Foreign exchange trading, more commonly known as forex trading, refers to the act of trading the different currencies of the world. With its roots dating back to 1970s, foreign exchange trading caters to the Forex market. This market started with the introduction of floating currencies and free exchange rates and has grown to become the biggest market in the world, trading in more than USD1.5 trillion in a single day.
An investor’s goal in forex trading is to generate profit from the movement of foreign currency and is typically done in currency pairs. When trading foreign currencies, you should always remember to trade only if you expect the value of the currency you are investing in or buying to increase. If the currency you bought increases in value, you must then simply sell the other currency so as to gain a profit. An open trade, also referred to as an open position, is a type of trade where in a trader has bought or sold a certain currency pair but is still yet to sell or buy back its equivalent amount.
It is estimated that about 70% to 90% of the foreign exchange market is speculative. This means that the individual or institution that has sold or bought the currency has no definite plan of taking a delivery of the currency; instead, these traders are exclusively speculating on that specific currency’s movement.
If you are new to this domain, you might find yourself at a loss once you have decided to take on the foreign exchange market. Firstly, you should know that the forex trading provides its investors more chances to earn and generate profit as compared to the stock market. Money moves relatively faster in forex trading which prevents any single investor from affecting the market price too much. Trading also opens and closes within seconds – something not possible in the stock market. Here are a few tips on how to get started on forex trading.
To begin trading, you will need to create a Forex account. This can be done by filling in an application form and signing the margin agreement which allows the broker to step in at any point in time. You will then have to come up with a trading strategy that works for you. Different traders use different strategies, and no one strategy is guaranteed to work for everyone. So, do not just copy a trading strategy from a successful investor, instead, find the right style for yourself.
Study and understand the trends and movement of prices. You may also opt to study historical trends to gain a deeper understanding of the movement of the prices of currency. Getting familiar with the top five currency pairs is also important. These currency pairs are USD/Yen, Euro/Yen, Pound/USD, Swiss franc/USD, and the Euro/USD.
Now that you have a bit of insight into the world of forex trading, you should get in there and start churning in your profits.
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