Forex Trading

Best Forex Trading Brokers

Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69-80% of retail investor accounts lose money when trading CFDs with the above providers.You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

The Forex market is the trade arena which allows investors to trade foreign currencies throughout the trading day. This market is the largest in the world and has a daily turnover of 5 trillion USD.

Forex Markets are active 24 hours a day, 5 days a week. The value of the currencies change every moment throughout the day according to the supply and demand levels.

Just as in a regular market, we can buy and sell currencies. There are more than 100 currency pairs in the world which can be traded. Currency exchange rates are uniform throughout the whole world. If the exchange rate of Euro in relation to USD is 1.522 in London, it will be 1.522 in Congo, New York, Australia and in Hong Kong.

The forex market is largely composed of speculators who buy and sell currencies to profit from the change in the exchange rate of a currency. Only five percent of the transactions are for real purposes of commerce such as: industry, tourism etc. The remaining 95% of the transactions are used for trading reasons. This is a zero-sum game: the total gains are equal to the total losses.

What is Forex Trading?

In simple terms, it’s the simultaneous buying of one currency and the selling of another. When you trade forex, you can trade with a broker through a trading platform. Currencies are always traded in pairs, for example GBPUSD (trading the British pound against the US dollar). The first currency in the pair is known as the “base” currency, the second one is the “quote” currency. They are also often referred to as “buy” and “sell” or “offer” and “bid”. A GBPUSD price of 1.5531 means that GBP1 buys you USD1.5531. The most traded currency pairs are USDEUR, GBPCAD, CHFJPY, AUDNZD.

How to Trade Forex?

You trade currencies in pairs

All currencies are traded in pairs and each currency has an official abbreviation, for example GBP for British pound, USD for US dollar and EUR for the euro. The “base currency” is the first currency in the pair and the “quote currency” is the second currency. These are commonly referred to as the bid and ask price.

Price differences create trading opportunities

You can trade currencies because the values of currencies change. The exchange rate tells you how much of one currency you need to pay to buy one unit of another. In forex trading, exchange rates are displayed as the bid and ask price for a currency pair. The difference between the bid and the ask price is known as the spread and it’s how your broker generates much of its revenue. Spreads can vary from broker to broker, so look out for tight spreads in order to minimise your trading costs and maximise your profits.

Know what’s behind the spread

It’s important for you to understand how spreads are measured. For example, if GBPUSD has a bid price of 1.5530 and an ask price of 1.5533, the spread is three points. Although in forex trading, most people call them pips. A point or pip is the smallest movement up or down in the price of a currency.

You can trade in bullish and bearish markets

When you trade forex, you’re buying one currency and selling another at the same time which means you can speculate on rising and falling markets. This is one of the major advantages of forex trading. You are likely to hear forex traders talk about bullish and bearish markets. When a market is rising or believed to be about to rise we call it “bullish”; when it’s falling or believed to be about to fall it’s called “bearish”.

How To Place Your First Forex Trade

First of all, consider whether the currency you wish to trade is likely to rise or fall. This forms the basis of your trading strategy. In a buy position, you believe that the value of the base currency, in our example the euro, will rise against the quote currency, the US dollar. Let’s assume the price of the EURUSD is 1.3038 on the bid price and 1.3040 on the ask price. Therefore, the spread is two pips. When you buy, your trade is entered at the ask price of 1.3040. Later you decide to close your trade and the bid price of the EURUSD pair is 1.3072 and the ask price is 1.3074. Your trade has gained 32 pips. If each pip was worth one US dollar, you would have made a USD32 profit. Now let’s see what happens with a sell position. You believe that the value of the base currency will fall against the quote currency. Using the same example, this means you believe the price of the euro will weaken against the US dollar.

The current value of the EURUSD pair is 1.3038 on the bid price and 1.3040 on the ask price. As you’re selling, your trade is entered at the bid price of 1.3038.

Later in the day, you look at the position and the EURUSD is now at 1.3072 on the bid price and 1.3074 on the ask price. Your trade has lost 36 pips. You decide to close your position at the current price of 1.3074 and accept your losses. If each pip was worth USD1, you would have lost USD36.

What affects the Forex Markets

The key driver of forex movement is supply and demand. As external influences change the amount of a particular currency in circulation, or how much people want to hold it, its price will move. Here are three major factors that can impact supply and demand in forex.

Interest rates

If you purchase an asset in a currency that has a high interest rate, you can get higher returns. This can make investors flock to a country that has recently raised interest rates, in turn boosting its economy and driving up its currency.

However, higher interest rates can also make borrowing money harder. If money is more expensive to borrow, investing is harder and currencies can weaken.

Economic announcements

The steady stream of announcements concerning a country’s economy – like GDP, inflation and production figures – can have a major impact on market confidence, and in turn cause forex movement.

Central bank actions can also have a major effect. Quantitative easing, for instance, involves increasing the amount of currency in an economy, which can cause its value to depreciate.

Market Sentiment

The overall feeling among investors about the direction of an asset can be a major influence in any financial market, and forex is no different. If the majority of traders believe a currency is on the way up or down, it can influence others to follow suit.

What are the advantages of Forex Trading

24×7 Operation

The Forex markets are open 24 hours a day, 5 days a week, which means we can open and close trades at any hour of the day, unlike equities and commodities trading. The highest volume of trading usually takes place as the various global markets open throughout the day – starting in Sydney, moving on to Tokyo, London and finishing in New York.

Liquidity

The FX market has huge appeal for the retail trader as it is an extremely liquid market. A liquid market means that there are a huge number of buyers and sellers resulting in swift trade execution – both buying and selling – at all times during market hours.

Leverage

Due to the high level of liquidity in the FX market, most brokers will offer a higher leverage than other markets. This means that a trader only requires a small percentage of the overall price of a position. For example, if we had leverage of 500:1 and have $200 to invest, we could take a position of $100,000.

When we use leverage small movements in the price of a currency have greater weight, which can lead to greater gains on smaller investments. However, leverage does work both ways and can magnify losses.

Low Entry Requirements

Due to the high level of leverage it is possible to open accounts with FX brokers from as little as $100. This is a much lower entry level than other types of investments. This too minimises your risks when getting your feet wet in the trading world.

Low Transaction Costs

FX brokers mainly generate their revenue from the difference between the buy and sell prices, known as Spread. Due to the high trading volumes it is quite a small fee when compared to the fees charged by a traditional stock broker.

No Market Manipulation

It is nearly impossible for one big player to corner or manipulate the FX market due to its size. Unlike smaller markets where a large institution may be able to affect the price by placing a big order, the Forex market is so big this will not have a major impact.

What is “Spread” in Forex Trading

You’ll always see two prices when trading Forex: the buy price, which is higher than the current price of the pair, and the sell price, which is lower. The difference between the two is called the spread. If you think the base currency is going to strengthen against the quote currency, you can buy the pair at the buy price. If you think the base currency is going to weaken against the quote currency, you can sell the pair at the sell price.

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