Are you thinking about venturing into the forex market? It’s becoming an increasingly popular sector for experts and beginners alike, with the Bank for International Settlements reporting that trading reached $6.6 trillion per day in April 2019. Three years previously, that figure stood at around $5.1 trillion – proof that this is a market on the rise.
But, as a novice, it can feel like an extremely daunting and complicated world to be entering. With that in mind, we’ve put together a guide on all the basics you need to know about forex trading – its risks and rewards; frequently traded pairs; and the factors that shape the market.
What is forex trading?
The word forex comes from foreign exchange, which is the process of changing one currency for another. It is a global marketplace where currencies are traded in pairs, such as the US dollar (USD) and the Euro (EUR).
What are some of the most commonly traded forex pairs?
The EUR/USD pair is the most frequently traded in the world, accounting for almost a quarter of all deals as of April 2019. The US dollar and the Japanese yen (USD/JPY – 13.2%) and the British pound and the US dollar (GBP/USD – 9.6%) complete the top three. In fact, the USD features in all but one of the top 10 pairs – the EUR/GBP, which is ninth on the list at 2% of all trades.
What are the advantages?
One of the pros of entering the forex market is that it is colossal in terms of the number of trades taking place on a daily basis. This means there is a great deal of liquidity and you can enter and exit positions at the touch of a button. The market is also open 24 hours a day, five days a week. With major hubs spread across the world from Sydney and Singapore to Paris and New York, investors can make deals at any time of the day. There’s no denying that it can prove an extremely profitable environment for those who do their research and trigger their trades at the right time.
What are the risks?
The inherent risk, of course, is that trading can lead to losses that exceed the initial investment, but by using a stable, reliable broker you may be able to minimise that danger. Other complications can arise too, though. For example, if a trader uses leverage then dealers or banks may offer them a high ratio, which will increase a trader’s liability if the investment doesn’t pay off.
How to decide which forex pairs to trade?
Another challenge facing traders in the forex market is being able to demonstrate a working knowledge of the factors that affect currency pairs. For example, the United States and Singapore entered into a Free Trade Agreement in 2004, which has meant a profitable partnership for both countries and provided an opportunity for those trading the US/Singapore dollar pair.
It’s also worth monitoring countries’ main exports. If a certain substance is in high demand then it stands to reason that any nation distributing a lot of that material will experience a boost to their economy and forex pairs involving that currency might be making moves in the market.