How FX trading works
In FX trading, currencies are quoted in pairs. Let’s take the most popular currency pair as an example, EUR/USD. The first currency (Euro in this case) is called the base currency and the second (USD) is called the quote currency. When you trade a pair you are speculating on whether the base currency (EUR) will strengthen or weaken against the quote currency (USD).
Currency prices are typically quoted to five decimal places. The most important decimal point to keep an eye on is the fourth, also known as pip. It is the number of pips we use to calculate the profit and loss.
Currency positions are traded in specific amounts called lots, which equals to 100,000 units of the base currency. It is also possible to trade in smaller amounts - mini, micro and nano lots sizes, corresponding to 10,000, 1,000 and 100 units respectively.
What influences currency prices?
There are three key factors that impact the prices in the FX market.
Economic reports have a big effect on currencies. For that reason, the Economic Calendar is the trader’s best friend. It includes all scheduled news events and data releases, graded by importance.
Currencies are sensitive to political uncertainty caused by events such as elections, referendums and political scandals.
Acts of God, such as tsunamis, earthquakes and hurricanes, can cause significant price volatility in the currency associated with that region.
Who trades FX?
Apart from banks, financial companies and professional traders, anybody with an interest to capitalize on daily market moves can access FX trading. The FX market is a decentralized global market. What that means is that there is no physical location where traders meet to buy or sell.
In such a market, it is technology that makes it possible for traders all over the world to deal directly with each other. Put simply, FX trading is a market without middlemen. All you need to participate in this fascinating and fast paced market too is a trading account with a reliable broker.
Advantages of FX trading
FX trading has evolved into one of the most popular markets to trade. Here are the three key reasons why so many traders choose it.
Available 24 hours
From Sunday to Friday evening, the FX market is available for trading around the clock. This makes it ideal for traders who can only trade the markets on a part-time basis.
When trading FX online, you can control positions much larger than your capital by using leverage. This can lead both to larger gains and losses, which makes risk management a key part of every FX trading strategy. At ThinkMarkets, you can choose to trade currencies with leverage up to 500:1.
Low starting capital
Unlike trading on an exchange where the contract sizes are predetermined, when trading FX online, you get to decide the size of your positions. This allows traders to start with the capital they feel comfortable with. At ThinkMarkets, you can start participating in the fascinating FX markets with no minimum deposit requirement for a Standard account and only $500 minimum deposit for a ThinkZero account.