FX Market: What should Traders Know?

FX Market: What should Traders Know?

Capital Markets CIO Outlook | Thursday, March 28, 2019

Trading can be done via foreign exchange (Forex) if the financial capital is sufficient to get started. Trading in Forex means always selling one currency to buy another. This is why they are quoted in pairs showing which currency is purchased and sold. Each currency is listed as its three letter code, which usually consists of two letters which correspond to the region, as well as of one which stands for the currency. The basic currency is worth one unit in all currency quotes and the currency quoted is the amount of currency one unit in the base currency can purchase. This means that with one euro, a trader can buy $1.1256. As an investor makes money in Forex, the value of the quoted currency appreciates or the basic currency decline.

There are two types of transactions (positions) opened by Forex traders: for the purchase or the sale. The purchase order is also referred to as a "long position" because exchange rates continue to increase in the context of strategic planning.  A trader can earn growth and a decline in the exchange rate on the Forex market. Every transaction is expressed in a certain amount of money (size) in the foreign exchange market. The specific amount of money is given in lots. One lot corresponds to 100,000 basic currency. Trading operations should not be started in full at once. The fractional options: 0.05 batches or 0.2 batches are available.

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The Forex work mechanism is simple. The trader sees the EUR/USD chart falling, which means that the euro falls against the dollar. It opens a short sale position with a lot size of 0.5 (50,000 euro), with no losing time. The question arises, if the trader is not so well off, where does the money come from? A dealer provides the trader with leverage. The leverage allows transactions to be opened on the trader's account even without the necessary amount. It is sufficient to deposit a margin 100-500 times smaller than the volume of the lot to open a transaction.  

Marginal exchanges contain a high degree of risk and may not be appropriate for all. A trader must consider the investment goals, the level of experience, and the appetite for risk very carefully before deciding to trade foreign exchange. If a trader can sustain a loss of some or all of his original investment, it is therefore not necessary to invest money where the trader cannot afford to lose. 

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