- The forex market or the foreign exchange market deals in changing one currency into another for different reasons.
- It includes a network of buyers and sellers who transfer currency between each other at an agreed price.
- Volatility due to price movements of some currencies makes forex trading extremely volatile for traders.
Forex market or foreign exchange market deals in changing one currency into another for different reasons, generally for commerce, or trading. It includes a network of buyers and sellers, who transfer currency between each other at an agreed price. Volatility due to price movements of some currencies makes forex trading extremely volatile for traders. Even as risks increase, there is also a greater chance to make profits in such a trade.
Currencies trade against each other in the form of exchange rate pairs. For instance, AUD/USD is a currency pair. It trades the Australian dollar against the US dollar. The foreign exchange market exists as both sport or cash and derivatives market. The derivatives market includes forwards, futures, options, and currency swaps.
Traders and companies also use forex market to hedge against the risks arising due to interest rate and currency price changes.
Here are five key things beginners should know while trading in forex:
Familiarity with currency pairs
It is important to be familiar with currency pairs one is trading since different pairs behave in different ways. There are several factors and market conditions that impact a currency. Thus, traders should be fully aware about market forces working behind the currency.
Bid-ask spread is the difference between the lowest sell price and the highest buy price. A higher spread indicates lower volatility and vice versa. Thus, traders should always keep an eye on the spread and plan their trades in a similar way.
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Forex trading strategies
Scalping, day trading, trend trading and swing trading are some of the strategies used by traders in forex trading. A trader should always pick up a trading strategy based on market movement and their goals.
Leverage is referred to as borrowed money. Traders use leverage to execute large volume trades with relatively lower amounts of capital. However, having leverage on the higher side can also result in losses, which can ultimately make it hard to repay the borrowed capital.
Since there is no central location, traders can trade forex 24 hours a day. However, traders must work according to a fool-proof plan to cut down on any uncertainties.
The forex market is generally considered more opaque than other financial markets. Currencies are traded in over the counter (OTC) markets, which don’t require mandatory disclosures. Thus, traders should be extremely vigilant while operating in the forex market.
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