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Forex is one of the most liquid markets in the world, with a daily trading volume that exceeds nearly $6 trillion. Various banks, investors, and retail traders participate in currency trading and capitalize on the volatility presented by different pairs. With the developments in fintech technology, forex trading is no longer limited to the big guys. Now participants from all over the globe can speculate on price movements and profit using proper risk management, strategy, and mindset.
What are currency pairs?
A forex pair consists of two different currencies. The one that comes first is called the base, while the latter is known as the quote. By looking at a currency pair, you can determine the value of one against the other. It can tell you how much financial asset you need to buy the counterpart. For example, if the pair USDJPY trades at 110, you would need 110 yen to purchase a single dollar. When you are buying USDJPY, you take the USD and sell the Japanese Yen. The opposite can be said for a selling scenario.
Requirements for Trading Currencies
Before placing your buy and sell positions, there are some requirements that you must meet.
Capital
Traders who wish to trade the forex markets need an initial amount of seed capital that they can use to buy and sell currencies. Investors recommend a minimum amount of $10000 for trading. For traders who do not have sufficient money, it is possible to borrow some from your brokerage. Taking leverage can allow participants to open bigger positions, but it can also add risk to the portfolio if used aggressively.
Broker
A trading broker provides access to liquidity sources and carries out your transactions accordingly. There are several broker models available in the forex market that include standard, ECN, raw spread, No Dealing Desk, etc., to name a few.
Strategy
As mentioned before, traders must have a sound strategy that follows proper risk management. The markets are constantly changing and require traders to follow a comprehensive approach to profit. It is quite easy to lose all of your money in currency trading without any proper game plan.
Proper Equipment
Trading using the right application and tools can make a ton of difference in performance. Your trading software and the charts are the weapons that you use to beat the markets. A bad internet connection or malfunctioning software can result in missed opportunities, late exits, etc.
Fundamentals
A good note of fundamentals is essential in currency markets as they are responsible for maintaining the exchange rate. They can influence the price to change the trends and shift towards a bull or bear market. In forex, the following economic factors play an important role:
- Gross Domestic Product GDP
- Interest rate
- Bank meetings
- Non-Farm Payroll NFP for USD only
- Inflation
- Employment figures
A Few Benefits of Forex Trading
Forex trading has numerous advantages for traders. We have listed some of them as follows:
- Liquidity. With a daily trading volume of nearly $6 trillion, the forex market is one of the most liquid in the world. Tons of investors participate daily, which contributes to the significant liquidity
- Volatility. There are multiple currency pairs at the hand of a trader which offer varying volatility. Volatility is the bread and butter of an investor. The availability of several options allow traders to choose the instrument of their choice and make profits with ease
- Developments. There is a ton of growth in the forex market, which includes better platforms, algorithms, lower spreads, faster execution speed, and so on
- Duration. Unlike other markets that are open for a short duration, the currencies can be traded 24 hours, 5 days a week. Various sessions contribute to varying volatility and liquidity, which again is beneficial for traders
