Currency Trading
Currency trading is made possible by the fluctuations of the relative value of global currencies. As a currency trader, your goal is to correctly predict the change in relative currency value. The currency market can also be used to mitigate your losses due to negative market forces or inflation. For instance, if the U.S. dollar is constantly devaluated compared to the euro then you can exchange dollars for euros in order to save some of your money.
What Causes Currency Values to Fluctuate?
There is no one single reason why the value of currency fluctuates however supply and demand are major forces in the currency market. When a currency becomes scarcer in a country or in the global marketplace, the demand for that currency increases and so does its value. On the other hand, if there is a surplus of a particular currency the demand will decrease and the currency will lose value. Some of the factors that affect supply and demand include government debts/surpluses, inflation, trade levels, economic policies and economic growth.
Taking Advantage of the Forex Market
Currency trading can be a profitable alternative to equity trading. First of all, the cost of trading in the forex market is usually lower than the cost of regular stock trading online. Moreover, the high volatility in the currency market offers you the opportunity to generate a substantially larger profit than traditional stock investments. however, the volatility can also make your losses higher as well.
How Does Currency Trading Work?
The lack of a central exchange combined with the low number of regulations makes a currency trade an over-the-counter transaction or OTC. Governments, corporations, institutions and individuals can all access the foreign exchange market. Forex trading is generally conducted through a broker who can be accessed from a financial institution or online. There are now a wide range of online forex brokers to choose from so you can conveniently trade currencies from the comforts of home.
Before You Trade: Learn the Basics
Before you begin trading currencies you should learn everything you can about the forex market. A good place to start is strategy and tips guides provided to you by your forex broker. You can also access financial articles from reputable sources like the Wall Street Journal to learn more about forex trading. You must also learn how to control your risk because there is a possibility that you will lose a great deal of money. One way you can avoid this is to never risk any more capital that you can afford to lose.
Open a Demo Account
Once you have a grasp on the basics you can open a demo trading account to try out your newly acquired forex trading skills. With a demo account you will be trading in real time with real exchange rates but you will be using practice money. This means you cannot lose any of your own money. This is the perfect way to learn how to trade because you can test out your strategies without putting your money at risk. Essentially, you are getting free information and sometimes free customer support.
Open a Real Money Trading Account
When you feel confident that you are ready to move on from your demo account then you should open a real money trading account. If you have any questions you should ask your broker – they are generally happy to help. Before you place your first real money trade, it is wise to consider the level of risk you want to incur, the size of your initial investment and your trading goals. Finally, you should always stick to an effective trading strategy and only trade with money you can afford to lose in order to protect yourself from financial hardship.