Trading Currencies: The Ultimate Guide
Master the basics you need to grasp when trading currencies, equip yourself with indispensable risk management strategies and learn the glossary which is indispensable when trading currencies.
*Sage FX would like to state that traders should research extensively before following any information given hereby. Any assumptions made in this article are provided solely for entertainment purposes and not for traders to guide or alter their positions. Please read our Terms & Conditions and Risk Disclosure for more information.
- Mastering the basics of trading currencies
- Currency trading: the glossary
- Risk management strategies
Until only 50 years ago, currency trading was an endeavour only accessible to the powerful and wealthy. It is safe to say that those days are gone as reliable online brokers such as Sage FX are bringing new financial opportunities to new, curious traders.
In this article, master the basics you need to grasp when trading currencies, equip yourself with indispensable strategies you need to employ to minimize risk and learn important words you need to know when trading currencies. Let’s get started!
Mastering the basics of trading currencies
The forex market, in 2020, was estimated at $1.93 quadrillion. As of April 2021, the cryptocurrency market cap was worth $2 trillion. It comes as no surprise that this presents an immense amount of opportunity for traders worldwide.
From where do you start? What are the basics you need to know before you start capitalizing on it?
Currency trading is when traders buy and sell currencies and make a profit from the difference in the value of currencies. There are several benefits to trading currency. Trading currency does not require a hefty investment and can be done with a very low deposit. With a minimum deposit of $10, you can start trading with Sage FX. It can also be done at any time with the forex market staying open 24 hours a day from Monday to Friday and the cryptocurrency market staying open 24/7. Currency trading also does not cost much. Transaction costs are kept at a minimum and the only cost involved is for the spread between the buy and sell price of the currencies.
Currency trading is done by choosing what is called a currency pair. The most popular pairs in forex are the ones that belong to the biggest economies (USD, EUR and GBP). However, choosing other minor currencies to trade them against might prove to be quite interesting and might yield results. When it comes to cryptocurrency pairs, the absolute giant is still Bitcoin. However, altcoins such as Ethereum and Stellar Lumens are continuously gaining ground.
What makes the value of these currencies rise or fall?
When it comes to forex, this depends on the country or countries the currency operates in. Things like demand and supply, geopolitical events, news and interest rates are a few of the major drives of change that can influence the currency. It is of the utmost importance for any traders who are actively placing forex trades to keep an eye out on news that might affect the currencies being traded.
Cryptocurrencies, on the other hand, operate on a slightly different spectrum. While the basic notion of supply and demand is still relevant here, cryptos are affected by how much of the currency is still available and how much has been mined (for Bitcoin). Regulation, updates to the code, and cost of production are other factors that might skyrocket the value of the crypto or make it fall.
For both the forex and the crypto market, it is important to keep reading forex news articles such as our news section that provides concise, relevant articles that give you all the information that you need before you place a particular trade.
Glossary of Currency Trading
As with any other subject, it is imperative you get acquainted with important terms and words that are used. Once you read the below glossary you will be able to pass off amongst the most expert traders by picking up their lingo.
1. Base Currency– the first currency in a currency pair eg. USDGBP (USD would be the base currency).
2. Counter Currency – the second currency in a currency pair. Eg. USDGBP (GBP would be the counter currency).
3. Going Long– when you buy a security.
4. Going Short – when you sell a security.
5. Leverage – when a trader borrows capital from the broker once he/she opens a position. This increases the potential return of investment.
6. Position Sizing – seeing when it is the best size for a trade.
7. Pip– the smallest movement a currency can make.
8. Stop Loss – when a trader sets an amount that does not allow him to keep trading when he/she reaches this amount. It is an order designed to minimize losses.
9. Take Profit – when a trader sets a certain profit level and it does not allow him to close a trade higher than this level.
10. Risk Management – when a trader keeps risk in mind when trading in order to minimize losses.
11. Spread – the difference between the buy and the selling price. This is also the cost of placing the trade.
Risk Management Strategies
It is important to keep in mind that you can never eliminate risk when trading on the live markets. However, you can take precautions that minimize your risk for loss. You can put measures into place before you actually start trading.
Set stop losses in place
Stop losses close losing positions before you rack up large losses. It is important you set a stop loss before you start trading as part of your risk management strategy.
Decide your optimal position size
Generally speaking, responsible traders set this at not more than 2% per trade. Trading more than 2% of your capital on any single trade may lead to significant losses that might be detrimental to your trading.
It is also important to keep in mind that as usual, it is always recommended to draw up a fool-proof trading strategy. This will help keep you disciplined and helps you stick to your trading goals for that particular session. Keeping a trading journal will also ensure you keep a healthy perspective when trading. It keeps tabs on past strategies when you look at your past trading activities.