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February 13, 2014

Beginning On the Foreign Exchange Trading Market

This article looks at different aspects of the foreign exchange trading market that should be considered by the beginner trader in order to be successful.

Beginning Foreign Exchange Trading

The foreign exchange trading market is one of the largest and most lucrative worldwide.  It works on a 24 hour trading timeframe from Monday to Friday.  While the majority of all foreign exchange trading is conducted by large corporations and governments, it is accessible to average individuals through its online format.  Generally, the businesses conduct commodities trading via the futures and forwards markets, and the retail traders engage in trades on the spot market.

This article looks at foreign exchange trading for the beginner, examining how the market works and the different aspects you must consider when trading.

The foreign exchange market

The forex market operates on the principle of a trader exchange one currency for another currency.  The foreign exchange market is decentralised meaning that these currency pairs do not go through a central exchange when traded.  Furthermore, the online market presents with virtual currency instead of physical currency leading to traders never exchange physical money.

This absence of a central exchange also contributes to greater movement on the market or higher liquidity.  This liquidity may contribute to some losses, but it generally provides the trader with benefits if the trader uses an effective strategy.  The most prominent benefit is that a trader can experience profits from either a rising or falling market.

Currency pairs on the foreign exchange trading market

All trading on the foreign exchange market is conducted using currency pairs.  The forex market allows for trading of all global currencies; however it is recommended that new traders trade currency pairs including one of the seven major currencies.  This is due to information on these pairs being more easily accessible than that of the obscure currencies.  The US dollar is especially favoured as it offers the most accessible data, as well as the highest liquidity on the foreign exchange trading market.

When trading on the foreign exchange market, it is important to know what a ‘pip’ is.  A pip measures the change in currency value during a trade in the market.  Normally a currency value is displayed to a four decimal point symbol, and the pip indicates the smallest increment alteration in the decimal point after a movement.  For example, if a currency pair presents as GBP/USD = 1.5318 and then after the trade shows as GBP/USD = 1.5313, one will have experienced a movement of 5 pips.

Foreign exchange trading risks

While forex trading involves a great deal of trading analysis, the prediction of market movement is ultimately speculation.  This is why each trade presents with an equal chance of profit or loss.  In order to limit the risk of loss on a trade, you should implement different risk management techniques.  One popular means of risk management is using stop and trailing loss orders.  By setting these orders you are accepting that a loss can occur, but protecting your capital from falling to the point of detrimental should the loss be experienced.

 

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