Aside from investing in real estate and business, many people are getting hooked into the foreign exchange trading. This worldwide activity has been a buzz word to financial investment enthusiasts. Today, we’ll scratch a little more beneath the surface to understand how Forex works.
Basics of the Forex Market
The foreign exchange market or currency market is a worldwide over-the-counter or decentralized market for currency trading. It encompasses all areas of purchasing, selling, and exchanging currencies at existing or fixed prices. A currency is changed into another currency for various reasons, such as for trading, commerce, and tourism.
Currencies are essential in all parts of the world as it is vital to execute foreign trade and commerce. A basic example of this happens when travelling. If you’re from the US and are going to Korea, you have to first convert your money into Korean Won to be able to transact in the said country locally.
When we say the Forex market is decentralized, it means that currency trading occurs through computer networks worldwide, rather than in a single central place. The forex market operates for five days and a half a week but runs continuously from opening to closing time. When one market closes, another one opens in another part of the globe, which makes prices increase or decrease constantly.
Leverage in the Forex Trading
Borrowing capital is also prevalent in forex as it can provide advantage to investors. A broker lends money to investors so they can exchange bigger positions in a currency. As a result, the leverage increases the yields from advantageous moves on a currency exchange rate. However, it can also amplify losses.
Foreign exchange facilitates the buying and selling of currency exchange rates, with the aim of shifting the rate to the trader’s favor. Forex currency rates are shown or quoted as bids or as prices from the broker.
Brokers may initially cap the number of leverage they used with novice investors. Traders can, in most cases, customize the quantity or size of the trade depending on the leverage they wanted. The broker will however demand a portion of the total outstanding amount of trade to be accounted in cash, which is also known as initial margin.
Emotions and Forex Trading?
When it comes to Forex trading, the worst enemy a trader will encounter is themselves, and they have an obligation to find a way to deal with that. After all, the trader is the one who makes the most decision, thus it is up to him to put in place reasonable actions to secure open positions.
Traders get worried when they put money in a transaction and the market is not going their way. In times like this, a skilled trader maintains to its trading strategy and shuts the transaction to reduce the losses. On the other hand, a beginner remains in the trade and expects the market will recover. This emotional reaction will very easily lead the inexperienced traders to lose all their capital.
Traders may over trade because of greed. This may also cause them to take pointless actions and easily mismanage their accounts. It’s necessary to enter the forex market with a clear approach.