This has led to a boom in the industry, which currently sees trading volumes of more than $6 million per day in a market that is worth more than $2 quadrillion per year. Most of these transactions are performed by financial institutions such as banks, but an increasing number of individuals are working for themselves and trading online. As the biggest market in the world, there are opportunities for gains to be made when trading currencies and the returns, as well as the losses, tend to be fast as well because of the sheer volume of trades taking place at any one time. Individuals can start trading with a relatively small amount of investment capital, allowing them to make larger and more lucrative trades after a shorter time than traditional investments. Nevertheless, the risks involved are to be taken into consideration in an equal manner. One of the things that have made forex trading popular is the low barrier to entry for those wanting to give it a try. Even total beginners can trade forex, although research and an understanding of the markets and specifically the indices one is undoubtedly more of a stable market likely to have less volatility. Forex trading terminology Anyone who wants to trade in currencies needs to research the market thoroughly to get an understanding of the way currency values fluctuate in response to the various market forces at work. Part of this is understanding the terminology used to describe the various aspects of the foreign exchange market. Ask – This is the selling price of a currency pair, set by the broker but based on the value of the underlying pair of currencies. Bid – This is the price a broker is willing to pay for a currency pair and it is also affected by the value of the currency pair. Currency pair – a quotation of one currency against another, comprising the base currency which is listed first and the quote currency as the second price. It compares one currency with the other, showing how much of one currency you would need to buy a single unit of the other and they are expressed using a three-letter code. Spread – this describes the difference between the bid (the selling price) and the ask (the buying price) and is the basis of spread betting. Instead of bidding on a specific asset, traders speculate on the performance of a currency in terms of whether its value rises or falls. Appreciation – this means an exchange rate value has increased. Depreciation – also known as devaluation, describes a currency that has decreased in value. Cross currency pair – this is any pair of currencies that doesn’t include the US Dollar, so GBP/EUR is a cross currency pair, but USD/EUR is not. Major pair – any of the major currencies that are traded against one another most in the world. These pairings represent a significant proportion of the forex market, and they are all traded against the US dollar. Indices – these are assets that contain top performing stocks within the local market and can be used to determine how well that local market is performing. There are several different types, including derivative indices, futures, and options. Stop loss order – an order placed by a trader to sell a particular currency once it hits a certain level to minimise losses when a currency value drops. Close at profit order – this order is designed to maximise profits by selling a currency when it reaches a predetermined high point. Long position – this means to buy a currency in the hope that it will increase in value so it can be sold at a profit. Short position – this means to sell a currency Pip – This stands for Price Interest Point and it is the smallest increment that a currency’s value is measured, which is usually the last decimal of its price. It is used to describe the smallest changes in the value of one currency against another, so if the sell/buy price of GBP/USD is 1.42835 / 1.42855 and then it shifts to 1.42865 / 1.42885 then it could be said to have risen by 30 pips which are 0.00030. What to consider before starting forex trading Although foreign exchange trading could be a profitable investment, it is important to research the market and understand as much as you can about the way currencies behave in response to global events. There are plenty of things that can affect the way currencies are valued including:
Inflation ratesInterest ratesRecessionSpeculationGovernment debtTerms of trade
Because the market is so volatile, and therefore extremely risky, it is important to keep abreast with news to get a sense of the political and economic conditions of the countries whose currencies you are speculating on. While some trading positions can be held long-term to accumulate value, forex trades are usually conducted at a faster pace, so you need to keep your eye on anything that could have a significant impact on currency value. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when spread betting and/or trading CFDs. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. Marketing for CFDs and spread betting is not intended for US citizens as prohibited under US regulation.
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