What Forex to Trade?
There has never been a point in time where financial markets are as accessible as now. Technological advancements that have happened over the years have made financial markets accessible to everyone with a smartphone.
However, with this accessibility, the challenge shifts to which market is ‘ideal.’ Before venturing into the world of financial markets, it is important that one consider the potential advantages and disadvantages involved with each. The forex market has over and over excelled at offering a higher level of flexibility in terms of time with a low capital requirement, making it ideal for both beginners and advanced active traders.
What is forex trading?
Forex trading or foreign exchange trading involves the conversion of one currency to another. Currency is often exchanged for a number of reasons—for example, tourism, trading and ecommerce.
While a significant amount of foreign exchanges will be done under practical circumstances, the rest is often done by people looking to earn a profit. As currency gets exchanged, it causes volatility in the prices of some currencies, which makes it more attractive to the investors since it offers a great opportunity for high profits as the risk increases.
The forex exchange market
The foreign exchange market is the most liquid and largest market in the world. The development of the internet has been instrumental in helping the forex market achieve this status. It is easily accessible through smartphone applications, allowing traders all over the world to participate.
Currently, the forex market has an average daily trading volume of $5 trillion, a figure that the world’s combined stock markets have been unable to attain. Unlike the stock and derivatives markets, the forex market does not operate through a central market place. The trading happens electronically over the counter (OTC).
The lack of a centralized exchange allows this market to remain available 24 hours a day for five and a half days a week. This allows currencies to be traded across major financial centres worldwide such as Sydney, Paris, Singapore, Hong Kong, Frankfurt, Zurich, Tokyo, New York and Hong Kong. This trading can be done across any time zone, meaning that the end of the trading day in Hong Kong begins a new trading day in the U.S.
Currencies are traded in pairs since when you buy one currency, you automatically sell another one. A currency pair is made up of two parts: the base currency (comes first) and the quote currency.
When looking to buy or sell a currency pair, the price indicated will represent the amount of the quote currency, you will have to use to acquire a unit of the base currency. For example, in the currency pair USD/JPY, the USD is the base currency while the JPY represents the quote currency. Therefore, a quote price of 1.8000 means that 1 unit of USD is worth 1.80 Japanese yen.
Type of forex pairs you can trade:
Forex pairs can be classified into three: the majors, commodity currencies and cross currencies.
- Major forex currencies: This categorization is made up of currencies that are frequently traded on the forex market. There lacks a consensus on the number of major currency pairs, but some of these include USD/CHF, GBP/USD, USD/JPY, EUR/USD.
- Commodity currencies: These are made of currency pairs related to a commodity such as iron ore, coal or Oil. Some of these include USD/CAD and UAD/USD
- Cross currencies: These are forex currencies not paired with the U.S. dollar such as EUR/JPY and EUR/GBP.
Why you should start forex trading
Small capital requirement
One of the reasons why forex trading has gained much acceptance and popularity is reduced barriers to entry, such as small capital requirement. Anyone can get into forex trading for as low as $100. Some brokers will even allow you to start with as low as $20, and with consistency, you can grow to make sizeable gains from it.
Forex trading happens 24 hours a day for five and a half days a week, offering traders great flexibility since they can enter and exit a trade anytime they want. If you are an individual looking to trade during your free time, Forex allows you just that.
Liquidity is determined by the number of active buyers and sellers in a financial market. Owing to that the forex market has a large number of buyers and sellers compared to other financial markets, it is the most liquid. This allows traders to get a fair price through which they can sell or buy currencies.
High liquidity is beneficial as there exist minimal chances of market manipulation by corporations with large financial muscles.
High risk and profitability
Forex allows traders to take advantage of risk in anticipation of great returns. Forex trading will give you handsome returns if you are a wise trader. A number of people started forex trading as a part-time activity and have since switched into full-time trading.
Forex pairs to trade
This is the most popular and traded currency pair in the forex market accounting to 24% of all daily forex trades. This currency is mostly traded due to its affiliation with two of the world’s biggest economy: the U.S. and the European single market.
The pair operates with a large daily volume, allowing it to maintain high liquidity. This, together with tight spreads, makes it very attractive to traders. Some of the key factors that determine the price movement of the EUR/USD include interest rates by the U.S. Federal Reserve.
This currency pair is made up of the pound sterling and the dollar. This pair is also known as ‘cable’ from the use of the deep-sea cables used to transfer ask and bid quotes between New York and London. Currently, this pair accounts for about 9.6% of all forex market trades.
The strength of this currency pair is determined by the strength of the respective economies. That is, if the U.S economy is growing faster than the British economy, the dollar will strengthen against the pound.
The USD/JPY is also known as the ‘gopher’ and is comprised of the U.S. dollar and the Japanese yen. This currency pair is the second most traded after EUR/USD, accounting for 13.2% of all forex transactions carried out on a daily basis. The price of the USD/JPT can be determined y the interest rates of the U.S and Japanese economy.
This currency pair is also known as the ‘Aussie’ and is made of the Australian dollar paired against the U.S dollar. The value of this currency pair is determined by the value of the Australian mineral and metal exports such as coal and iron ore, which accounts for a large portion of the country’s GDP.
Any time the value of these items flop, the value of the Australian dollar flops, making the USD stronger, meaning that one will send much fewer dollars in exchange for a single Australian dollar.
This currency is made up by pairing the U.S dollar with the Canadian dollar. The strength of the Canadian dollar is tied to the price of oil, since it Canadian’s main export. With oil being priced in U.S. dollars, Canada can use its oil exports to gain a huge supply of U.S. dollars. Therefore, if the price of oil rises, the Canadian dollar will be stronger than that of the U.S dollar.
Forex is not a get-quick rich scheme
It is unlikely that you will start raking in cash once you start forex trading. Skilled traders do make profits in forex trading. However, as with any other career or investment undertaking out there, it won’t happen overnight.
Everyone goes into forex trading, thinking they will be millionaires. However, the truth is that even expert traders will often experience losses while trading Forex and for you to get there, you will need lots of experience and practice.
We recommend starting with a demo account until you are comfortable to move to a real account.