If you are planning to speculate and try to make money by currency trading it is vital that you have a basic grounding on how transactions are conducted within foreign exchange markets. Here are some of the basics to help you on your way and hopefully enable you to eliminate some of the more elementary mistakes that are often made.
Principles Of Currency Trading
Every foreign exchange trade involves the simultaneous buying of one currency against the selling of another. Currency quotes are delivered as exchange rates as a form of comparison to evaluate the price of one specific currency against another. Market forces and economic news will dictate the fluctuation of each currency value at any given time working on a basic principle of supply and demand to determine what the value of each currency being traded is. When you place a trade you are aiming for the currency that you have purchased to rise in value in relation to the currency that you have sold. How successful you are in calling the movement correctly will ultimately dictate how much money you win or lose on each trade.
How To Identify A Potential Trade
Stock market prices in general are dictated not just by supply and demand principles but also by opinion and sentiment as well. If the Greek government announces a deepening financial crisis for example, that will have an effect on the currency price, but where the real skill of the trader comes into play, is identifying what level a price should rise or fall to based on the facts to hand, and if a price falls further than you think it deserves to you have the option and ability to back up your judgement by speculating on the price rebounding once the bad news has been digested. The whole point about financial speculating is of course that you could have misjudged the scale of the price collapse and it could fall even further, costing you money, or hopefully, you have managed to call a price overreaction correctly and profit accordingly as the price recovers.
How To Make A Trade
If you have an opinion that the pound is undervalued against the dollar you can execute a trade to buy the pound whilst simultaneously selling the dollar, then sit back and wait for the exchange to reflect your opinion and the pound to rise against the dollar. You have to remember that there is a margin involved of typically 1% between the buy and sell rate which is the commission involved in the trade that you will have to pay, so you have to factor this into your pricing and target exit price. In order to crystallize your gain into hard cash you must then do the reverse of what you did to open the trade, in other words you need to then sell the pound for dollars, enabling you to pocket the difference as profit less the commission charged for the trade.
Rapid Movements
Currency trading involves small incremental falls and rises and there is unlikely to be huge volatility during any one trading session. This means that to make any reasonable amount of money from FX trading you will have to work in relatively large sums of money and work on the basis that you should be prepared for rapid small movements in the price that present you with a window of opportunity to make a profit. Many successful traders conduct numerous transactions on any given day and are prepared to enter and exit markets for very short periods of time, with a view to building up profits over a series of individual transactions rather than one large single trade.
If you are nervous about racking up losses as you learn how to read the markets and develop a successful strategy then always consider applying a stop loss with each trade, so that you know the maximum amount of profit or indeed loss that you are exposed to with any specific market trade that you place.
Joseph Renshaw is a business and investment advisor. He blogs frequently and enjoys passing financial tips on to his readers. For more about currency trading, click here.
Source: http://www.ericfinance.com/currency-trading-basics/
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