Five Things You Should Know About the Currency Exchange Market
Meta: Discover the five most important facts you should know about the currency exchange market before you can become a successful forex trader.
Five Facts to Learn About the Currency Exchange Market
The currency exchange market, also known as the forex market, is one of the most active financial markets in the world.
While buying and selling in this market was limited to large institutions in the past, the advent of the internet meant that individuals could also effortlessly engage in forex trading.
Now there are countless websites and platforms where a person can create an account, add money, and begin trading. Whether you are a novice in this market, or want to learn more about forex, even if you have some background information, the guide below can be of great assistance.
Below are five facts that you must know about the currency exchange market.
1. Forex Rules Compared to the Stock Market
One of the first things people learn about when they begin to trade stocks is that countless regulations exist within the market. There are rules regarding every aspect of buying and selling stocks, including taking up short positions or long positions.
An interesting aspect of the forex market is that very few regulations exist. Traders can buy as much of a particular currency pair as they want, and they can sell their entire stake within minutes, hours, or days.
2. No Commissions
When you are engaging in stock buying and selling through a broker, you must pay the broker a commission for each trade. Those who invest their money in a managed fund such as a mutual fund have to do the same.
Such operations do not exist in the forex market. You can comfortably buy and sell in significant quantities without the need to get a broker involved. That means 100 percent of the profit from a trade is yours to keep.
3. Trading on Margin
A significant advantage of trading currencies is that you have access to margin, allowing you to take up positions with a lot more value than the balance you may have in your forex account. For example, if you have $10,000 in your account, you can trade on margin up to 40:1 on some platforms, giving you access to $400,000.
The stock market, in comparison, only allows margin trading of up to 4:1, while you likely have to sign up with a broker or a similar service to get access to this feature. Most of the apps that you can use to buy and sell stocks have minimal options for trading on margin.
4. Understanding Currency Pairs
One key difference between the stock market and the forex market is that when you are buying and selling a stock, you only need to worry about the performance of that particular company.
When trading forex, you are buying and selling currency pairs. For instance, you may engage in a trade for the USD/EUR pair, which means you are selling euros to buy US dollars. As your concern is the relative value of each currency to each other, you must worry about the values of both currencies and how they may fluctuate in the coming hours and days.
Any forex trade means assessing how two economies are performing and how the currencies of those two countries may rise or dip in value.
5. Outside Influences on Currency Values
The forex market is highly prone to influence from outside sources. Such influence can also occur in the stock market, as political events do have a profound bearing on how stocks perform.
With the stock market, however, such events usually lead to temporary shifts in positions, with the market eventually finding its footing again. In the forex market, though, political and world events are the primary factors that drive the price fluctuations of currency pairs.
The behavior of traders in the forex market is not going to have a significant impact on the value of the US dollar relative to the euro. The performance of the European and U.S. economies, and any political events taking place in those nations, are much more likely to drive price fluctuations.
People who do have an interest in current events and world affairs are much more likely to become successful forex traders. As they learn how those events influence currency rates, they can better predict when to engage in specific trades in the forex market.