Forex Trading: Introduction to Currency Trading

Considered as the largest market in the world, the Forex (Foreign Exchange) is the place where currencies are traded on daily basis, with more than 5 trillion US dollars being exchanged.

What is Forex Trading

For individuals sitting on a large pile of cash, the market can also be used to reduce financial risk by diversifying the currencies that they hold. Historically, the average citizen had no direct access to the currency exchange market but the rapid pace of technology has leveled the playing field, allowing virtually anyone to engage in currency trading through the use of personal computers and smartphones .

Becoming a Trader

The smartphone has revolutionized trading, with almost anyone being able to trade anywhere, anytime, just by downloading an application. Having access to the market is a huge opportunity but as with all things, trading carries its own set of risks.

The first term that a budding trader needs to get familiar with is Volatility. This term is a measure of uncertainty regarding a certain financial instrument’s future value.

Volatility determines the magnitude of your profits and your losses. Essentially, a volatile currency is more likely to gain or lose a lot of value in a short period of time. Currencies with low volatility on the other hand are relatively stable, with their price fluctuating at a steady pace.

If you inferred that currency trading revolves around the two directly proportional concepts of risk and reward, then you are precisely correct. The riskier a trade is the more profit you potentially gain and the larger your losses should the unfortunate happen. Unlike gambling though, the risks of trading can be minimized with experience and skill. Becoming an expert, however, takes a long time, which is why hiring a brokerage firm is a wise choice for the uninitiated.

Of course, the advice of brokers is much like training wheels that can’t stay attached to the bicycle forever. Any trader worth his/her salt eventually needs to traverse the trading world using his/her own wits. This is the reason why all successful investors have these traits in common: they are well-informed, well-read, never greedy, and constantly stay on-top of the latest news regarding the financial world.

The Tricks of the Trade

After finding a brokerage of your choice and downloading a trading platform on your device, it’s time to start using the services of your firm to the fullest potential.

The currency exchange market is one of the least volatile financial markets. The advantage of this is that it’s relatively safe while the downside is its low profit gain. Brokerage firms have found a way around this though through the use of Leverage.

Please bear with all the terms that we have to throw around. The financial world is in love with giving simple concepts complex names. Leverage is a term used in physics that relates to the amplification of force through the use of a lever. Leverage in finance, however, is much simpler. It is basically a loan that a brokerage gives its clients in order to give them more buying power, which subsequently results in higher gains and losses.

Since the currency exchange market has relatively low volatility, brokerage firms offset this by amplifying their traders’ purchases. In the currency market, leverage can be as low as 50:1 and as high as 250:1. Let’s use the 50:1 ratio as an example of how leverage affects a trade. Normally, having $100 in an account will allow a trader to buy $100 worth of currency. However, a trader can buy $5000 worth of currency using the 50:1 leverage.

It’s important to keep in mind that in the currency exchange market, risk and reward are directly proportional. So while your gains are amplified if you leverage your loans, your losses are equally amplified should your investment fail.

Borrowing from your broker to leverage your capital is called Margin Trading. In order to invest on margin, a trader must have a minimum amount of money in his/her account. Because of the amplified gains and losses of margin trading, there are times when the amount of money in a trader’s account becomes insufficient to continue trading on margin. In these instances, brokers issue a Margin Call, which is basically a demand for additional deposit, and it is done so that the trader’s account can meet the minimum maintenance margin.

Staying Ahead of the Curve

Trading currency is an opportunity that is riddled with responsibility. Under every successful trader’s shadow is a person whose account is in the red. Most brokerage firms have up-to-date information networks and reading up on the latest trends could mean the difference between massive profits and demoralizing losses.

Trading decisions that aren’t backed with research and technique are doomed to failure. There is a reason why we’re called traders and not gamblers. While experience is definitely the best teacher, it’s also the harshest mentor. Besides, it’s a lot smarter to learn from the experience of veterans and avoid the pitfalls that you otherwise would have fallen for. This is where brokerage firms shine. Constant support from a licensed broker with a breadth of experience can stimulate the growth of a trader while protecting him/her from making career-ending decisions.

If you’ve reached this far into this currency exchange crash course, the amount of work related to this field might be daunting, but this kind of opportunity is always backed by responsibility.

Currency exchange is not a method to achieve overnight success; it is a difficult path that leads to it.