The foreign exchange market is the largest financial market on Earth with a trading volume that can average more than $3 trillion per day. That’s a lot of money changing hands and trading currencies is becoming increasingly popular. There are many reasons for this.
As compared to the other trading avenues, with forex trading, you can trade currencies in intervals of minutes and hours. The advancements in Internet technology have also made the foreign exchange market a lot more accessible to people. The trick is to understand how currency trading works.
For example, foreign exchange is a 24-hour market but it’s divided into the European, Asian and U.S. trading sessions. Although there is some overlap in the sessions, the main currencies in each market are traded mostly during specific market hours. Additionally, currencies are always traded in pairs.
The currency on the left (the Euro here) is known as “the base”. The currency on the right (the USD here) is known as “the counter”. See how to trade EUR/USD
You can start trading currencies with a relatively small amount of capital. For instance, the minimum investment amount for trading currencies with our Short Term trading tool is $5.
Profit potential is what every investor wants to hear about and trading currencies with forex has plenty of it.
With foreign exchange, traders can use a variety of tools and techniques to develop a winning strategy. This includes the analysis of currency charts and following the effect of economic, social and political events on currency prices.
Foreign exchange is a 24-hour market that is only closed from Friday evening to Sunday evening.
The majority of the volume in currency trading is confined to only 18 currency pairs compared to the thousands of stocks that are available across global markets. Having less options makes trading and portfolio management an easier task.
Events like the United States Non Farm Payrolls measure monthly changes relating to employment figures of a given population. An increase in unemployment signals a slowdown in the economy and possible devaluation of the country’s currency because of declining confidence and lower demand.
The U.S. NFP is one of the most anticipated employment reports because it is a reliable indicator of employment in the U.S. It is issued on the first Friday of every month and it’s not something you want to miss.
The minimum bid rate issued by the European Central Bank is considered by traders to have a major impact on the financial markets. In particular, Euro currency pairs are affected because this event relates to the interest charged by the ECB for loans it gives to banks across Europe.
For example, when an economy is overheating, central banks may raise interest rates to make borrowing more expensive. This increases the yields for assets denominated in the currency, which increases demand by investors and causes an increase in the value of the currency.
Around the 19th of every month, the Bureau of Economic Analysis releases the Trade Balance Report. This report relates to the imports and exports of the United States and is a good indicator of the the health of the U.S. economy and its relationship with the rest of the world.
In general, when exports are greater than imports, this is a good sign for a country’s economy and could translate into an increased value of its currency. This is because trade balance impacts the supply and demand for a currency. When a country has a trade surplus, demand for its currency increases as foreign buyers exchange more of their home currency to buy goods.
EUR/USD is the abbreviation for the euro and U.S. dollar currency pair and indicates how many U.S. dollars are needed to purchase one euro (the base currency). EUR/USD is affected by factors that influence the value of the two currencies in relation to each other and to other currencies. For example, when the Fed intervenes in open market activities to make the U.S. dollar stronger, the value of EUR/USD could decline due to a strengthening of the U.S. dollar compared to the euro.
The next most actively traded pair has traditionally been USD/JPY because it is sensitive to political sentiment between the United States and the Far East. USD/JPY is the abbreviation for the U.S. dollar and Japanese yen pair and is also known as trading the “gopher”.
GBP/USD is the abbreviation for the British pound and U.S. dollar currency pair. According to the current Bank for International Settlements (BIS) survey, GBP/USD is the third most traded currency pair, comprising 14% of the total daily trading volume. This is because each of these currencies are supported by two of the largest economies in the world, making it fairly easy to detect signals that predict the upwards or downwards movement of the pair. Trading GBP/USD is also known as trading the “Cable”.
USD/CAD is the abbreviation for the U.S. dollar and Canadian dollar currency pair. It is the fourth most traded currency pair in the foreign exchange market and there is plenty of information about it on the web, including macroeconomic and political news as well as trading strategies and technical analysis forecasts.Trading USD/CAD is also known as trading the “Loonie”.
USD/CHF is the abbreviation for the U.S. dollar and Swiss franc currency pair. The pair draws a lot of attention when the political or economic climate in Switzerland changes dramatically. It is also affected by the interest rate differential between the Federal Reserve (Fed) and the Swiss National Bank (SNB). Trading USD/CHF is also known as trading the “Swissie”.
Feeling confident about trading currencies?