The basics of currency trading
The digital economy offers multiple ways to earn a profit. One of the oldest and most popular ones is Forex. Currencies of different countries bring profit to traders who exchange them wisely. Discover the fundamentals of foreign currency trading in the UK today.
A look back
Until the 1990s, currency trading was only accessible to institutional players.Transactions by major organizations, like banks and hedge funds, still account for the largest share in terms of volume. Overall, this biggest financial market in the world has a daily turnover of up to 5 trillion US dollars. The sheer scale is therefore immense.
Who can trade
Today, any internet user with basic knowledge may start trading currencies through a broker. This intermediary is indispensable. Even though the required software (trading platforms) may be found online, accounts are only opened by brokers. A popular provider operating in the UK today is FXTM.
For a person with no prior finance experience, the idea may seem daunting. It must be noted that no investment is completely risk-free. However, reputable companies provide their clients with multiple educational opportunities. From tutorials and guidance to copy trading, these aspects will be covered below.
The logic of trades
Currency exchange is familiar to all travellers. When going abroad, you are often faced with the need to exchange your money into the country's national currency.
These rates are always in flux, so it is possible to benefit from these shifts - just like holders of stocks do. If you buy low and sell high (e.g., purchase Euros while they are cheaper and sell them following a spike), the difference constitutes profit.
As a trader, you will be using one of the cutting-edge platforms available today (e.g., MetaTrader 4 or 5). This software is packed with advanced forecasting tools that facilitate decision-making. Here are the very basics a trader must know:
1. Pair-based nature
All currencies are traded in pairs only, and each contains a base currency and a quote currency separated by a slash. One of the most popular combinations - major pairs - is EUR/USD. Its value (e.g., 1.08) shows how many US dollars one Euro is worth. In the given example, a Euro will cost you 1 US dollar 8 cents. Additionally, there are so-called "cross" (not including USD) and "exotic" (e.g., including TRY) currency pairs.
2. Ask or bid?
A trader has more than one price to consider. Each pair comes with its own "Ask" and "Bid" price. The former is used when the base currency is being bought, and the latter is applied to selling. A currency is always slightly more expensive for its buyer than for its seller.
3.Spread
The difference between the Ask and Bid prices (e.g., 1.0962 - 1.0958) is referred to as the "spread". Basically, it determines the broker's commission and the seller's profit. Each 0.0001 is a "pip", so the above-mentioned difference of 0.0004 is read as "four-pip spread".
4.Types of positions
A trader opens either a "long" or a "short" position. The first type refers to the scenario when a currency is bought and later sold back at a higher price. The second means you sell a currency intending to buy more of it after its value drops. Hence, you go long if you expect the currency to gain value, and go short when you think it will depreciate.
How to gain experience
It is recommended you start with a demo account.This risk-free mode enables you to explore the functions of the platform with no financial risk involved. You will not make any profit, either, but the demo period is a must for any reasonable rookie. With reliable brokers, demo registration procedures are quick and simple.
Once experience and confidence are gained, it is time to open a live account. And if you still fear mistakes, try copy trading. This way, decision-making is delegated to a professional (strategy manager), whose trades are simply replicated in your account.
Due to the popularity of Forex trading, the internet is packed with tutorials and other educational content. It is. however, crucial to choose trustworthy sources. Your broker should be able to provide ample teaching material and guidance.
