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Wednesday, 15 January 2014

What is Currency Trading?

At its heart, currency trading is about speculating on the value of one currency versus another. The key words in that last sentence are speculating and currency. I think that looking at currency trading from those or two dimensions is essential.

On the one hand, it’s speculation, pure and simple, just like buying an individual stock, or any other financial security, in the hope that it will make a profitable return. On the other hand, the securities you’re speculating with are the currencies of various countries. Viewed separately, that means that currency trading is both about the dynamics of market speculation, or trading, and the factors that affect the value of currencies. Put them together and you've got the largest, most dynamic and exciting financial market in the world.


Most of the time, traders approach currency trading from those two perspectives. Looking at them separately and blending them together to give you the information you need to trade in the forex market.

Speculating as an enterprise


Speculating is all about taking on financial risk in the hope of making a profit. But it‘s not gambling and it’s not investing. Gambling is about playing with money even when you know the odds are stacked against you. Investing is about minimizing risk and maximizing return, usually over a long time period. Speculating, or active trading, is about taking calculated financial risks to attempt to realize a profitable return, usually over a very short time horizon.

To be a successful trader in any market requires:-
  • Dedication (in terms of both time and energy)
  • Resources (technological and financial)
  • Discipline (emotional and financial)
  • Decisiveness
  • Perseverance
  • Knowledge


But even if you have all those traits, there's no substitute for developing a comprehensive trading plan. You wouldn’t open up a business enterprise without first developing a business plan. So you shouldn’t expect any success in trading it you don’t develop a realistic trading plan and stick to it. Think of trading as if it were your own business, and approach it as you would a business enterprise, because that's what it is.

Above all, try not to take your trading results too personally. Financial markets are prone to seemingly irrational movements on a regular basis, and the market doesn't know or care who you are and what your trade idea is.

Currencies as the trading vehicle


If you've heard anything at all about the forex market, it’s probably that it's the largest financial market in the world, at least in terms of daily trading volumes. To be sure, the forex market is unique in many respects. The volumes are, indeed, huge, which means that liquidity is ever present. It also operates around the clock six days a week, giving traders access to the market any time they need it.

Few trading restrictions exist - no daily trading limits up or down, no restrictions on position sizes, and no requirements on selling a currency pair short.

Selling a currency pair short means you’re expecting the price to decline. Because of the way currencies are quoted and because currency rate move up and down all the time, going short is as common as being- long.

Most of the action takes place in the major currency pairs, which pit the U.S.  dollar (USD) against the currencies of the Eurozone (the European countries that have adopted the euro as their currency), Japan, Great Britain, and Switzerland.  There is also plenty of trading opportunities in the minor pairs, which see the U.S. dollar traded against the Canadian, Australian, and New Zealand dollars. On top of that, there’s cross-currency trading, which directly pits two non-USD currencies against each other, such as the Swiss franc against the Japanese yen.  Altogether, there are anywhere from 15 to 20 different currency pairs, depending  on which forex brokerage you deal with. 

Most individual traders trade currencies via the Internet through a brokerage firm. Online currency trading is typically done on a margin basis, which allows individual traders to trade in larger amounts by leveraging the amount of margin on deposit.

The leverage, or margin trading ratios, can be very high, sometimes as much as 200:1 or greater, meaning a margin deposit of $1,000 could control a position size of $200,000. But trading on margin carries its own rules and requirements and is the backdrop against which all your trading will take place. Leverage is a two-edged sword, amplifying gains and losses equally, which makes risk management the key to any successful trading strategy 

Before you ever start trading, in any market, make sure you're only risking money that you can afford to lose, what’s commonly called risk capital. Risk management is the key to any successful trading plan. Without a risk-aware strategy, margin trading can be an extremely short-lived endeavour. With a proper risk plan in place, you stand a much better chance of surviving losing trades and making winning ones. 

1 comment :

  1. eToro is the most recommended forex broker for beginning and established traders.

    ReplyDelete

 

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