As you might already know, forex stands for Foreign Exchange. You’ve likely dealt with forex and various currencies when traveling abroad, but have you ever thought about the possibility of trading to make a profit? If so, you must understand the basic trading principles well before entering the trading market.
Check out some basic trading principles that all forex traders should know and understand.
Currency Options
While traders on the stock market have thousands of stocks to choose from, options for forex traders are far more limited. There are only eight major economies with currencies that are popular among traders. They are the United States, Canada, the Eurozone, Australia, New Zealand, United Kingdom, Japan, and Switzerland. The currencies of these countries are known among forex traders as “the majors”.
Although you can trade currencies from other countries, the major currencies have the highest liquidity and the tighter spread between the buying and selling prices. Both of which are very important costs to pay attention to active traders.
What affects the exchange rate in the forex market?
Many different things can influence the exchange rate of money in the forex market. Among the most important factors in interest rates. The central banks of each country determine higher interest rates. It is usually leading to a stronger currency over time.
Other important factors affecting currency exchange rates are economic growth, unemployment and trade balances between countries. Generally, any news that appears with economic figures that are better than expected about a country has the potential to increase the value of that country’s currency.
Another important thing to understand about the forex market is that currencies are always traded in pairs. This means that to buy one currency, you must simultaneously sell another currency. Although this might sound confusing at first, it makes sense when you think about it.
How to use leverage safely
The forex market is one market that can offer traders an extraordinary amount of leverage. A forex trader will borrow money from his broker to increase his purchasing power in the forex market. Globally, brokers in the forex market offer leverage from 1:20 to 1: 500, and sometimes more.
Leverage can be very dangerous because it can cause you to lose money faster if you only trade with your own money. However, it can also increase your profits in the same way. This is the main reason why the forex market is very attractive to so-called independent retail traders.
Understand interest rates
Accroding to Baby Pips, a currency’s interest rate is probably the biggest factor in determining the perceived value of a currency. Because interest rates are the key to how exchange rates between currencies move. Understanding their interest rates and the direction of their goals is one of the most important skills for any professional forex trader.
One way traders follow this is by watching statements and speeches from central bankers very closely. For example, the Chair of the US Federal Reserve speaks, you can be sure that forex traders around the world are fixed on their screens, watching for any clues on where interest rates might move in the future.
Events like these usually cause extreme volatility in the affected currency, which is also something that special traders have learned to use it.
Read more: Beware of Suddenly Illusion of Trading
