How do You Trade Currencies?
The currency (or forex) market is the largest investment market in the world. From 2007 to 2010 it grew by 20% annually and is now around $5 trillion in average daily turnover. The volume came primarily from professional traders, until recently when retail traders have entered the forex market for investment purposes. Many people have learned to trade forex and here we will look at some basic steps how to trade currencies.
How to Trade Currencies - Before you begin:
- Understanding a forex quote - When you read a forex quote, the bid price will be on the left and the ask price will be on the right.
- Choosing your currency to trade - There are many factors you need to take into account when choosing your currency to trade and deciding whether to buy or sell and these revolve around making predictions about the currencies. Consider a country’s trading position as this will impact the economy of the country and therefore it’s currency. Consider a country’s politics, their election results and their economic regulations. Look at a country’s economic position.
- Calculate and consider potential profits - Calculate increases and decreases in the value of your account and measure changes in value between two currencies (known as a pip). This will help you decide whether to trade.
Opening your brokerage account:
- Choose an experienced brokerage company - This should be a regulated company that has been operating for at least ten years and which offers a wide range of products. Then, visit the websites of different companies and read reviews before you choose.
- Open your account - This can be a personal account or a managed account with a broker.
Begin trading:
- Analyze the market - There are many different methods for analysis, most commonly through technical analysis (reviewing historical data or charts) or through fundamental analysis (looking at the economy of a country).
- Work out how much you can trade - You need to limit how much you trade on each currency pair. A good guideline is to never invest more than two percent of your money in any particular currency pair.
- Place your trade - There are two different ways that you can trade. You can simply buy or sell currency pairs, hoping the value of the pair increases in your favour or you can use derivative products such as futures or options where you can profit from changes in the values of the currencies. A trader must consider a market order (that allows the trader to obtain the currency at the current exchange rate) or a limit order (that allows the trader to specify an entry price). A take-profit order will automatically close a position when a rate reaches a certain level or a stop-loss order will automatically close a position when the rate has declined a specified amount. Here’s a visualization of a derivative contract on a currency pair:
Pricing provided by Ava Options Trading by AvaTrade.
For traders who are new to forex it is important to understand the basic steps of forex trading before you begin. Research, work and time is required to become a successful trader, but understanding the process is step one.
