Key Principles to Grasp While Trading Currency Pairs

Key Principles to Grasp While Trading Currency Pairs

You may be experienced while trading in the stock market, or you may be a newbie altogether. If you have not ventured into the currency market yet, you should be aware of the fact that forex online trading tells quite a different story from stock trading. This applies to the way that trading occurs, and any data you are required to analyse before your trading begins. 

Trading in Forex

Forex or foreign exchange is a term that encompasses the basic exchange of one currency with another. Foreign exchange represents a process by which one currency is changed into another, and this happens for different reasons. Typically, currency exchange takes place for the purpose of commerce, tourism, or trading. Currency markets are international markets, and trading in different currencies happens on a global scale. These are the most traded in markets today, and trading volumes and values tend to be the highest. Trillions of dollars are traded in and forex online trading has made it easy for any trader to plunge into this potentially lucrative way to make profits. 

If you are used to stock trading after you have had to open a demat account, you may think that the forex markets are easily navigated. However, you should be aware that trading in currencies may be complex as well as risky, simply because large flows of trade exist within the system. The good part of forex trading is that, because of the extent of the trading system, it is not easy for rogue trading to take place with traders attempting to impact currency values. This implies that there is a good deal of transparency in forex trading. 

Aspects of Currency Trading

You may be a pro at trading in the share market today, but if you are treading the path towards currency trading, there are a few aspects that you should be well-versed with: 

  • The FX or forex market represents a global marketplace for the purpose of exchanging international currencies. 
  • Due to the global reach of commerce, trade, and finance, the markets related to forex are the biggest in the world, offering you liquidity in this asset class. 
  • Currency pairs are important to know about in forex trading. Currencies are traded against one another in pairs according to their exchange rates. For instance, the EUR/USD is an example of a common currency pair to trade the euro with the US dollar. 
  • Forex markets prevail as cash or spot markets, and as derivatives markets. In derivatives, forex markets, currency swaps, futures and options and forwards are offered as modes of trading. 
  • The participants of forex markets make use of forex to speculate about geopolitical events, hedge against global interest rate and currency risks, and for portfolio diversification, among various reasons. 

As you can tell from the concepts related to the forex markets, they present a relatively different picture to trading in the stock markets or subscribing to any upcoming IPO

Currency Pairs

In forex online trading, there are various key principles you should get a handle of, but currency pairs are the most vital. In the simplest words, any currency pair is technically a quotation of a pair of different currencies, with the value that represents one currency in the pair quoted against the other in the pair. The first currency that is listed in the pair is called the “base currency” and the other one is the “quote currency”. 

In terms of forex trading, currency pairs tend to compare values of currencies to each other. Hence, the currency pair in trading currencies indicates the amount of the quote currency required to buy a single unit of the base currency. In the trading world of currencies, any given currency is identified by a code, like USD for the US dollar. Regarding the most liquid currency pair traded today, the EUR/USD comes first. The next popular traded pair is the USD/JPY. While trading currency pairs, you should be aware of certain principles. 

Grasping Principles

While trading in the share market today, traders stick to principles and different strategies while trading in equities. The same applies to trading in currency pairs. Before you plunge into trading in forex, there are some rules of trading as well as practices to imbibe to make your trading with actual money a success.  Here are some key principles to grasp before you start: 

  • Reading Indicators - In forex trading, there are certain trading indicators, like trading signals, that help you to know the direction of values of currencies. Besides these trading signals, there are some other tested indicators like the RSI (relative strength index), Bollinger Bands, Moving Averages, etc., that you should get a hang of before you trade. 
  • Understanding Leverage - In case you are, like every other trader, wanting to make money, you must take advantage of leverage. Essentially, leverage is a loan that your broker provides you with to trade in currencies. According to the value of the amount in your trading account, you can borrow any remaining amount you need from your broker. While engaging in forex online trading, the leverage you get from your brokerage may be significant for you to conduct your trades with ease. Of course, leverage can work the other way in case you make losses or try to take more leverage than you can handle in trading. 
  • Understanding Stop Losses - Forex traders make use of stop-loss orders to safeguard against risks. This is a protective tool if a currency pair’s value moves in an opposite direction to the one traders expect. If you place a stop-loss order at the opposing side of the value expected to move, an automatic trigger for a sell-off of your position occurs. This mitigates your risk in the event your forecast doesn’t work out. 

Trading Forex with Strategies that Work

Once you know some of the main principles that govern the forex trading floor, you can formulate strategies and plan how to trade. The basic things to do while potentially trying to make trades work in your favour are to have plans that you trust while opening your  positions and closing them. You can open a demat account and invest in stocks may be easy for you, but forex trading takes a lot more work. However, the rewards are good. You can also explore any upcoming IPO to secure your financial portfolio. 

 

Related Articles: What Are Cross Currency Pairs And What Do They Mean? | How does a Spread Contract Help in Currency Trading | How Currency Fluctuations Impact your Financial Plan | How Global Factors have Influenced the Value of the Rupee | How Domestic Factors Influence the Value of the Rupee

  • Open your FREE Demat Account in 5 Minutes
+91|
Select State
Select City
By submitting your details, you are authorising us to call you or send promotional communication even though you may be registered under DND
angle-up