Investors can trade profitably through the FX market and millions participate daily. Before starting to trade in FX, traders should however learn how they can participate, common terminology, and how FX works. This guide will help you get started on trading in FX.
FX Explained
FX markets are the biggest financial markets globally and it is open around the clock just about each day of a normal working week, excluding holidays. At any given moment, massive amounts of dollars are at play on FX exchanges.
Each nation, or sometimes groups of nations like the EU, uses its own currency to buy goods and services domestically. To buy goods from foreign countries however, the buyer typically first has to exchange their currency for the currency of the country where the goods are sold.
As each country uses its own specific monetary policy, there are many factors that will have an effect on the exchange rate of currencies from different countries. Factors include things like domestic economics, interest rates and political developments.
Traders can nowadays trade from just anywhere using their phones and computers thanks to technological advancement in electronic trading in recent years. This has expanded the market tremendously. As there’s no single regulatory agency globally, brokers all over the world receive deposits from traders that want to take part in FX markets.
For new traders that only have limited capital, this may at first seem daunting. Originally, the market was only used by big financial institutions, including hedge funds and large banks. It has however evolved into a market for traders of all investment levels and sizes. Starting in the FX market requires as little as $10.
Glossary of FX Market Terms
Closed Position – A position is closed by a trader when they sell their assets and take a profit or loss.
Open Position – A position is opened by a trader when they enter into a transaction and it stays open until they close it.
Margin – This is the amount a trader has in their trading account. Margin is used by a broker to calculate how much leverage they may allow a trader to have when they execute trades.
Leverage – This is money lent to a trader by a broker based on the available funds in the trader’s account and the asset that will be leveraged. This is also sometimes referred to as a multiplier.
Spread – This is the difference between the selling price of an asset and the price offered to buy the asset. Trades can be performed quicker the closer together the two prices are to each other.
Currency Pair – In the market, a currency pair is two national currencies that are traded against one another. Although pairs that are the most popular involve the Euro, American Dollar, and British Pound, markets are readily available for just about any currency globally paired with currencies that are more common.
Pips – In FX, a “pip” is the smallest unit of measurement in sell and buy bids placed on the market. In bigger markets like EUR/USD, a pip is .0001 of the current price. In other markets, a “pip” can be various sizes.
Common Currency Abbreviations:
- AUD – Australian Dollar
- GBP – Great Britain Pound
- EUR – European Euro
- JPY – Japanese Yen
- NZD – New Zealand Dollar
- USD – United States Dollar
CFD – Contracts for Difference are trades opened by investors when they believe a specific asset’s value will decrease or increase. If a trader opens a position expecting the price will increase and it does, they will make a profit from the difference between the closing price and the opening price. CFDs’ profitability vary depending on a number of factors, including the broker, leverage, position time frames, etc.
Short Position – A trade is opened believing that the asset’s value will decrease, enabling a trader to buy the asset at a lower price and making a profit on the difference. This is achieved by either selling an asset that the trader has already, or by selling assets that have been borrowed and then buying the asset at a date in the future (covering the short). This is crucial as the asset has to be given back to the lender eventually.
Long Position – Opening a trade believing that the asset’s value will rise over time.
National Interest Rates –Interest rates for national currencies are set by a country’s central bank. Although this is the rate used when banks lend money to each other, it is also used in the FX markets when brokers “roll over” a position that is open.
Trading FX Markets on Olymp Trade
The FX markets on Olymp Trade essentially consists of trading traditional currency pairs with multipliers offered by Olymp Trade to provide leverage for trading CFDs (Contracts for Difference).
This is how traders can take part in markets with a wide variety of currency pairs, metals, commodities, and other assets. Olymp Trade provides multipliers that allow traders to increase their trades’ value by as much as 500 times the amount invested. Olymp Trade multipliers enable small investors to make decent profits on currency pairs making small movements.
Risk and Reward
Just like in any financial market, trading has its own set of risks and rewards. Fortunately, these are fully dependent on the trader, their experience, their ability to make decisions independently and their data analyzing abilities.
One thing to remember is that each trade has a winner based on when the transaction is done and the asset’s behavior after the trade. A trader should never risk more money than what they are willing to lose. With conscientious effort and by using the numerous available educational tools, traders are able to make profits more often than not.
Volatility in the Markets
At first glance, it may seem as if the exchange rates of market assets show very little movement. The differences between the exchange rates of USD/CAD (American and Canadian Dollars) for example only fluctuated by 16 USD cents from 2017 to 2019. If we however look at the chart below, we can see many decreases and increases during that time. These movements afforded investors with opportunities to make a profit.
As currency pairs are traded in pips, or 0.0001 of the currency, and due to the sheer volumes of the assets traded, the market provides lots of activity for traders to make a profit on.