Currency trading for beginners 2023

Forex, FX, or foreign exchange is the conversion of one currency into another currency. Most people will experience forex when travelling to another country where their local currency is not legal tender. However, many financial institutions and individual investors alike trade foreign currencies for profit.

In fact, the forex market is the largest and most liquid asset market in the world, with an average daily trading volume of around $6 trillion. Investors can use forex to speculate on geopolitical events, diversify their portfolios, or hedge against interest rate risk and international currency.

Foreign currency can be traded 24 hours a day, 5 days a week – even traders need the weekend off. Currency can be traded in multiple ways. The most obvious method of currency trading is to simply purchase an allotted number of a particular currency with that of another currency.

This form of currency trading is conducted in what is called pairs and pips. A pip is the smallest increment of trade possible, where 1 pip typically represents 1/100th of 1%.

CFDs

CFDs are short for ‘Contracts for Difference’. CFDs are a very popular form of derivative trading that allows forex traders to make speculative trades within the forex market. Basically, this form of currency trading is wagering on whether the value of a particular currency will rise or fall. CFDs are commonly offered by brokers and CFD trading can be conducted from anywhere in the world.

Therefore in CFD currency trading, you do not buy or sell a currency asset, but instead buy or sell a number of speculative units. For example, if the value of a particular currency moves in your favour, you would gain more CFD units – conversely if the market moves against you then you would lose CFD units. Trading CFD units are broken into forex lot sizes. For example, to trade GBP/USD with 1,000 units is a micro lot.

CFDs are a leveraged product – meaning you only need to deposit a small fraction of the necessary capital required to buy the full value of the trade. You can open a position for far more than you have. Doing so can yield significant profits but you will be liable for the full value of the position – essentially your wins will be magnified with high leverage but so will your losses. It is possible to lose far more than you can afford with leverage so there is a high level of risk. 

The currency pairs represent a number of the world’s largest economies and are traded in significantly high volumes. There are many fundamental factors that affect the value of currency pairs.

Interest rates

It is the responsibility of central banks to maintain financial stability. To achieve this the banks will influence interest rates. Forex traders should look out for sudden interest rate rises as this will cause demand for that currency to increase when investors attempt to obtain the high yield.

Political factors

Political events can have a very dramatic effect on a nation’s economy. Think elections, trade wars, or even policy changes – government instability can greatly affect the forex market whilst good economic policy can boost a currencies value. Using this research is commonly referred to as trading the news.

Economic data

Economic data commonly comes in the form of economic releases detailing the financial performance of a nation’s economy. Retail sales, employment data, inflation – These are the sort of factors that allow traders to gain an insight into the valuation of a nation’s currency.

Volatility

The forex market and therefore currency pairs, are generally considered to be of low volatility. This is because the forex market is considered to be of high liquidity – that is that the market is highly active with many traders trading at great volume. A market that is traded 24/5 with a $6 trillion daily turnover is highly liquid.

This form of currency trading falls into 3 distinct forex markets:

Spot forex market

This is immediate trading. On the spot trading is the exchange of one currency against another that is settled immediately at the point of trade or very soon after. This is the most popular form of currency trading in the forex market and also the largest.

Forward forex market

This forex market is based on a self-regulated contract to buy or sell a currency at a specific price but the trade will be settled at a set date in the future.

Future forward market

Not too dissimilar to the forward forex market, the future forex market involves a legally-binding contract to buy or sell currency at a specific price and with a future set settlement date.

Understand the quote

When reading a quote for a currency pair, you will notice two prices. The first price is the quote for the rate at which you can sell the currency pair at. The second price is the quote for the rate you can buy the currency pair for. The difference between these two quotes is what is known as the spread. The spread is the amount the dealer charges for conducting the trade.

Choose your position

Choosing a forex position differs from other markets since you are buying one currency while simultaneously selling another. When you buy a position, you are wagering that your base salary will rise in comparison to the quoted currency. For example, if you trade USD/JPY, you are investing in the belief that the US dollar will strengthen against the Japanese Yen.

When you choose to sell a position, you are wagering that your base salary will, in this case, fall against the quoted currency. For this example, if you sell USD/EUR, you are investing in the belief that the US dollar will weaken against the Euro.

Currency trading and currency pairs are a vital component of the greater forex market. The forex market is a highly liquid, generally low volatility market with a daily turnover of around $6 trillion. nextmarkets offer one of the best platforms to learn how to trade currencies online.

Trading currency pairs can be profitable either through speculative CFD trading, or by buying foreign currency knowing it will rise in the future. Learning how to trade currencies is the first step towards trading in the forex market.