Meta description: Forex is the busiest and the most liquid of the financial markets. Let’s look at the way it operates and what’s in there for you as a trader.
The Forex or foreign exchange market allows you to invest in currency pairs. Here we speak of the base currency and the quote currency.
The most commonly used currencies are the US, Australian, Canadian, or New Zealand dollar, the euro, the Swiss franc, the pound sterling, the South African rand, or the yen.
Forex is the most active of the financial markets. It is indeed the busiest and most liquid of these markets. The total amount of daily transactions amounts to almost 4 billion dollars.
The currency market is particularly volatile and considered risky by professionals. Volatility is an estimate of the amplitude of price variation over a given period. This indicator also reveals the level of risk associated with a currency pair. High volatility indicates an increased risk of price variation.
Volatility is an essential element that the trader can take advantage of when trading. Thus, the traders who use scalping day trading techniques are incredibly attentive to the most volatile currency pairs. The latter must have a high volatility threshold and the lowest possible spreads to minimize the costs associated with each transaction. Regardless of the trading style, it is necessary to adapt your strategy to market conditions.
Forex for hedging risks
Forex trading is the standard tool for financial institutions, international companies, and banks to hedge the risks related to their businesses and investments. Companies operating abroad usually are exposed to the omnipresent risk of price fluctuations in currencies depending on the country they perform trades. The foreign currency market helps them obtain fixed rates for their goods and products enabled by the forward and futures contracts.
Becoming successful in Forex
You can achieve the status of a profitable Forex trader only by regular trading and practicing. When you are just at the beginning of a trading career, you must use the demo account to try your skills, know the market and the main currencies’ features. It also helps discover the strategies, pros, and cons of available currencies and determine which one is best for your tradings.
At the very beginning of every trader’s career, the choice of the broker comes first. Selecting a reputable forex broker ensures you in many aspects. First of all, going for a regulated broker, you are more confident that you entrust the money to a professional and honest company. Besides, they offer you the chance to practice prior to real money trading.
Types of currencies
As a trader, you can pick up from several types of currencies, such as major, minor and exotic currencies. Major currencies go in pair with the American dollar and are the most traded ones. Also, they are less prone to volatility and suitable for long-term investments and strategies.
On the other hand, we have minor and exotic ones. The minors are not paired with the US dollar and include the British pound, yen, and euro. They are also popular as cross currencies.
Exotic currencies don’t have a high trading volume on the Forex market but also offer a great opportunity for profits. They are also more volatile because the economies of countries they represent are usually smaller and sometimes very unstable. The most common currencies of exotic type are, for instance, Mexican Peso or Turkish lira. These are paired with some major currencies, most often with the US dollar.
For beginners, it’s advisable to start with the majors. Once they know the market better, they can switch to exotic ones.
Whatever currency you opt for, make sure to have a trading plan and make the calculations considering your initial capital, fees, commissions, and the time span of your trades.