It wasn’t long ago that forex trading was something only professional traders did. These days, however, it’s been democratized through online trading platforms that give retail traders all around the world access to this huge global market. All that’s needed to participate is an internet connection and a device like a smartphone.
As of September 2022, over $5 trillion was exchanged every day in the forex market, which dwarfed the New York Stock Exchange’s $25 billion in daily transactions. It’s the new population of retail forex traders that made this figure what it was.
Accessing the forex market through an online trading platform may be an exciting opportunity, but you should only start doing it once you’ve built a solid knowledge base about what moves currency pairs, and about the nature of online forex trading. This kind of knowledge is not difficult to acquire, though you’ll have to sacrifice some of your time and energy to gain the skills. Many trading platforms assist by offering targeted educational materials to their clients, and also keeping them up to date with financial news.
In this article, we’ll lay down some of the forex trading basics to help get you started.
In the forex trading world, you’ll never simply buy or sell a particular currency like the US dollar or the Mexican peso. Rather, in order to buy one currency, you will have to sell another currency. The way this is done is through pairing currencies together. For instance, the EUR/USD currency pair partners up the euro with the US dollar. When you see a value for the EUR/USD – for example, 1.0515 – it means that one euro will cost you $1.0515. The value of a currency pair tells you how much of the second currency in the pair is needed to buy one unit of the first currency.
If you keep up with the news on the EUR/USD and notice it’s value has increased to 1.0565, you’d say that it has increased by 50 pips. Pip means “points in percentage” and refer to the fourth decimal place in a digit like this one. It wouldn’t be uncommon for a currency pair to move between 50 and 100 pips in one day of forex trading.
There is a wide variety of national currencies available in the forex market, but you’ll find that the bulk of forex trading is done with only 18 pairs. Practically, if you engage in forex trading, you are taking a position on the future price movements of one currency relative to another. If you open a “buy” deal on the AUD/USD, you are anticipating the value of the Australian dollar will appreciate relative to the US dollar.
Let’s say you are pleased to find, in the next couple of days, that it has done so. Your earnings will be measured in proportion to the size of the deal you opened. Likewise, when gauging how much you’d lose if the AUD loses strength against the USD.
Choosing Your Pairs
What, then, pushes the AUD upwards in its rivalry with the USD, or pulls it downwards? When there is a high demand for the AUD, meaning that many people are interested in buying it, its price goes up. When most people would like to sell it, its price drops. You may ask, in turn, what makes people want to buy or sell a particular currency. There may be several reasons operating at one time, and they would often include interest rate decisions of the relevant central banks, the emergence of data showing the economic growth of one of the countries involved, and important geopolitical events like wars.
Some people try to hedge against risk by trading in several currency pairs at the same time. While this strategy has merit, it’s important to find out which pairs are correlated with each other before opening any deals. For example, if you open “buy” deals on both the AUD/USD and the NZD/USD (the New Zealand dollar against the US dollar), you won’t have reduced your risk at all because these two pairs usually move together with each other, whether up or down.
Your research should go into finding out which pairs are correlated with each other, and whether their correlations are positive (like the case above) or negative (meaning they normally move in opposite directions). You should also broaden and deepen your understanding of what drives the movements of currency pairs, which you can do by reading a selection of articles from trusted sources. In general, it’s advised that novices take their initiation into the forex trading market slowly and deliberately, always maintaining the willingness to learn as they go.