Introduction –
Through foreign exchange (forex), investors have the ability to trade almost any currency in the world. You should be aware that you are taking on a speculative risk in order to make money in forex. Essentially, you are betting that one currency will gain value over another. The expected return of currency trading is lower than that of stocks or bonds and is comparable to that of the money market. Leverage, on the other hand, has the potential to both increase risk and increase returns. For active traders, currency trading typically yields higher profits than passive investing. It is essential to keep in mind that currencies are traded and priced in pairs when buying and selling them. You might have seen a currency quote for a EUR/USD pair of 1.1256, for instance. The euro serves as the base currency in this example. The quoted currency is the US dollar.
About Base Currency –
The base currency is worth one unit in every currency quote situation. The quoted currency is the quantity of the base currency that can be purchased for one unit. According to the previous example, this merely indicates that one euro can purchase 1.1256 US dollars. Either a rise in the value of the quoted currency or a fall in the value of the base currency can earn an investor money in forex. The investor’s position on each currency pair provides a different perspective on currency trading. Because you are “selling” the base currency in order to Buy currency or the quoted currency, a position in the base currency can be considered a short position. The quoted currency, in turn, can be regarded as a long position in the currency pair.
Value of Euros –
You can see that one euro can buy $1.1256 and vice versa in the example above. An investor must first go short on the US dollar in order to go long on the euro in order to buy euros. When the value of the euros rises in relation to the value of the US dollar, the investor will need to sell back the euros in order to profit from this investment. Let’s say, for instance, that the value of the euro rises to $1.1266. If the investor sold 100,000 euros at this exchange rate, they would gain $100 (112,660 – $112,566) on the lot. In contrast, the investor would lose $100 ($112,460 – $112,566) if the EUR/USD exchange rate decreased to $1.1246, from $1.1256.
Benefits for Active Traders –
For active traders, the currency market is a haven. The forex market is the world’s most liquid market. Bid-ask spreads are frequently close to zero, and commissions are often zero. For some currency pairs, spreads close to one pip are common. Forex trading can be done frequently without incurring significant transaction costs. There is always a bull market somewhere in forex. There are always opportunities to trade due to the long-short nature of forex, the variety of global currencies, and the low or even negative correlation of many currencies with stock markets. During bear markets, there is no need to wait around for years.
