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The following is the Introduction to Forex Trading for Beginners in 2022
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Introduction to Forex Trading for Beginners
When it comes to investment, there is no shortage of options. From traditional stocks that have existed for decades to thriving cutting-edge cryptocurrencies, you can enter many markets. Although you may have heard a lot about cryptocurrencies, stocks, indices, and ETFs, you may not be familiar with foreign exchange trading. Even more surprising is that the foreign exchange market is the largest in the world!
Did this pique your interest? In this guide, you will understand what the foreign exchange market is, what it takes to become a foreign exchange trader, and important foreign exchange information for beginners to help you find your footing before taking the next step in actively trading currencies.
content
- What is foreign exchange trading?
- How does foreign exchange trading work?
- What is a currency pair?
- Is forex trading worth it?
- The risk of trading foreign exchange
What is foreign exchange trading?
So, what exactly is foreign exchange trading?
Foreign exchange is an abbreviation of the term "foreign exchange", which refers to the overall market where people can buy and sell international currencies. It is sometimes referred to as foreign exchange trading. Compared with other investment tools such as stocks and bonds, foreign exchange trading is relatively new. Only 30 years ago, retail or personal foreign exchange transactions were not the choice of ordinary traders, mainly used by large banks. In the retail industry in the late 1990s and early 2000s, foreign exchange trading began to open to the general market and began to flourish.
The foreign exchange market provides excellent opportunities for those who have relatively little available funds but are still able to invest. Traders invest in exchange rate pairs to trade one currency against another. You sell one currency to buy another currency, this is the formation of currency pairs.
So, for example, you might want to invest in USD/AUD, thinking that the USD will strengthen against the Australian dollar. This is not much different from when you used to redeem local cash at the airport when traveling overseas.
Although the term foreign exchange is an abbreviated version of "foreign exchange," there is no specific market or platform to trade currencies.
How does foreign exchange trading work?
Foreign exchange transactions work similarly to any other normal transactions you conduct, except when you conduct foreign exchange transactions, in addition to buying, you are actually selling. So, for example, if you invest in USD/AUD, you are actually selling a certain amount of Australian dollars for a certain amount of dollars.
There are three main ways to conduct foreign exchange transactions:
Spot market. This foreign exchange market is probably the easiest to understand, because it is based on current exchange rates and transactions occur "on the spot."These are often called cash markets and represent the most basic types of transactions. You pay (in this case, a currency), and then get the equivalent value in a different currency according to the current exchange rate. With the rise of online trading platforms such as eToro, the spot market has become the most popular way of foreign exchange transactions.
Forward market. When you are trading in the forward market, you are not actually trading in cash like in the spot market. Instead, you invest in a contract of a specific type of currency at a specific exchange rate on a specific date when the transaction occurs. These are private agreements between the two parties, which distinguish them from...
Futures market. Trading on the futures market is very similar to the forward market because it is based on an agreed contract that will see the currency exchange at an agreed exchange rate at an agreed time.
However, the main difference between the futures market and the forward market is that the futures market is a legally binding agreement settled on the official commodity market.
What is a currency pair?
Currency pairs are what it sounds like-a pair of currencies. In foreign exchange trading, currency pairs show which type of currency is being traded. Or, from another perspective, it shows how much of one currency is needed to buy one unit of another currency.
The way the currency is listed in the currency pair is very important. The first currency listed in the currency pair is the base currency. The second is called the quote currency. The currencies are listed under standardized abbreviations used in the global market.
For example, suppose you are looking at the foreign exchange market and you see AUD/USD = 1.10000. AUD stands for Australian Dollar, which is the base currency. The U.S. dollar stands for U.S. dollars, which is the quote currency. This means you can exchange 1.10 USD for 1 Australian dollar.
Here are some of the most frequently traded currency pairs:
Foreign exchange currency pairs are usually divided into three types:
The first three currency pairs listed (EUR/USD, USD/JPY, USD/GBP) are often referred to as major currencies. They come from generally large, stable economies and are not as volatile as other smaller emerging markets. These markets may be affected by one or two major natural events or business decisions.
Cross currencies are currency pairs that do not include the U.S. dollar (USD). The fourth and fifth pairs (EUR/JPY, EUR/GBP) listed in the table are good examples of cross currencies, as this type usually includes major currencies such as the Japanese Yen (JPY) or the Euro (EUR).
The last two currency pairs in the table (USD/CAD, AUD/USD) are called commodity currencies. This is because the economies of Canada and Australia are closely linked to commodities such as oil, natural gas and iron. Therefore, when it comes to these currency pairs, there may be high liquidity and high volatility.
Is foreign exchange trading worth it?
Then, the biggest question is: Is foreign exchange trading profitable? Like any investment opportunity, foreign currency can be a worthwhile investment of your time and resources. However, as with other investment types, there may also be some disadvantages.
We have broken down some of them here.
Benefits of foreign exchange trading
Several aspects of foreign exchange trading make it a good investment opportunity, including:
fluidity. As mentioned above, many of the most frequently traded foreign exchange currencies have strong liquidity. This means that a lot of this currency is available, so transactions can be completed almost anytime. The universality of these currencies also allows them to resist sudden changes or manipulations. This means that traders do not have to worry about being affected by major business changes or political decisions. By being "liquid," currencies are free to maintain flexibility and absorb such changes.
flexibility. Because the foreign exchange market has so much trading volume around the world, traders can more easily open or close positions when they want. And because it is not traded on an official market, it can conduct foreign exchange transactions around the world 24 hours a day, 5 and a half days a week
For example, in contrast to the U.S. stock market, the U.S. stock market has opening and closing times on weekdays.
Availability. As discussed at the beginning of this article, the foreign exchange market was created to a large extent to provide services for daily bettors who wanted to capture the huge profits made by major economic participants. This accessibility only increases with the increase of online trading platforms (such as eToro), which can be used with just a few taps.
Leverage. Many foreign exchange brokers will allow traders to take advantage of leverage, which means that traders will be able to trade at a much higher price than the initial payout. For example, if you want to apply 100 times leverage to your account, you only need to provide $1,000 of your own funds to make a transaction of $100,000. This allows traders to benefit from small changes in currency value called points.
The risk of trading foreign exchange
Of course, every investment opportunity is accompanied by risks that potential traders need to be aware of before diving in. Here are some of the main things you need to consider before you start.
Leverage. Wait, isn't leverage a benefit of foreign exchange trading? Yes, it is, but for the same reason, it can also be a huge disadvantage. If you enter the market too deeply under true leverage, you may lose a lot of money quickly even if the market changes slightly.
Fail. It is not interesting to think about failure in terms of investment, and no one plans to lose money when entering the market. But it is important to keep your eyes open for foreign exchange transactions. Public data shows that 73-95% of retail traders lose money in foreign exchange transactions. With such high statistics, responsible trading is a must.
lack of experience. Unlike stocks or mutual funds, foreign exchange traders do not have the same guidance options, such as financial advisors and portfolio managers. This will make investors feel more aimless in the market. Complicating this feeling is that large institutions such as banks and other companies still control large amounts of foreign exchange transactions, which can be daunting for individual investors.
educate. The aforementioned lack of professional help can be particularly harmful, because all the different macroeconomic factors play such a huge role in determining the strength of global currencies. To become a successful foreign exchange trader, you need a comprehensive understanding of the global economy and what makes them work. This type of information may be a bit difficult for everyday investors to grasp.
For example, the rise and fall of a country's interest rates play an important role in the strength of its currency. This is called interest rate risk. At the same time, country risk is related to the overall stability of a country. For smaller countries with less room for error in payments and reserves, this can be unstable, which in turn makes them more prone to currency crises.
For related foreign exchange traders, mastering so many global factors may be an obstacle to success.
Forex trading is an excellent opportunity for traders with various experiences and investable capital. It allows you to enter a truly global market, which is the largest in the world. Of course, it also comes with risks, just like any investment opportunity.
You exchanged currency at the airport while traveling overseas. Are you ready to participate more in foreign exchange trading? Currency trading on eToro gives you the opportunity to buy and sell a range of international currencies while following the recommendations and actions of successful public investors. By copying their actions, you can imitate the activities of some of the best traders on eToro. Let's start today.
Sign up for eToro to practice your foreign exchange trading.
This information is for educational purposes only and should not be regarded as investment advice, personal recommendation, or an offer or solicitation to buy or sell any financial instrument. The preparation of this material did not take into account any specific investment objectives or financial situation, nor did it follow the legal and regulatory requirements to promote independent research. Any reference to the past performance of financial instruments, indexes or a basket of investment products is neither, nor should it be regarded as a reliable indicator of future results. eToro makes no representations and assumes no responsibility for the accuracy or completeness of the content of this guide. Before investing any funds, please make sure you understand the risks involved in the transaction. Never risk more than the loss you are prepared to suffer.
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