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For those who are not sure what currency trading really is, it’s the act of buying and selling currency pairs in the Forex market. This exchange is done at specific rates, depending on the Forex market. This is the biggest and one of the most liquid markets in the whole world, with a daily turnover of $6.6 trillion only in 2019.
In a way, everyone does a form of currency trading whenever they travel abroad. This happens when you exchange money. As you may have already noticed, the exchange rate varies. This is where currency trading, as an activity, takes place. As for a currency pair, it simply represents the two currencies that you trade against each other. For example, the EUR/USD currency pair represents the Euro paired with the American dollar. In this article, we will present you with a guide that we like to call currency trading for dummies. Here is everything you should know about this activity.
Currency trading for dummies
Currency trading has, like any other industry, specific terminology that you should know. For example, there is an ask and a bid for every currency pair. The ask is the price you will have to pay to buy a specific currency. The bid is the amount that you will receive after selling a specific currency. The term “pips” is used to quote currency pairs. Usually, a pip equals 1/100 of 1%, meaning 0.0001. The pip is used to calculate the bid/ask spread for a currency pair.
When it comes to the investment part of currency trading, people make or lose money based on the direction a currency pair takes. Also, on the decisions that you make concerning when to buy or sell a pair. Let’s say that you are considering the EUR/USD currency pair. You want to buy 100.000 euros for a certain price, expressed in dollars because you foresee an appreciation in the euro. In case the dollar depreciates, you make a profit. In case the dollar appreciates against the euro, you are losing money. In essence, this is not too difficult to understand.
Currency trading is always risky
However, there are certain risks involved with currency trading, besides losing money, that everyone should know about. It’s mandatory that everyone educated themselves before performing any kind of trading. Remember that the market is extremely volatile and dangerous for someone who doesn’t know all the secrets of trading. In case you want to learn and practice, we recommend you use a demo account that doesn’t have real money. Most online trading brokers offer it as part of their educational resources and it can help you a lot, as a beginner.
There are also some specific terms that any trader should know about. We will explain the most important ones in the following lines.
What is leverage?
Traders use leverage which means putting up a small sum of money. However, through it, the trader is able to buy many times the funds in the account. Using leverage is also known as margin trading. The smallest moves between currencies can bring you gains if you perform margin trading. Keep in mind that this essentially means borrowing money from your broker. Most of the time, this comes with margin calls and you have to give your broker money so it covers the loss of capital.
Costs and risks
Obviously, there are certain costs when you perform currency trading on the Forex market. The dealer is usually the one deciding how much to charge. Keep in mind that commission-free trades could still have costs attached to them, depending on how you’re trading.
We have already mentioned the risks of trading but you should always be on the lookout for scams. Brokers with offers that sound unlike any others and extremely favorable are usually looking to steal money from you. Large returns on small investments also represent red flags.
All in all, it must be said that currency trading is definitely not an easy thing and not a completely safe activity. Also, it’s not meant for everyone looking to make some money. We hope that our currency trading for dummies guide helped you grasp a better understanding of how things work.