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Trading Foreign Exchange: A Beginner’s Guide

With rising awareness of investments and trading markets amongst youngsters, many people are now increasingly participating in trading foreign currencies. If you are one of the beginners willing to join forex trading, here’s a synopsis of everything you need to know about it!

FX trading works upon the conversion of one currency into another. The Forex market is run by a global range of banks spread across different areas in different time zones, such as London, New York, Sydney and Tokyo.

Types of FX Markets

Spot Market

As the name suggests, this type of market allows traders to exchange a currency pair then and there: ‘on the spot.’ It is important to note here that the traders need first to buy an asset and then make a trade on a spot date. Traders would not be gaining any profits until they sell their assets.

Forward Market

Unlike the spot market, in the forward market, traders can purchase an asset and sell it on a set date in the future. The amount of currency in this type of market is also set prior, along with the date. The terms and conditions in these agreements are customisable till the end of an agreement and are settled over the counter.

Future Market

This is similar to the forward market. These also have a set date and time in the future. The only difference is that these contracts are more rigid and standardised.

Understanding Key Concepts

  • Base Currency and Quote Currency

Base currency is the currency a trader has purchased, and the quote currency is the currency in which a trader would exchange the first one. Base and quote currencies are depicted in three-letter codes, for example, EUR/USD. This means that Euro is the base currency, and US Dollars is your quote currency.

  • Lot

A lot is a batch size in which currencies must be traded—for example, a lot of 200 pounds. However, as forex markets are global and vast, they have extensive lots. The minimum lot one can trade 100,000. As all traders might not have 100,000 units of the base currency, traders can trade using leverage.

  • Leverage

Leverage helps traders access a Forex trade without paying the lot price. Traders can put down only a small amount of the lot as a deposit. This is known as a margin. With this margin, traders can benefit from the profits of the entire lot price. Similarly, the losses are also counted as per the entire lot.

Benefits of Forex

Hedging

Especially for multinational companies, who are active in purchasing assets and making foreign exchange transactions, the risk of Forex currency changes is more. Thus, hedging funds is more beneficial to such companies where they can set the value at which the transaction can be finished despite the market fluctuations.

Beginner-Friendly

Beginners can easily access the market as it requires less investment in the initial period compared to other markets. Similarly, it is easy to enter with many free demo accounts and online tutors available.

24-Hour Service Availability

Due to 24 hours of market availability and global reach, traders can research and act upon any assets at any time of the day.

Final Words

Forex trading has taken the currency world by storm. Even though the profits are massive, they are also associated with many risks and factors to consider before entering. Practising with caution and proper knowledge will go a long way!

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