Learn how to profit from movements in forex rates
Hundreds of thousands of traders and investors are leveraging the fast-moving forex rates daily to grow their account. The sheer trading volume in the currency markets market creates healthy amounts of volatility which in turn offers speculators more profitable opportunities. In fact, forex is one of the most widely traded asset classes in the world and today, more investors prefer to trade forex rates and their derivatives instead of stocks and commodities.
Advantages and disadvantages of trading forex
What helps with the unpredictable daily movements of forex rates, is that speculators have the opportunity to profit from both rising and falling markets. Regardless if an economy is doing well or not, you can still speculate on its currency’s movements using forex CFDs or Contracts for Difference.
CFDs, currency options and futures are all tradable instruments under the forex market and with a trading account, you also get access to CFDs on stocks, commodities and even cryptocurrencies as well.
Forex traders prefer trading CFDs because these assets are traded on margin which allows for trading thousands of units of currency at only a fraction of the cost of the total position. The broker provides you with the trading capital needed to cover the position as long as you meet the margin requirement. The required margin can be as low as 2% in some cases – providing traders with massive purchasing power. However, it’s important to note that trading on margin is a risky endeavor since it exposes you to downside risk and if your trade results in a loss, it could mean that you may lose more than your invested capital.
Forex rates and their movements
You can only gauge the strength of one currency when comparing it with another and this is why forex trading is performed with currency pairs. Each pair also enjoys different trading fees, exchange rates as well as trading volume.
High trading volume is particularly favorable for forex traders and the major forex pairs which include the EUR/USD, GBP/USD and USD/CHF among others – are the ones that enjoy the highest trading volume in the market and as such provide better pricing and larger price fluctuations.
The main motivator behind movements in the exchange rates between two currencies is supply and demand. When the U.S economy is performing well, its currency becomes stronger and more attractive for investment.
Supply and demand are also largely affected by the global economic outlook, various geopolitical events as well as by announcements by central banks and other financial institutions. Therefore, forex traders need to stay on top of this news and events in order to be able to make accurate market predictions.
Live forex rates
You can see the live forex rates directly in your trading platform which also provides extensive charting capabilities. The chart is where traders perform their market analysis in terms of price action. The platform provides several years’ worth of historical price data which are reflected as movements on the chart.
Most traders also employ various technical indicators that can monitor the chart for repeated price patterns that can provide insight into a current market performance as well as the future direction of the price.
Since forex traders merely speculate on forex rates and don’t actually buy or sell the underlying currencies, they can profit even if the price is moving downwards and therefore there are more opportunities to trade than any other market – especially since the exchange rates are moving up and down quite rapidly throughout a daily trading session.
How to trade forex rates
Trading forex is mainly performed by buying and selling a currency against another. As already mentioned, however, traders don’t actually buy or sell the underlying currencies. The main objective is to speculate correctly if one of the currencies in the pair will go up or down against the other.
To put things in perspective, let’s say that you have reasons to believe that the euro will increase in value against the dollar. That means that the EUR/USD forex pair is a good buy opportunity and therefore you want to buy or go long 100.000 units at the current exchange rate of 1.1067.
For this example, let’s consider that you were indeed correct, and the exchange rate went up by 33 points to 1.1100 – you close the position to realize your profits. Since 1 point of movement in the exchange rate of EUR/USD is worth approximately $1, you would have gained $330 for this single trade before any trading fees.
On the other hand, if you were with the assumption that the dollar would instead appreciate in value against the euro you would actually have to sell the EUR/USD pair or go short in order to achieve the same profits.