If you are interested in the theme of investment, you will have probably heard about foreign currency (forex) trading now. You may even know a few people around you who trade in the forex full time as a career.
Forex trading refers to the buying and selling of currency pairs in order to generate profits. The goal is simple; to achieve profits from trading in the level fluctuation of the major currency pairs.
Before starting in foreign exchange trading, here are some important things that you first need to know.
#1 when you trade Forex, you don’t actually have the physical currency
While some people like forex trading will traditional moneychanger to buy foreign currency, it’s completely different.
The biggest difference when it comes to forex trading is that you do not have a physical currency that you can trade. Of course, if you go to a moneychanger you have to give the person some money in one currency to get money in another currency.
For example, if you want to long EUR/USD (this means that you are buying the euro (EUR) with expectations that it will perform well against the US dollar (USD)), you don’t actually have any US dollars, and do not have to sell any dollars to buy a euro.
Instead, what happens is that a forex broker you can use the electronic records of your system, and any profits or losses in trade, based on how currency rates fluctuate.
If rates move in your favor, you will make a profit. If rates move against you you will incur losses. They want to stop trading, you just get out of the position. You don’t really have physical currency that you can trade.
#2 know the spread you are facing
Differences of supply and demand is an important component of forex trading.
You will immediately realize how competitive forex spreads as compared to the spread we are used to seeing on the board in the traditional money changers. While most of the money changers earning a spread of about $0.01 or 0.02 for each dollar traded, forex spread can be as low as $0.00006.
The spread of the face is important because it ultimately affects the profitability of your trades. Traders start every trade in a slight loss due to the spread of it download. Hence the lower the spread is, the easier it is to tie and then make profits on their trades.
Major brokers like IG are able to provide competitive spreads to their customers because of the volume of transactions that hold all day. The table below shows the minimum average margins that the trade can expect from the IG all major currency pairs.
Note: minimum & average spread quoted in pips. 1 point = 0.0001
#3 is to grab the profits from the fluctuations
If you are new to trading, it’s easy to be confused by the differences between investment and trade. Here’s one way to think about it.
When investing, you’re buying an asset that you think will appreciate in value over the long term. When trading forex, your objective is to make profits based on the fluctuations of exchange rates in the short term. Although some exchange rates may not deviate a lot in the long run, you can achieve profits if you are able to capture short-term price volatility successfully.
#4 be very familiar with currency pairs that are trading
Just as there are many stocks you can choose from, there are also many currency pairs that you can trade. Popular pairs include EUR/USD, USD/JPY and EUR/GBP.
Always remember that different currency pairs on different types of goods. Trading strategy that works well on one currency pair may not be suitable for another.
Another area that new traders tend to overlook the major macroeconomic policies that may affect the currency. These include statements concerning interest rates, fiscal spending and policy updates. These ads can have a large impact on short-term exchange rate fluctuations or even the introduction of shocks. So make sure you know when these ads will be delivered and be prepared for them in advance. If you are in doubt, stay out of trades during these periods of extreme uncertainty.
#5 you used to leverage a double-edged sword
Unlike popular beliefs, the foreign currency trading itself isn’t really “risky”. Most of the major currency pairs barely ever fluctuate 2% to 3% during a short period of time.
What makes forex trading the most dangerous is that the leverage used. It is common to find leverage of 50:1 for forex trading. This means that only $1000, a trader can take a position of up to $ 50,000.
In this example, a 1% movement in the currency means that your employee is now standing in either the $50,500 or $ 49,500. This translates into a 50% profit or 50% loss on $1,000 of capital. This highlights that while 1% of the movement in currency rates may not seem significant, leveraging up to 50:1 could lead to 50% of the profit or loss on capital.
During volatile periods, when currency pairs can take sharp fluctuations, it is possible to to incur losses that exceed the initial capital expenditure. This makes forex trading dangerous if traders are not able to adequately manage their risks.
Try a demo account before you start
Many people are enticed by the foreign currency trading because of the possibility to be able to make profits only a small capital expenditure. At the same time, however, should not only focus on Profits we hope to make, while ignoring other important aspects of forex trading.
If you are new to forex trading, it is highly recommended that you first try your strategies with a demo account first. IG allows you to exercise your trading career with $ 100, 000 in virtual funds, giving you the opportunity to become familiar and confident with trading before making a decision on whether you should put in actual money in your craft.
This article sponsored by IG,the world’s No. 1 CFD provider (by revenue excluding FX, 2016). All views, opinions and recommendations expressed in the article are the independent opinion of DollarsAndSense.sg and does not in any way reflect the views, opinions, testimonials or recommendations from IG Asia Pte Ltd (company. Reg. No. 20051002K) (“IG”). Information for educational purposes only and does not constitute any form of investment advice or an offer or an invitation to invest in any financial instrument. No responsibility is accepted by the IG for any loss or damage arising in any way (including negligence) from anyone acting or refraining from acting as a result of such information or materials.