8 Important Components Of Currency Trading

8 Important Components Of Currency Trading




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Currency trading is taking the world by storm and is gaining popularity in some ways, over the famous stock market investments that have traditionally been sought after. Currency trading involves some of the largest markets in the world. Furthermore, as these are the most liquid markets, there is a huge scope for great earnings when you trade in currency. Although some passive investors avoid these markets for their high risk and high reward characteristics, for active investors, the currency markets are a haven of wealth. If you know some key components of trading in currencies, you may just be a player in trading in these markets. 

The Key 8 Components of Currency Trading

The word “currency”, to some traders spells instant danger, while others embrace it with full strength. For seasoned traders, who pay heed to strategies and factors that influence the currency markets, currency trading is a way to make a good amount of money while trading. There are certain components of the foreign exchange market that traders and investors must understand and go into details of to succeed. These components are important because they are determinants of how currency markets function and operate. Investors must know certain terms, and how currency pairs are traded among other basic components that form the trading activity. In the sections that follow, there are eight key components that should be grasped. 

1. The World’s Largest Investment Market - On an international scale, the currency markets are the most liquid and the largest. This is a market that is valued at some $4 to 5 trillion in the notional value which is exchanged on a daily basis. Foreign exchanges globally allow for trading to occur 24 x 7. 

2. Trading is done In Pairs of Currencies - While engaging in online trading in the currency markets, trading is done with pairs of currencies. Therefore, one currency is traded against another currency. For instance, the euro or EUR, may be traded against the US dollar or USD (EUR/USD).

3. How Pairs are Quoted - Currency pairs are quoted as “pips”, or percentage in points, and these go out reaching four places of decimals. Essentially, a “pip” represents the tiniest increment of a trade. 

4. Activity Volume - There are many international currencies in the world, as much as there are countries to match. Nonetheless, there is a small number of pairs of currencies that you can trade (around 20). These constitute the majority of nativity and volume of currency trading in the markets. 

5. The Factors Influencing Prices and Trading - Currency prices tend to fluctuate according to the economic climate of a particular nation and of the world at large. Primarily, the countries whose currencies are traded the most tend to influence prices, with geopolitical risk, the stability of economies, financial and trade flows involved. 

6. When Markets Close - Currency markets shut from the evening of Friday to the evening of Sunday. Trading cannot take place during this period. 

7. Trading Sessions - One of the main components of the foreign exchange market is to know that trading is done in one of three sessions (or any of three sessions). These are the United States, European, and Asian sessions. 

8. The Base/the Quote - In any currency pairs, the base currency is displayed first, versus the quote currency shown next. Therefore, in EUR/USD, the base is the EUR, while the quote is the USD. So EUR/USD = 1.09 actually means that a single euro can buy USD $1.09. 

Added to the components above, investors should be aware of the risks involved in currency trading as these pose more than the stock markets. Currency markets are highly liquid and prices here may be more volatile than those in the stock markets. 

Learn About Currencies

You can open a demat account anytime and learn about stocks and invest in the same at a good broker like Motilal Oswal. You can also discover any upcoming IPO for subscription at this reliable brokerage. Nonetheless, if you wish to really diversify your portfolio, currency trading offers you a plethora of advantages once you grasp its elements and do some serious information gathering. 

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