Forex trading can be a lucrative way to make money, but it’s important to understand the risks and how the market works before you invest any money. Here are the six things you need to know about Forex trading.
The Forex Market Is Always Available
The foreign exchange market is the largest and most liquid investment market in the world, with over $5 trillion changing hands every day. At any given time, on any given business day, you can buy or sell a currency pair at an exchange rate you’re willing to risk. Unlike other markets that operate during certain hours of the day, Forex trading never closes. It’s open 24 hours a day Monday to Friday and all weekend long. You can buy or sell at any time, but these trades will only be executed when other traders are willing to take your price.
It’s also possible for the total amount of money in the market to change based on current conditions.
Price Moves in Pips, Not Points
Most people understand prices with two decimal places – like if something costs $20, you know it’s not worth very much. But figuring out how much one currency is worth compared to another can be difficult because of the extra zeroes.
So instead of thinking about the value in points, Forex traders think of it as a ratio – and that ratio is called a “pip.” It’s like changing currencies by one unit at a time. A pip is the smallest amount a currency can move, so if you want to calculate percentage in point, you need to move the decimal place over three spots. This means a 4 pip movement would equal a .25% change.
In addition to calculating the value of your investment in dollars, you can also see how it’s been affected by changes in pips.
Currency Pairs Are Linked by Similarities
When you’re trading Forex, you’re buying and selling one currency at the same time as another. Each currency is paired with a second, and those pairs of currencies are called “currency pairs” because they’re bought and sold simultaneously. The value of each currency in a pair will go up or down together – it’s how we measure if we’ve made money or lost money from the trade. For example, if you buy a currency pair where one represents the U.S. dollar and another represents the value of the Japanese yen, both currencies will move up or down together as measured against a third currency – like the Euro.
Every Trade Has Two Sides
Currency markets are designed to be efficient and profitable for everyone involved. When you enter a trade, you’re always buying something from someone else who wants to sell. And every time you make money, someone is losing money on the other side. That’s why it’s possible for you to lose money if you’re only making trades in the direction of the price movement, but you always have to keep in mind that there are other traders on “the other side” of your transaction.
You Can Use Leverage to Increase Your Investment
Leverage is the use of borrowed capital to increase your investing power or trading capital – and it can be a great way to build your investment faster than using only cash on hand. When you borrow money to trade, you’re essentially trading with someone else’s money – and this is called “margin.” But it does come with a price, and you’ll need to be careful.
If your position starts losing money, the broker will make a margin call, which gives you two choices: either deposit more funds or close the trade. This means if you used 50% of your margin and the trade starts losing money, your account will “go to margin.” If you can’t pay up and close the trade fast enough, the broker is likely to close it for you – and they’ll take those losses out of your trading capital.
Biggest Currencies Are Not Necessarily Strongest
The U.S. dollar – or USD – is the most traded and liquid currency on the Forex market, but this doesn’t make it the strongest. It’s also considered a haven, which means there will always be demand for it in times of global instability.
The same is true for other major currencies like the Euro or British Pound – they’re liquid and highly traded because they’re backed by strong economies. But this doesn’t mean they’re the best currency to trade if you’re looking for a good return on your investment, and some traders will disagree with the “strongest currency” label altogether.
Forex trading can be a lucrative way to make money, but it’s important to understand the risks and how the market works before you invest any money. These are some things you need to know about Forex trading before getting started if you’re interested.