If you are interested in trading today’s financial markets, you have many choices at your disposal. You can trade stocks, bonds, commodities, options, forex and more.
What many people do not realize is that the forex market is the largest market on the planet. According to some reports, the daily trading volume that takes place in the forex market is more than the trading volume in stocks for an entire year.
What exactly is the forex market?
The forex market is a global, decentralized market for currency trading. Put another way, the forex market is a way to try to capitalize on fluctuating currency values. For example, if you believe that the value of the euro is going to decline versus the U.S. Dollar, you could sell euros and buy dollars.
How does forex trading work?
Forex trading is often referred to as “pairs trading” because it involves the simultaneous purchase of one currency and sale of another. Currencies are always in a state of flux, and forex traders look to try to take advantage of movements in currency markets.
If a trader believes that the value of the Canadian Dollar is likely to decline against the Japanese Yen, the trader would buy Japanese Yen and sell Canadian Dollars. In another example, if a trader felt the Australian Dollar was going to decline versus the New Zealand dollar, he or she could sell Australian Dollars while Buying New Zealand Dollars. Another way of looking at it is a trader is buying or selling the spread between the two currency values.
Top Currency pairs
While there are many currency pairs that can be traded, the most popular tend to be:
Sticking to more actively traded pairs may provide better liquidity and tighter bid/ask spreads.
Speaking of spreads
A forex pair is quoted as a spread. What this means is that if you want to trade the EUR/USD pair, for example, you can buy euros at one price or sell euros at another price. For example, this pair could be quoted as: 112.90/112.92. Such a quote would mean that you could buy euros at 112.92 or sell them at 112.90. The two point spread in between, referred to as the pip spread, represents the dealer’s profit.
What drives forex markets?
Today’s forex markets can be driven by many issues. Some of these issues include differences in monetary policy, interest rate differentials, risk aversion, geopolitical events, import and export data and more.
While the forex markets do constantly fluctuate, they do also see extended moves that take place. For example, the euro has been trending lower versus the dollar for some time now.
How to get started
One of the biggest reasons that forex may be popular among traders and investors is its low cost of entry. Today, a forex account can be opened with just a few hundred dollars or less. You will need to find a broker to work with, and forex brokers like AlfaTrade exist to provide forex brokerage services.
Leverage in Forex
Forex does provide considerable leverage. What this means is that one can control a large amount of a currency with only a small amount of money. Depending on the forex broker, one may be able to use leverage of 10:1, 20:1, 50:1 or even 100:1.
While leverage can help magnify gains, it also equally magnifies losses. Leverage should only be used by experienced traders who understand the risks associated with it.
Forex Trading Strategies
When trading forex, there is a seemingly limitless amount of strategies that one may use. Some traders may trade based on market fundamentals while others may look to technical analysis for trading decisions. Some of the more popular forms of technical analysis used in forex trading include moving averages, stochastics, pattern recognition and various oscillators.
The forex market provides a wealth of opportunity but also comes with its own unique set of risks. Getting started in this vast market has never been easier than it is today, and it will likely continue to gain in popularity.