Currency trading, as the name suggests refers to the process of purchasing and selling currencies. It involves exchanging one currency for another to make a profit from it. The rate at which they are exchanged is determined by the market i.e., Forex.
The main objective of business bodies opting for currency trading is to generate higher profits.
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What is Currency Trading?
Currency trading, most commonly called foreign exchange, involves the buying of currency while selling another currency simultaneously. The process is conducted on the foreign exchange market and currency movement is stirred by supply and demand dynamics. The currency value will increase if the demand for it is higher and vice versa.
With the evolving technology, currency trading these days has become extremely convenient. Businesses of different scales need a reliable and affordable way to manage their monetary requirements. The traditional option of reaching out to financial institutions has been replaced by foreign exchange services.
It is imperative to note that the trade is always conducted in pairs in currency trading. An instance of the currency pair is GBP/USD.
How Does Currency Trading Work?
The currency market is perhaps a major investment market. Currency trading is accessible at all hours except from Friday evening to Sunday evening. Three trading sessions include Asia, European and United States trading periods.
Though these sessions can overlap, main currencies are mostly traded in these predefined market hours. This suggests that some of the currency pairs will have a high volume in certain sessions.
Understanding Pairs and Pips
The integral part of currency trading is pairs and pips. In the forex market, currency trading is done in pairs where investors must buy one currency and sell the other.
Pips (Percentage in Points) refer to the slightest increment of trade. Prices of maximum currencies are set to the fourth and fifth decimal points. However, the Japanese Yen is an exception to this rule.
Benefits of Currency Trading
Low Transaction Costs
One of the lucrative benefits of currency trading is that it incurs low transaction charges. Business owners do not need to bear heavy transaction costs for carrying out currency trades. In addition, there is very little commission that is levied in foreign exchange trade.
Minimum Capital Requirement
With a low capital amount, one can get started with currency trading which proves ideal for small investors and business owners. This is the reason why it is viable to use ‘leverage’ and regulate substantial amounts of money by making only a small deposit.
Zero Restrictions on Directional Trading
Business owners do not have to come across any restrictions in the foreign exchange market in the same way while investing in a stock market. Traders are always into selling and buying a currency depending on the state of the market, hence, as per predictions of change in currency value, one can opt for selling it short or long.
Offers demo account
In foreign exchange, brokers extend the provisions of accessing a demo account. Every facet of these accounts is real, only that instead of involving real currency, it focuses on token play money. These demo accounts help rookie investors understand their potential in market stimulations before giving into a deal.
Transparent and flexibility
There is no involvement of a regulatory authority in currency trading, nor there is a cap on money that can be used for trading. Hence, it is ideal for both rookie and seasoned investors. Furthermore, the foreign exchange market functions round the clock which curbs the need of scheduling trading hours and time constraints.
Things to Consider While Choosing Currency Trading
Analyse the Trading Style
To master currency trading, it is important to comprehend the trading style. It goes at par with the risk profile of the trader.
Select a Credible Broker and Platform
It is equally important to select the right broker and platform. A credible and well-informed broker will help you with prevailing currency market trends.
Be Aware of Individual Potential
Business owners must mention the entry and exit points before doing currency trade. As trade is not a sure-shot thing, it is important to be well prepared for the double down and opt for exit if scenarios surrounding currency trading are not favourable.
Even political stability has a bearing on currency movement and hence is taken into consideration by foreign investors. They are less likely to invest their capital in a country that is going through political unrest as it leads to lower currency demand. It is equally important to incorporate proper risk management skills.
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Frequently Asked Questions
What do leverage and margin refer to in Forex?
Leverage enables people to trade or gain exposure to substantial currency amounts without having to bear the trade's full value upfront. Instead, traders can make a small deposit which is a margin.
What are the risks related to currency trading?
The foreign exchange market is susceptible to higher volatility which proves to be advantageous in creating trading opportunities; however, it comes with risks as well. In case of any unexpected scenarios or market fluctuations, it will impact the currency value and unfavourable currency movements will lead to losses for traders. Leverage can in some conditions magnify losses instead of helping traders with gains.
What things must be considered while choosing a broker?
Traders must opt for a broker who has a good record and long years of experience. Additionally, they must ensure that they are levying zero charges for opening an account and check if there is the availability of trial trading or not. Traders must also look for customer service, commissions and spreads, regulatory compliance and more.
How to start trading in currencies?
Firstly, traders or willing entities must log into a trading account and then involve themselves in thorough research. It is vital to be aware of what to purchase and sell and when to purchase or sell. For instance, in case the value of the Indian Rupee is falling/ reducing against the US dollar, traders must purchase rupees and sell dollars. Then they must commence with a modest initial investment. Lastly, ensure to put a limit order or stop loss with a broker.