This article will help you to clear some questions about the currency trading and the equity trading. This knowledge will help you on the way to your first million… or your first hundred, that is not bad too. Anyway, it certainly will help you to earn our money!
So, there are three main differences between the currency and equal trading:
Instead of looking at a single asset, currency traders look at the currency pairs
The men we call “FX traders”, or “Currency traders” operate, as we see, currencies. For example, a trader thinks the JPY will go up compared to the USD. What he does? He buys the pair JPY/USD at a current price $112 (that means he buys Yen with US Dollars). He will sell this pair, when the price of the Yen goes up. After this manipulation, he will get more money than he had before.
As you can see, there is nothing difficult here. Buy the asset when you think it will grow and sell it after your assumption was realized. During this process you are looking at the value of two assets, not only one, and this is the difference.
You will receive data about the currency pair something like that: USD/JPY = 112. That means 1 USD is equal to 112 JPY. We name USD a “base currency” in this pair, and JPY in this situation will be the “quote currency”. Now let’s diversify “long” and “short” positions in this situation. “Long” we name a position, in which we are buying the base currency, “short” we name a position, in which we are selling it.
The leverage of currencies is usually higher than the leverage of equities
Despite the fact that the FX market is on f the biggest markets in the world, the currency movements are really small. Mostly, currency pairs movements are not more than 1% per day. So, making a Million from 100USD is a quite long process.
Due to this situation, many Currency Traders use leverage, which is, in fact, a loan provided by the broker. A lot of brokers provide leverage of 50:1, 100:1, or even 200:1 if you trade no more than $50.000.
For example, if your deposit is $2000 and the leverage is 50:1, you will be able to trade $100.000 of currency. As you see, the trading volume exceeds your actual fund. That allows you to make a much higher profit.
But we have to remember, that risks are growing on the assumption of the leverage rising. With higher leverage your losses will be greater if the chosen currency pair goes in the opposite direction. However, these losses will be not so fatal, as in the equity market, as we remember about a tiny 1% maximal price changing of any currency.
But that does not mean, that FX traders should work without any stops or limit orders. Vice versa, before opening an account, you need to gather detailed information about your brokerage company.
Stock traders concentrate on the company data, while currency traders look at the whole market
In fact, it’s quite easy to operate currencies. The difficulty is in prediction of the next currency move. First of all, FX Traders need to have in-depth knowledge about what drives the value of currency.
When you work with equities, you also need to make the technical and fundamental analysis. The technical analysis of currencies and equities are quite similar, but fundamental analysis differs.
FX traders are not interested in the performance of single companies as equal investors. They look at the performance of the whole economies. They need to keep up such macroeconomic indicators as GDP growth, Industrial production, Retail sales, Consumer Price Index, Interest rates, Money supply, Geopolitical events, etc.
This information is open and published by governmental agencies. Usually the traders’ day starts from the review of the economic calendar. As practice shows, before the release of an important report, markets are usually more volatile.
So, you don’t need to have any special skills to start forex trading. But, of course, you need to understand the specifics of the market. You will enjoy the process only after the in-depth study of the matter.