If you’ve heard anything whatsoever about the FX market, it’s potentially that it is the largest financial market in the world, at least apropos daily trading volumes. To be sure, the forex market is unique in several respects. The volumes are, indeed, enormous, which means that liquidity is ever present. It also operates full time six days every week, giving traders access to the market any time they require it.
Few trading restrictions exist – no daily trading limits up or down, no restrictions on position sizes, and no needs on selling a currency pair short.
Selling a currency pair short means you are expecting the price to decline. Due to the way currencies are quoted and because currency rates move up and back down all of the time, going short is as common as being long.
The majority of the action occurs in the major currency pairs, which pit the U.S. Dollar (USD) against the currencies of the Eurozone (the Western european countries that have adopted the EU Dollar as their currency), Japan, Great Britain, and Switzerland. There’s also lots of trading prospects in the minor pairs, which see the U.S. Greenback traded against the Canadian, Australian, and New Zealand dollars. On top of that, there’s cross-currency trading, which directly pits 2 non-USD currencies against one another, such as the Swiss franc against the Japanese yen. Altogether, there are anywhere from 15 to 20 different currency pairs, depending on which forex brokerage you deal with.
Most individual traders trade currencies through the Internet thru an agent. Online fx trading is generally done on a margin basis, which permits individual traders to trade in bigger amounts by taking advantage of the quantity of margin on deposit.
The leverage, or margin trading proportions, can be terribly high, infrequently as much as 200:1 or larger, meaning a margin deposit of $1,000 could control a position size of $200,000. But trading on margin carries its own rules and wants and is the backdrop against which all of your trading will occur. Leverage is a two-edged sword, increasing gains and losses similarly, which makes risk administration the key to any successful trading methodology.
Before you ever begin to trade, in any market, make sure you’re only risking money you can stand to lose, what’s ordinarily called risk capital. Risk management is the key to any profitable trading plan. Without a risk-aware strategy, margin trading can be an extremely short-lived endeavour. With a correct risk plan in effect you stand a much better chance of surviving losing trades and making winning ones.
Felix Richman is an FX trader and columnist on subjects like forex robots, and well-liked FX software programs like FAP Turbo.
