Many people are looking at different forms of investment. As they begin their research, they find that they have a lot of different options. One that soon generates some interest is Forex trading. It is also one that can cause some confusion for the new investor.
What is Forex?
This is the foreign exchange market. It is sometimes referred to as FX. It is a robust market that sees an average turnover daily of $5.1 trillion. The trading activities take place through banks, financial institutions, and traders, and brokers such as an ECN broker for example.
How It Works
When an investor becomes involved in Forex, it means they will be purchasing one currency and selling another. The purpose is to make a profit through the low buying of a currency and selling at a higher price, with the difference between the two being the profit realized.
What is an ECN Broker?
For those who are new to Forex, they will want to rely on the professionals within this industry to help them. Which means they may want to use an ECN Broker. ECN stands for Electronic Communication Network. The services that this type of broker can offer can be most valuable to the traders.
ECN Broker Services
The ECN broker will take a trader’s order and submit this to the providers of liquidity or the interbank market. This allows the trader’s order to be lined up within the real market, which is comprised of other types of traders.
An experienced ECN broker will create two lists, one being comprised of the best asking prices and the other the best bids. This is based on information gleaned from financial organizations as well as the leading banks.
The broker will then compare the lowest spreads along with the best prices and match these against the trade. No attention is paid to the actual source.
To sum up the ECN broker services, the broker acts as a go-between for the buyer and the seller but does not focus on price alteration. But, with their experience and expertise, they may be able to work on leveraging to the client’s advantage.
ECN Broker Clients
This type of broker makes their income based on the ask-bid spread. For this to be profitable to them, they seek out clients who can generate a profit and are active in the market. This type of client is working on trading by volume, which allows the ECN broker to increase their profits.
How to Find a Reputable Broker
For those who are new to Forex, they have a lot to learn, and they need to be able to source out reputable brokers as they will be relying on them to scale up their trading success. There are many different resources that can be used to find brokers. This type of resource will provide some vital information about the brokers being listed to help traders make a decision.
What to Look For in a Broker?
One of the most critical attributes a broker can possess is credibility. One way to determine this is to check out what licenses they have. There are many different types of licenses, and it is essential to know the basics of these to determine what the broker is qualified for. Another option is to research their trading volume to see how active they are.
The Broker Platform
Transparency is something that a trader should watch for when choosing a broker. A trader can determine the transparency of a broker’s platform by using reliable resources. Traders should also familiarize themselves with the payment system that the broker has established on their platforms.
How to Best Take Advantage of Certain Currency Pairs
Once a trader is going to become involved in Forex, they must develop a trading plan. This will include deciding on which forex trading pair to choose. It can be a little overwhelming as there are more than 180 legal currencies that exist throughout the work. However, there are only a small number of them that are involved in high volume trading. Part of the confusion lies within the market movement for the different currencies.
- Getting Started: The newbie to this type of trading wants to be sure that they are choosing a currency pair that is known for its high liquidity. These types of pairs present less risk and are not as volatile as some of the others. There are also lower spreads with high liquidity currency, which means the trading costs are not as high.
The most popular traded currency is the US dollar. In second place is the euro followed by the Yen (Japanese).
Which Pairs Are the “Safest” in Todays Climate?
The world economy has a direct impact on Forex, and this can be ever-changing. New traders have to keep up with the market. By doing so, it will allow them to make trading decisions about the safest pairs. The current environment is comprised of:
- EUR/USD: This comes in second to the US dollar. It usually creates less volatility and fewer risks and offers the lowest spread.
- GBP/USD: It no longer holds the reputation for being one of the largest pairs. It has become super volatile due to the 2016 Brexit affair. The risks are higher, but there may be an opportunity for more considerable gains.
- USD/JPY: This one needs to be observed as to how it is performing at the time. It is considered to be safe but is subject to high volatility. If there is a spiral down in the economy, it can raise the price of this set.
- USD/CHF: Switzerland is considered to be neutral, and the Swiss franc is thought to be a safe choice. Unless there are political or economic downturns which then will raise the price of the pair.
How to Evaluate Currency Pairs for Long and Short Term Investments
Every investor has their own mandate when it comes to Forex trading. Some want to build a portfolio that allows for short term gain. Others are looking at long term investments. Making the decision on either of these means learning how to determine which currency pairs are best suited for either of them.
The new trader must learn how to determine whether a pair is going to increase or decrease in value over time. This will allow them to decide to go short or go long.
The Currency Position
The new trader needs to determine the position of the currency pair. A trader will look at buy and sell signals. For those looking to go long, they will look at the buy signals. For those who are interested in short positions, their focus is going to be on the sell signals.
There is a lot to learn about Forex, but it is an exciting experience. It is one that can be entered into with a small investment. However, relying on all the right resources will create a much better experience. There is a lot of information available on the web that ranges from posts to white papers to full beginners’ guides and even courses.
Starting with just one currency pair is the wisest decision for a new trader.