What Is Trading Currency?
Trading currency entails simultaneously buying and selling of currency in pairs through dealers or forex brokers. Generally, different currencies vary in strength based on the level of economic performance which gives rise to differing exchange rates. In recent years, factors such as globalisation have contributed to a surge in trading activities between countries. The significance of trading currency cannot be understated since it has facilitated the smooth transfer of both goods and services between across the globe. Furthermore, the emergence of retail forex trading has enabled smaller institutions and individuals to participate in the forex market due to the lower capital requirements and the possibility of reaping huge profits.
What Are Currency Pairs?
This arguably represents the most crucial concept in trading currency as it forms the very basis of Forex trading. A currency pair refers to the pricing and quotation arrangement of all the currencies that are traded in the Forex market. There exists two type of currency pairs namely the major and minor currency pairs. Major currency pairs not only represent the widely traded currency pairs but also the most liquid pairs in the Forex market. In most cases major currency pairings constitute of the US dollar and any other leading currency such as the Australian dollar or Euro. On the other hand, minor currency pairings.Currency pairing enables traders to establish the present value of a given currency based on comparisons with a different currency. A currency pair constitutes of a base and quote currency.
For instance, AUD/USD. This currency pairing represents the Australian Dollar vs. the US dollar which can also be referred to as a Forex quote. From the example, the Australian dollar represents the base currency while the US dollar represents the quote currency. When buying a currency (going long) the prevailing exchange rate determines the amount of the quote currency to be payed when acquiring the base currency. In contrast, when selling in trading currency (going short), the current rate of exchanges helps the trader determine the number of units of the quoted money that can be acquired by using a single denomination of our base currency.
Bid Price & Ask Price
Pricing represents another fundamental concept that every aspiring currency trader needs to understand before indulging in trading currency. Pricing of currency pairs consists of two parts namely the bid price and the asking price. The Bid price refers to the prevailing market price that a broker is willing to sell a unit of the base currency so as to acquire a given number of units of the quote currency. In contrast, the ask price (offer price) is the price at which a broker is willing to sell a given amount of the base currency with an aim of acquiring a sole unit of the quote currency.
What Is Leverage?
In the past, the trading currency used to be a reserve of big corporations and governments. However, the advent of retail Forex trading has opened up doors for small investors to participate in currency market. Presently, any potential investor may be involved in the market using very smaller amounts of initial investment depending on the chosen broker. Typically, these little sums of capital invested by small scale Forex traders would translate to negligible profits.
However, Forex brokers introduced the concept the concept of leveraged trading as a way of enabling smaller traders to benefit from trading currency by allowing them to control a larger capital exposure. In trading currency, leverage is presented as a ratio and the amount of leverage available for a trader varies from one broker to another. Leveraged trading not only increases the potential for traders to rake in greater returns but also heightens the potential to make more significant losses.
Advantages Of Trading Currency
Flexible Lot Sizes
Trading currency allows traders to set their lot sizes which allow merchants to participate to pump in smaller amounts of capital.
Minimal Transaction Costs
Traders only incur minimal costs while trading currency since the cost of conducting a transaction is determined by the spread.
Flexible trading times. The Forex trading market essentially operates for 24 hours which allows a trader to choose the desired time for trading.
Another advantage of participating in currency trading revolves around the issue of leveraged trading whereby a trader gets a bigger capital exposure as compared to the money invested.
The high liquidity associated with Forex trading allows for the instantaneous buying and selling of currencies.
Immediate Execution of Market Orders
Forex trading allows for the timely execution of buying and selling orders due to the high liquidity associated with Forex trading.
Technological advancements have made it easier for traders to easily access trading platforms using personal computers and smartphones.
Risks Associated With Trading Currency
High Risk Associated With High Leverage
The greater the leverage employed by a trader, the higher the level of risk associated with trading.
Complexity in Determining Prices
Numerous factors influence prices levels in trading currency which make it extremely difficult to determine prices.
The highly unpredictable characteristics of the Forex market means that a trader can easily suffer immense losses over a very short period.
Risks Associated With High Leverage
For example: when the exposure is set at 50:1 and a trader wants to take a $50,000 position on the Australian dollar. Under the present regulatory framework in Australia, a dealer is mandated to hold a minimum of $1000 AUD in his/her account to support the desired position. This occurs dues to the minimum margin requirements of not less than 2%. Under the 50:1 exposure a -1% move yields a $500 loss. This example shows the risks associated with high leverage forex trading Australia and its potential to amplify the potential losses