Fundamentals of currency trading – When it comes to the economy and fundamentals of the global currency market, the bid and ask price are the two exponential factors that drive market prices. This principle also applies to the foreign exchange market. When a currency is bought, the demand for it increases, which pushes the price up. Likewise, every time a currency is sold, supply increases, causing the price to drop.
Fundamentals of currency trading
The impact of each purchase and sale in the forex market is directly proportional to the size of the transaction for each operation. Most news and economic events happening around the world have an impact on the markets. Therefore, understanding what is driving the price and following the news of the currency market is your key to becoming a successful forex trader.
How liquid is the forex market?
Fundamentals of currency trading If the way traders make a profit is by taking advantage of the difference between the bid and ask price of currency pairs, then the next logical question is, how far can you expect any given currency to move?
This depends on how liquid the currency is, or how much it is being bought and sold at a given time. The most liquid forex pairs are the ones that have the most supply and demand in the forex market, and this supply and demand is generated by banks, companies, importers, exporters and traders. The major currency pairs tend to be the most liquid, with the EUR/USD moving 90-120 pips on an average day.
By contrast, according to Fundamentals of currency trading the AUD/NZD moves 50-60 pips per day and USD/HKD only moves an average of 32 pips per day (when looking at the value of the currency pairs forex, most will be listed in 5 decimal points. The “pip” is 0.0001.
So, if EUR/USD moved from 1.16667 to 1.16677, that would be a change of 1 pip. The major forex pairs tend to be the most liquid, and thus offer the greatest short-term trading opportunities.
However, there are many opportunities between minor and exotic currencies as well, especially if you have some specialized knowledge about a particular currency.
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Fundamentals of currency trading You probably know that the simple rule of trading is to buy low and sell high. In the foreign exchange market, you can also sell assets without owning them – this is known as ‘shorting’. Let’s check this possibility with an example.
Let’s say you have 10,000 EUR on your account, and you want to trade with the USD/JPY currency pair. Without buying USD or JPY, you can simply sell this pair and sell Yen in USD, while your actual account balance is in EUR.
This feature tells us why the forex market is a good market to trade. Moreover, you can trade forex on margin, which means using leverage. With the help of this leverage, you can trade amounts much larger than the deposit amount. This is at the same time a double edged sword, as your potential gain can be many times greater than your deposit, but it can also make you lose the whole amount faster.
Learn what leverage is in the currency market in our article “A full explanation of the concept of leverage”
Subject to supervision and licensing
Fundamentals of currency trading Currency trading is highly monitored, and many forex brokers are licensed by more than one authority. This goes to show that forex is one of the safest markets to trade in, although this only applies to licensed brokers.
Trading with a demo account
Fundamentals of currency trading You also have the ability to trade without risk with a demo trading account. This means that traders can avoid putting their capital at risk, and can choose when they want to move into live currency market trading.
For example, an Admirals demo trading account gives traders access to the latest real-time market data, the ability to trade in virtual currency, and access to the latest trading insights from expert traders.