What should you know about currency trading if you have never traded Forex before?
BY Chris Andreou
|January 18, 2021Forex markets differ from stocks and futures markets in a sense that spot trading in currencies doesn’t happen in centralised exchanges. Instead, currency trading takes place in a global computer network between banks, brokers and liquidity providers. Previously currency trading was available only for large institutional investors but thanks to brokers like TIOmarkets smaller retail traders have also access to these sizeable markets. While stock markets have billions of dollars worth of stock traded every day, daily Forex volumes rise above 5 trillion USD. We can therefore certainly talk about the biggest financial market in the world. These markets are so vast because they are needed in global trade between countries and internationally operating companies as well as almost everyone else from a tourist changing currency to a mining company selling their raw materials to another country.
By opening an account with TIOmarkets new traders can have the same access and opportunity to high-quality trade execution in FX markets as big investment funds. Trading software is different but access to the markets is available to small as well as big traders. Brokerages like TIOmarkets are therefore great equalisers and help small traders to participate in FX markets. This, however, isn’t everything TIOmarkets offers to new traders. We have an excellent trader education programme that helps new traders to grow and learn quicker. Webinars that are free for all traders are designed to equip new trader with skills and knowledge that speeds up their learning process. Go to TIOmarkets.com/webinars to register to our next Live Strategy Workshop.
When we buy and sell in FX markets we call it either taking a trade or going long or short or taking a position. Or, we might say that we take a long trade e.g. in EURUSD. Taking a long trade or having a long trade open in EURUSD means that we have bought EUR and sold USD. We, therefore, have long exposure to the Euro and short to USD. In practical terms, this means that any factors supporting the value of EUR work for us while the factors that support the value of USD are in theory likely to have a negative impact on our profit and loss.
There are two prices in every publicly traded financial market and the same goes with Forex. They are called BID and ASK. In the normal trading environment, BID prices are always lower than ASK and are used to initiate short positions. When we open a long position (or close a short), we use ASK prices. The difference between the BID and ASK (sometimes called OFFER) is spread. It’s an important metric for traders as it is part of their cost of business, so to speak. Market movements in FX markets are measured in pips. One pip equals 10 points or fractions (depending on the chosen terminology) and represents a $10 move when using one contract. One fraction (or point) is the smallest amount of movement recorded in the FX markets.
One pip sounds like something so small that it could be ignored but this is not true. A very active trader can take 20 to 30 trades per day and with trade frequency being this high the width of the spread relative to the size of the trades is a significant factor when assessing the long term profitability of a trading strategy. If our trader pays a 2 pip spread each time he trades his daily trading cost is 40 pips (assuming 20 trades per day). Multiply this with 250 trading days per year and Mr. Active Trader needs to make a significant amount of pips over the course of the year to cover his trading costs. This is why the tight spreads TIOmarkets offers are so highly appreciated by our traders.
In order to profit from a long EURUSD position, the value of Euro vs. the US Dollar needs to appreciate more than the cost of your trade. For instance, if your total cost of the trade is e.g. 0.8 pips (or 8 fractions), the bid price needs to move more than 0.8 pips from the time of opening the trade before your trade becomes profitable. Some brokers have wide spreads. This means their traders will find it difficult to create a profitable trading strategy. TIOmarkets however, provides it’s traders with highly competitive and narrow spreads. We are truly a client-focused and trader friendly broker. We even offer free trading strategy workshops to educate and prepare you for the challenge of trading the world’s biggest financial markets. Join Janne Muta our Chief Market Analyst to these workshops by registering at TIOmarkets.com/webinars.
Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional client’s losses can exceed their deposit. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.
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