As you may already know, forex is short for foreign exchange. Most likely you have already dealt with foreign exchange and various currencies from traveling overseas, but have you ever thought about the possibility to trade them for a profit? If you want to learn to trade, here are a couple of basic concepts that all forex traders should know and understand.
While traders in the stock market have thousands of stocks to choose from, the choices for forex traders are much more limited. There are only eight major economies with currencies that are popular among traders. They are the United States, Canada, the Eurozone, Australia, New Zealand, United Kingdom, Japan, and Switzerland. The currencies of these countries are known in forex trader circles as “the majors.”
While you can certainly trade currencies from other countries as well, the majors have the most liquidity and the tightest spreads between buy and sell prices, which are both very important costs to pay attention to for active traders.
These economies are also known to have the most extensive financial markets in the world. A trader’s job is basically to figure out which of these currencies will appreciate and which will depreciate, and then place his trades accordingly in the forex market.
What affects exchange rates in the forex market?
Lots of different things have the ability to affect exchange rates in the forex market. Among the most important such factors are interest rates. These are set by the central bank of each respective country, with higher interest rates usually leading to a stronger currency over time.
Other important factors that influence currency exchange rates are economic growth, unemployment numbers and the balance of trade between countries. In general, any news that comes out with better-than-expected economic numbers about a country has the potential to boost the value of that country’s currency.
Another key thing to understand about the forex market is that currencies are always traded in pairs. This means that in order to buy one currency, you will simultaneously have to sell another currency. Although this may sound confusing at first, it really makes a lot of sense when you think about it.
In the same way, the value of one currency must always be measured in terms of another currency. There is no such thing as a currency getting stronger or weaker by itself without comparing it to others!
How to utilize leverage – safely
The forex market is one of those markets that can offer traders an incredible amount of leverage, which basically means that a trader will borrow money from his broker in order to boost his buying power in the forex market. Globally, brokers in the forex market offer anywhere from 1:20 to 1:500 in leverage, and sometimes even more.
Leverage can be very dangerous because it could cause you to lose money much faster than if you were only trading with your own cash. However, it can also boost your profits in the same way. This is the main reason why the forex market is so attractive for the so-called independent retail traders – people like you and I who are trading forex from our own homes.
Once you learn a few profitable trading strategies and master the game, the forex market can provide you the opportunity to make big profits with only a small amount of initial capital in your trading account. This is the true power of forex trading and why so many people want to learn about it!
Understanding interest rates
Since interest rates are key to how exchange rates between currencies move, understanding interest rates and the direction they are headed in is one of the most important skills for any professional forex trader.
One of the ways traders keep up with this is to watch statements and speeches by central bankers very closely. When, for example, the Chairman of the US Federal Reserve speaks, you can be sure that forex traders all over the world are glued to their screens, watching for any hints of where the interest rate may be moving in the future.
Events like these usually lead to extreme volatility in the affected currencies, which is also something that specialized traders have learned to take advantage of.
The forex market is the largest financial market in the world with over $5 trillion in daily turnover, and offers liquidity like no other market. The opportunities this represent are simply too big to ignore. However, it is essential that all new traders take the time to really understand forex trading and learn important risk management strategies. Doing this could set anyone up for long-term success and an unlimited income stream from anywhere in the world.
If this all sounds interesting to you, you are welcome to learn more about forex trading basics at our free forex workshops that are regularly hosted around Australia. We look forward to seeing you there!