We’ve had a number of new members to FX Strategy in the last few weeks asking questions about trading FX so I thought we would take a step back this Friday from our usual focus and just go through a few fundamental facts regarding FX trading.

FX trading has increased dramatically in the last few years as traders have stepped back from the volatility of the equity markets. The equity market volatility as everyone is aware has been caused by the global picture and macroeconomic events. The best way to directly make calls on these macro global events is via the currencies markets and secondly via the commodities markets. Commodity markets are still very much the realm of the global investment banks and super secretive hedge funds hence many people use FX trading as their vehicle of choice.

There are roughly 60 pairs of currencies you can trade. Most people chose to focus on a small subset of these. With the most actively traded currencies being the USD, Euro, Japanese Yen, GBP, Swiss Franc and the little Aussie Dollar.

Each currency has its own characteristics with most falling into one of the two following categories: a risk currency or a reserve currency.

For example the AUD falls into the risk category and is highly sensitive to global confidence levels and commodity prices.

Apart from the opportunity to profit from strategising about global macro events there are other reasons why FX trading is popular.

These include liquidity. FX markets are oven 24 hours a day and over $4 Trillion in value is traded each day. This makes is much easier to get in or out of a position.

Also currencies are never delisted. Unlike a stock which can go bust, wipe you out and disappear, a currency can move against you but it will still be there.

Thirdly, leverage. Leverage can be both a friend and a foe and it is absolutely imperative that you fully understand all the risks you take on when using leverage – so study up on it – but when it is your friend it can magnify your returns handsomely.

A final point I will make relates somewhat to understanding leverage and that is the importance of stop-losses. This is a very important aspect of your FX Strategy. You need to learn to let your profits run but limit your losses through the implementation of a sound stop-loss strategy.

You will find more information on stop-losses at our trading platform provider’s link on www.fxstrategy.com .

By Friday Fundamentalist, Published on 30th of September 2011
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