Over the course of the next few minutes, we’re gonna go through some of the basics of the foreign exchange market: how it works, how people trade it, and what makes currency pairs move.
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So, this latest video, with Trading 212, what I thought we’d do, is take maybe something of a step back. Now, I appreciate plenty of people are quite familiar with foreign exchange trading, but for some people, it might be a new thing. So, we’ll do a few minutes, just explaining how this market works, when you’re trading, what you’re actually trading, and what makes currency pairs move.
Now, first of all, foreign exchange market, it’s the biggest market in the world; bar none it trades trillions of dollars a day, around the clock. So it appeals to both traders who are trading small size and larger size, because it’s relatively easy to get your trades filled and the cost of doing business is much lower, when compared to other markets.
With currency markets, no currency moves in isolation, so we have the idea of currency pairs. One currency quoted against another. So to make sense of this, let’s take a quick look on the platform.
So, we’re on the Trading 212 platform. Let’s click the search tool up here, top left, and see what’s available to trade. Let’s click on currencies.
Now, so here’s a list of various currencies: Australian dollar, Canadian dollar, Swiss franc, Czech koruna, and so it goes on. So there are potentially hundreds of permutations we could trade.
For example, if we go down to here, the PLN Polish zloty, if you wanted to, you could take a view on the Polish zloty against the Japanese yen, Polish zloty against the Mexican pesos. There are all sorts of combinations you can do here.
What most people tend to do, in the beginning at least, is stick to the major markets that the major currency pairs, because there’s normally plenty going on in those markets. And with Trading 212, if you’re trading 25,000 units or less, you can trade these with zero spread. So let me just highlight these by typing in zero at the top.
So there we go. That the most popular market, euro/dollar; then we have the other majors, dollar/Japanese yen, pound/US dollar, and the dollar against the Swiss franc.
So when we’re looking at currencies and currency pairs, it’s all about relative value. Is one currency stronger or weaker than another currency? And to get an idea of this, let’s take a look at how one currency pair has moved over recent months.
So all the currency pair is showing is the relative value of one currency versus another. So if we’re looking here in this example, pound/US dollar, we can see at the beginning of 2017, so January 2017, one pound would buy you around about one dollar and twenty-two cents.
At the beginning of September, the pound had risen in value, and one pound would buy you one dollar and an almost thirty two cents.
So, when we’re looking at Forex pairs, foreign exchange trading, we’re looking at the value of one currency versus another.
Now, because we have currency pairs, I think it can be a bit confusing in the beginning for some people when they click and they buy dollar/yen. Or what am I buying? My saying that dollars gonna go up; my saying that yen’s gonna go up. It’s understandable why this is confusing to some, but it’s really easy, I think, to understand.
So again, let’s take a quick look on a platform to understand when we’re trading what direction are we actually trading in.
When it comes to the directional trading, it’s really easy. Like I said, it can be a bit confusing for people in the beginning, but the way to remember: if you buy pound/US dollar, it’s the first quoted currency in the currency pair that you’re buying and selling, buying or selling. So if I buy pound/US dollar, I’m speculating that the pound is gonna go up, means this chart is gonna go up and correspondingly, the US dollar is gonna fall, so the pound’s value is gonna increase against the US dollar.
So, for example, if I’d bought down here, bought pound/US dollar, at the beginning of the year and we’re still holding the position, I’d be sitting on a reasonable profit. If I thought the pound had gone up too far and I think why the markets gonna fall, how do I profit from this? Well, how do I try and profit from this? The way to do it, I would click on sell, I would sell pound against the US dollar. So I’m speculating the value of the pound is gonna drop on this chart. It’s gonna turn lower.
Okay, so that’s that. That’s the rule of thumb when you’re buying or selling. It’s the first quoted currency that you’re buying or selling against the other one. So, if we sold the dollar against the Japanese yen, we’re speculating the dollar/yen is gonna fall, so the dollars gonna fall, and the yen is correspondingly gonna rise.
When it comes to trading hours, foreign exchange market is a true 24-hour market. So, it starts off Sunday night, UK time, when the Asian markets open for business, and it trades all the way around the clock, ‘till Friday evening, when New York finishes off for the weekend, then on Sunday, the whole thing starts again.
But, you don’t need to be intimidated or worried but this 24-hour market. Let’s take a look at some of the moves that we see and how we might want to trade it.
Here’s a snapshot of a few days, pairing against dollar, where each of these candlesticks represents ten minutes worth of trading. So, going back to the 5th of September, and ending up at the end of that particular week, on the 8th of September. So we can see you can see from the scale, just down here, that this is a 24 market. For example, this section here, we’ve got from eleven o’clock UK time, Asian trading kicks in the market, moves higher than we have sort of 7:00 to 8:00 in the morning, UK time, when the focus shifts to Europe, and the market continues to rise in this example, and then we have US time. So, from about five, six o’clock in the evening, UK time, the focus is very much on the US, and we had something of a quiet finish.
But don’t be, I think, worried about this being a 24-hour market, you know. Thanks to stop-losses and take profit orders, you can set up your trade. So, if a certain level gets hit, you come out for a small loss or you come out for the profit you’re expecting. Just because it’s a 24-hour market, you don’t need to watch these markets around the clock, sitting there in your pajamas with matchsticks, holding your eyes open. You know, you can use orders, to manage the risk for you.
When you’re trading foreign exchange that like, so many other products these days, you’re trading using leverage. So even though you might have, let’s say $100,000 position in one currency, you don’t actually tie up the whole amount, because traditionally, currencies don’t move that much during the day. You’re trading using leverage, so you may only have to put up half a percent or one percent value of the position. So you have a situation where a small sum of money can control a much bigger financial position.
Of course, that gives you the potential for greater profits. But hand-in-hand with that goes the risk of bigger losses, which is why it’s important, I think, to manage the risk using stop-losses. And we’ve done plenty of videos about how you might wanna use stop-losses.
The last thing we might want to look at, is what moves foreign exchange pairs. The short answer, and maybe not too helpful, is potentially everything can have an impact on the currency markets, you know, from things like interest rates, for example, if the interest rates in one country, are higher than the interest rates in another country. That can make that currency appealing.
But hand-in-hand with that, sometimes, higher interest rates mean, maybe a weaker economy, so that can make money flow the other way.
Things like unemployment numbers have an impact as well. And as we’ve seen, you know, in the past from twelve to eighteen months, political events can have an impact, the great example of that is the pound. You know, we’ve seen the pound, very volatile since the referendum vote in June 2016. So, all of these things can come together and affect the foreign exchange markets.
So, that’s it. That’s it. That’s a brief introduction to some of the basic mechanics of foreign exchange. Now, every week, we do different videos on trading strategies, but if you have any questions about this one, leave us a message in the comments down below. If you liked the video, click the thumbs up. And as usual, to not miss out on any of the various videos that we send out during the week, if you click the subscribe button there, then you get automatically notified when the next video goes up. But, we’ll bring things to an end. I hope you found it useful and I hope you have a good trading week.
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