Currency pairs or Forex is one of the most popular asset classes in the financial markets. With more than $6 trillion in daily trading volume, the forex market is undoubtedly the largest financial market in the world.
What is Forex or currency trading?
Forex or currency trading refers to the buying or selling of currency pairs in order to profit from the fluctuation in the exchange rates between two national currencies.
The forex market is a massive network of major banks and other key financial institutions where different currencies are traded against each other, based on their exchange rates.
While currency trading was originally reserved solely for high-net-worth individuals, today it’s widely accessible by everyone through CFDs.
Retail traders can access opportunities in online currency trading very easily and safely through a licensed broker. Currency trading is increasingly popular with investors and speculators due to the lower-barrier-to-entry, low trading costs and the potential for high returns.
Traders can take advantage of CMTrading’s award-winning platform to trade a wide range of financial assets either through their PC or smartphone.
How it works
Let’s consider that one EUR can currently be exchanged for around 1.50 USD. On your forex trading platform this quote would show up as: EUR/USD – BID= 1.5034, ASK= 1.5038. In this example EUR is the base currency, the basis for our exchange and the USD is the quote currency. This basically signifies how much one EUR is worth in USD. You may be confused by the Bid and Ask prices in the example but it’s actually quite simple. They stand for the price you can buy or sell the currency pair. The Bid price is the value your broker will buy the base currency (EUR) for the counter currency (USD) and the Ask is the value your broker is willing to sell the base currency in exchange for the counter currency.
You can see there is a 4-pip difference between the two prices quoted above. Pip is a percentage in point and refers to the smallest move of a currency’s rate and also an easy way to calculate profits or losses when trading forex. In forex the pip is always the fourth or second decimal in a pair’s quoted price. If we buy the aforementioned pair at the quoted Ask price (1.5038) and immediately sold it at the Bid (1.5034) we would actually lose 4 pips. The difference between the Bid and Ask price you are quoted is called the Spread and this is the commission charged by your broker for undertaking each transaction. So, in this case we would have to wait for the Ask to move at least 4 pips before closing so we can break even. Each pip after that is profit in your trading wallet as long as you manage to close the position before the price starts moving the other way.
What are the Pros and Cons of Forex Currency Trading?
Currency trading offers multiple key advantages for traders of all experience levels:
The market that never sleeps
Due to this massive volume of transactions that take place daily, more than 5 trillion USD in daily transactions to put things to scale – the forex market is considered the largest and most liquid financial market in the world. The liquidity refers to the millions of buyers and sellers of currencies and this abundancy allows for rapid order execution almost 24/7 (explained in next paragraph). And since the forex market doesn’t actually have a central exchange like the stock markets, it never sleeps, allowing you to speculate on price movements around the clock and find matching buyers/sellers to take the opposite side of your trade virtually instantly.
The forex market is closed during the weekend since most of the world’s banks are closed as well. However, daily forex trading is split into four trading sessions, which conveniently overlap by a few hours before each session closes – so we can trade around the clock. The Sydney session opens on Sunday evening (or Monday morning for some of us) and then the market moves to Tokyo, London and finally New York. Obviously, depending on the time you wish to trade and the currency, you are likely to notice that there isn’t much happening in the market. But if you can trade during the overlap of two trading sessions i.e. when the London and New York markets are in session then you will enjoy a lot of trading volume which translates to better liquidity, higher volatility and therefore greater profit opportunities.
A few cons you need to know
By now, you’re probably thinking this sounds fantastic! It is- but as with anything in life, there are downsides to consider too. Here are the ‘cons’ CMTrading suggests you bear in mind regarding Forex trading.
With this convenient links and tools you can review the Forex market history and analyze rate trends for any currency pair.
As with most things in life, learning Forex trading successfully comes down to you, how well you handle your investment and the work you put in. The cons needn’t be of any impact in your life if you plan well. Learn what you need to know to make informed opinions yourself, and don’t rely on others. Choose providers with solid credentials, and avoid emotional trading. With the right knowledge and attitude, currency trading success will be yours.
Trade on currencies with the South African fully licensed and award-winning Forex broker.