Forex market (currency trading market) is the largest market in terms of size with market liquidity that exceeds $ 3 trillion of traded value per day, this market is one of the markets which do not need central exchange center to conduct trades, as trading is direct between investors. The dramatic increase in the volume of currency trading recently is due to introduction of trading platforms which are available to everyone, such as MetaTrader, which facilitated and reduced cost for traders with small and medium-sized investments, and enabled them to trade over the Internet directly.
Forex market became in recent times the most popular market for speculators, as liquidity and the tendency of currency pairs in the market to move all the time a good environment with exciting opportunities for high profitability, and it appears that these properties make it easier for traders to achieve unusual commercial success, but still, success in currency trading remains limited for most investors, and here is why:
Most traders open accounts while having unrealistic expectations and in the same time they lack the discipline and knowledge needed to achieve success, as currency trading is not an entertainment and isn’t a way to achieve wealth fast as well, even though currency trading seems more exciting than the traditional markets such as the stock markets and futures markets and so on, but the application of the basic financial and strategic rules remain constant for all types of markets.
Research shows that traders and investors who lack discipline suffer continuously from inconstant performance in the Forex market, which costs them substantial losses of their capital, as currency trading is not easy and even experienced traders often lose, that’s why you should realize that currency trading requires some time to acquire the needed skill and it is not a highway to achieve vast fortunes.
The most tempting concept in currency trading is leverage, which looks very attractive for those who expect to transfer the capital of small accounts to wealth in a very small period of time, this is why you must constantly keep in mind that leverage is a double-edged sword, an investor can easily trade in 100,000 euros at once via margin deposit of 2000 euros simply by use a leverage of 1:50.
Most traders think this means that having a capital of 10,000 euros means the ability to trade in 5 trades of this size, but this belief is unfortunately false common belief among inexperienced investors, as opening trades as big as 100,000 euros should be treated on the basis of this size not on the marginal deposit of 2000 euros. This is why even though many investors study technical analysis indicators and learn how to analyze the charts correctly to open their trades at the appropriate times, they tend to use large leverage which forces them to stop losses early.
MOST COMMON CURRENCIES IN THE FOREX MARKET
The most common currencies in the Forex market come in seven pairs representing the most liquid currencies in the world, and those seven pairs are divided into four major pairs are:
- EUR / USD
- USD / JPY
- GBP / USD
- USD / CHF
In addition to the three commodity pairs:
- AUD / USD
- USD / CAD
- NZD / USD
And although there are many other currencies, in the Forex market only 18 currency pairs exist, and for this, the Forex market is much more focused than the stock market.
FOREX MARKET TERMS
As the prices of currency pairs in the Forex market constantly fluctuates up and down, these moves are measured in points, or the PIP, a point is the fourth decimal figure in the exchange rate, for example, if the price of the euro against the U.S. dollar currently stands at 1.2980 and then changed in price to 1.2990, that means the pair move by 10 points, if the pair moved from 1.2922 price to the price of 1.2921, that meaning the pair move by one point, which is $ 0.0001.
But there are some currency pairs which PIPs represent the second decimal point such as the USD and JPY pair.
Lot represents 100,000 units of the base currency, a client that bought 5 Lots of euro against the U.S. dollar, this means that he bought 500,000 euros against the U.S. dollar.
Spread is the difference between the price at which you can buy a currency pair at, which is the asking price, and the price at which you can sell a currency pair at, which is the sale price, and the asking price is always higher than the selling price.
FUNDAMENTAL AND TECHNICAL FACTORS
There is a long list and a variety of the factors that determine the value of each currency, these factors include the actual cash flows (imports and exports) caused by changes in GDP, inflation, unemployment, interest rates, budget and trade deficit or surplus, all of these conditions affect the overall economy, which affects the value of the currency because those factors governs the supply and demand for each currency, for example, inflation pushes the value of the currency to decline because its purchasing power is going down. Because of the diversity of those factors, we dedicate an article for details about fundamental factors and another for technical factors.
The main reason for why a lot of people are attracted to the Forex market is high liquidity in the market which allows the existence of leverages much larger than what is found in other markets.
Currency movements are measured in points or PIPS which can in the fourth decimal place or the second place depending on the currency pair. so the usual moves are just parts of a cent, as a movement of the GBP / USD as much as 100 points, means a move as much as $ 0.01.
For this reason leverages are applied in order to amplify these subtle changes and translate them into decent profits. When dealing with sums like $ 100,000, such small changes can lead to big gains or losses.
For this, the use of financial leverages relies on your trading style and your preferences for how you control your financial strategies, as even though leverages increase your chances of inflating earnings, at the same time they inflate your risk level, and the following example makes that clear:
If there are investors, both of which has $ 10,000 as a capital, and one of them is using a leverage of 1:100 while the other uses a leverage of 1:20, the value of the first trade amounts to $ 1,000,000, while the total value the second trade is $ 200,000, if both lost 100 points , the first will lose $ 10,000 while the second will lose $ 2000, which means that the first lost all his investment, while the second lost only 20% of his investment.
That’s why the use of small leverage allows you to have an area to breathe and reduce the level of risk in your trades, as high leverages can be empty your account really fast, which is why leverages represent a flexible tool which can be used in many ways.