The foreign exchange market is the most volatile of all trading markets. Due to this volatility it is also one of the most anxiety-inducing and stressful environments in which to work. If you do not understand the market, and are unable to develop sound forex trading strategies, the chances of surviving this setting are slim. However, by educating yourself in the workings of the forex market, and understanding your role as a trader, you will have a greater chance of experiencing profitable trades. This article looks at the some basic factors of forex trading that new traders must be aware of when entering the foreign exchange market.
1. Understanding the forex market
Unlike the stock exchange, the foreign exchange market operates on a 24 hour, 5 days per week trading timeframe. To maintain these operating hours, and account for time zones, there are demarcated market sessions. Generally, one will notice an overlap in these sessions where certain currency pairs may experience higher activity and movement with the most movement being seen during the U.S. session.
Foreign exchange traders are conducted using different sized lots. The micro lot is equivalent to 1,000 units of a currency. For example, if you are trading in US dollars will be equivalent to $1,000 of your US dollar base currency. The mini lot is equivalent to 10,000 units as opposed to the micro’s 1,000. Finally, the standard lot is equivalent to 100,000 units of base currency.
2. Currency movement
While many traders may not consider this, there are stock investors who do take an interest in trading on the foreign exchange market. While there are similarities in certain concepts between the stock and forex markets, these individuals do need to undergo training to complete their forex education. However, one forex feature which is also prominent in the stock market is that of supply and demand.
Supply and demand operates on the principle that when a particular currency is in demand the price will increase in value. However, if too much of the currency is supplied then the value will decrease. It should be noted that supply and demand are not the only influential factors on currency movement. Political events and social tensions can also have an impact on these movements. You should also keep your eye on the economic prices and interest rates of the specific currency’s country.
3. Forex trading strategies with pips and pairs
All trading on the foreign exchange market is conducted using currency pairs with the currency being priced to four decimal points. A pip can be likened to the smallest increment of these decimal points. This means that one pip will generally equal approximately 1% of the price.
The majority of beginner traders will start trading using the micro lot, as is described above. This is far simpler than the mini or standard lots as the micro pip is equivalent to 10 cents of a price in movement. This lower pip makes the calculation of any profits or losses less complicated for the new trader. A pip in the mini lot is equivalent to $1 and the standard lot pip is equivalent to $10.