If you’re reading this article, you’re probably learning Forex trading to earn extra income or diversify your portfolio. Regardless of your reason, you are correct to assume that foreign exchange is a profitable industry. However, it isn’t for all traders. It may seem like simple buying and selling of money, but the multitude of currencies combined with the volatile market can create serious problems for the uncanny trader. Significant losses can be incurred if the trader does not use the right trading strategy and time his/her transactions.
Foreign currency exchange is the largest global financial niche. Traders predict the value of money, and they make revenues from precise speculations in exchange rates. The industry is distinguished by a number of characteristics from the trading procedures of other niches. Yet ultimately, the market is an unpredictable, auction-based platform that is largely different from the stock market and other financial niches you are familiar with. It does, however, share a similar quality with other markets in that risks are high.
More investment capital enters Forex on a daily basis than any other financial niche. It is deemed that Forex is more than 30 times bigger than the NYSE, which is one of the largest stock markets worldwide. This makes foreign currency exchange a greatly liquid medium conducive for fast trading. Since there are numerous participants, a trader can confidently anticipate even massive buy or sell orders to be executed immediately.
Assets traded over the Forex market are known as currency pairs. Traders predict the value of one currency over another currency. No currency has its respective intrinsic value without its counterpart. The Great Britain Pound, for example may drop in value against Euro while concurrently falling in value over U.S. dollars. Currency pairs are identified with three letters for every currency, and the pair are written together to generate one six-letter code.
Due to the alarmingly high risks of leverage in Forex trading, varied forms of accounts are offered to meet different risk thresholds among traders. The discerning quality of these accounts is the “lot” range. A lot is the smallest range trade an account allows.
Classic Forex accounts buy and sell in lots of 100K units. This is very dangerous and not ideal for inexperienced traders. The use of Mini Forex accounts minimize the trade range to 10K units, which in turn lowers risk. It is still significantly dangerous though.