When it does come to trading currencies, there are a few important concepts that everyone should know. There is the Pip, the market rate, Liquidity, the mid-market rate, the interbank rate, and FX spread, markup, and margin. Foreign exchange involves any transaction involving two or more different currencies.
Pip
A pip is a measurement unit in the forex market that enables you to measure changes in the value of currency pairs. It allows you to manage risk in a more efficient way and calculate the profits and losses of your trades. It is an essential concept for day traders, as it allows you to place a monetary value on the fluctuation of equity.
Liquidity
Liquidity does refer to the amount of money that can be converted into another currency quickly. Some examples of liquid assets are government bonds and central bank reserves. These assets are needed by financial institutions to meet their short-term obligations. However, not all assets are liquid, and some types are less liquid than others.
Trend-following
The first thing you should know about trend-following forex trading is that you must use a low-risk entry point and a stop-loss point close to that entry point. This will help you remain in the trade for the duration of the trend. You can also use a wide trailing stop so that you do not exit the trade when it has reached a high or a low. This method works because trends are volatile and a tight trailing stop forces you out of the trade.
Range-trading
The concept of range trading involves buying and selling at distinct levels within the trading range. This strategy can be a profitable one if you are looking to trade within the range of a certain currency pair. For example, if the price is closing on a record high, you should buy near the resistance line and sell near the support line. This will maximize your profit within the range. Traders like range trading because it gives them clear entry and exit points.
Leverage
Leverage is a concept that has brought a whole new level of excitement to FX trading. It is a way to borrow money from your brokerage and return it when the trade closes. The downside of leverage is that it can lead to a large loss if you don’t make the trade. As a result, many professionals recommend using leverage as little as 10:1. Leverage is a forex concept everyone should understand, but it is not for the faint of heart.
Exotic and regional currency pairs
When trading forex, it’s important to understand the differences between exotic and regional currency pairs. These pairs generally match one major currency with another currency from an emerging or developing country. These currencies are less liquid than their major counterparts and therefore, they have higher spreads. Additionally, the value of these currencies is highly dependent on the interest rate of their central banks. If interest rates are lower, the value of the currency will decrease.
Geopolitical events
Geopolitical events play a critical role in the currency market. They can affect currency valuations by altering the interest rate and money supply. For example, a change in government in a country can change the interest rate or lower the currency’s value. In addition, wars can affect the value of a nation’s currency. They can also affect commodity prices and other assets produced by the nation at war.