Most beginner traders lose money as trading in any investment market is very difficult. But with the right education, practice and experience, success can be achieved. So, what is currency trading? How will you know if it is suitable for you?
The currency market or also called forex (FX) is the largest investment market in the world and keeps on growing yearly. The forex market hit $4 trillion in daily average turnover in April 2010 which is a 20% increase since 2007. Compared to the latter, New York Stock Exchange (NYSE) has only $25 billion of daily volume. The market might be large as until currently that professional traders give the volume. Retail traders found forex appropriate to their investment goals as currency trading platforms improved.
How Does Currency Trading Work?
This makes forex exchanges the largest and most liquid asset market in the world.
Pair and Pips
All currency trading is done in pairs. Instead of buying or selling a single stock like in the stock market, it is required to buy one currency and sell another currency in the forex market. Almost all currencies have a price that is into a fourth decimal point.
A pip which stands for percentage on point is the smallest step of trade. One pip usually has an equivalent of 1/100 or 1%. Most of the currencies have a price that is up to four or five decimal places. Currency pairs including the Japanese Yen (JPY) as the quote currency are exempted from this rule. Pairs including Japanese Yen (JPY) are priced out to two to three decimal places having pip on the second decimal place.
Currency is traded in a variety of lots. A micro-lot is 1000 units of currency. A micro lot is equal to $1000 of the base currency (dollar) if the account is funded in U.S. dollars. A mini lot has an equivalent of 10,000 units of the base currency and a standard lot is 100,000 units.
Beginners or retail traders are usually trading currency in micro-lots. This is due to 1 pip in a micro lot is only a 10-cent move in the price. With this, it is easier to manage losses when the trade is not gone well or produce the desired results. 1 pip is equal to $1 in a mini lot and $10 in the standard lot. Some currencies shift to as much as 100 pips or more in a single trading session. This makes the potential losses more manageable to a small investor when trading in micro or mini lots.