smaller or larger sizes. The reason is that it’s relatively easy to get your trades filled. At the same time, the cost of doing business is much lower when compared to other markets.
With the currency market, no currency is isolated, none of it moves in isolation. Every trader has the idea of currency pair where one currency is quoted against the other. There are often a lot of permutations that can be traded in the Foreign Exchange Market.
Most people starting are always concentrated on major currency pairs because there is often a lot of activities going on there. The most popular markets are Euro/Dollar, Dollar/Japanese Yen, Pound/Dollar, Dollar/Swiss Franc.
When you are looking at currencies and their pairs, it’s all about relative value. You are trying to see if one currency is stronger or weaker than the other.
Take the Pound/US Dollar for instance, in January 2017, 1 pound will buy you $1.22. At the beginning of September, the pound had risen in value. Here 1 pound will buy you $1.32.
Therefore, when we are looking at the Foreign Exchange Market, and trading, we are looking at the value of one currency versus another.
Try not to get confused
The fact that there are lots of currency pairs can be a bit confusing for you as a beginner. Most especially when you click and buy, for example, the dollar/yen. It would be difficult to determine if you are saying that either the dollar or the Yen is going to go up in value. It is understandable why these could be confusing for you. Notwithstanding, it is very easy to understand the Foreign Exchange Market when you are buying and selling.
How does directional trading work?
When it comes to directional trading, it’s very easy, and this is how you should understand it. If you buy Pounds/US dollar, it’s the first quoted currency in the currency pair that you are buying or selling. Therefore, if you buy the Pound/Us dollar, it means you are speculating that the pound is going to go up and that the US dollar is going to fall.
So, the value of the pound will increase against the US dollar. Now, if you think it’s the pound has gone up top far, and the market is going to fall, how would you profit from it? The way to do that is to sell the pound Currency against the US Dollar. With that’s move, you are speculating that the value of the pound will drop and the chart will go lower. That’s the rule of thumb about buying and selling the currency pairs.
Read also: Forex Trading: How to start trading like a pro
How about trading hours?
When it comes to trading hours, Foreign Exchange Market is a true 24 hours market. It starts off Sunday night, UK time when the Asian market is open for business, and it trades all round the clock till Friday evening when new York finishes off the weekend. And then on Sunday, the whole thing starts again.
The 24-hour market shouldn’t be intimidating to you, because thanks to the stop losses and take profit orders, you can set up your trade. so if a certain level gets hit, you can come out for a small loss or you come out for the profit you were expecting. The fact that it’s a 24-hours Market doesn’t mean you have to watch these markets around the clock sitting there in your pajamas holding your eyes open. You can use orders to manage the risks for you.
Use leverage to manage risk
When you are trading in the foreign exchange market, you are doing so using leverage. Even though you have a 100 thousand dollars positions in one currency, you don’t have to be tied up to the whole amount.
This is because traditionally, currencies do not move that much during the day. You are simply trading using leverage, so you may have to put up, half percent or one percent value of the position. With that, you’ll have a situation whereby the small sum of money controls a much bigger financial position.
Of course, that gives you the potential for greater profits, but, hand in hand with that goes the risk of huge losses. This is why it’s ideal to use stop losses to manage the risks.
Factors that affect the foreign exchange market
The moves that affect the Forex currency pairs could be anything. They include things like interest rates, unemployment numbers, as well as political events.