Currency Trading with AvaTrade UK
At AvaTrade, we provide all our clients with first class access to Currency trading. Whether you are new to the online trading world, or a seasoned pro, the Currency trading market offers a wealth of trading opportunities and with so many currencies to trade, you can easily diversify your trading portfolios.
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With daily trading turnover estimated at over $5 trillion a day, currency trading, also known as online forex trading, is the most liquid as well as the largest trading market in the world. To put the amount in perspective, the NYSE averages a daily trading volume of about $25 billion a day. What this means for our traders is that the currencies market will give you the opportunity to trade a wide range of major, minor and exotic currencies, all from the comfort of our all-inclusive trading environment.
How to Trade Currency – The Basics
So, you might be wondering, what exactly is traded on the currency market? The answer is simple: Money. Trading CFD currencies involves the simultaneous act of buying one currency and selling another. Thus, currencies are always traded in pairs, such as the EUR\USD (euro/US dollar) and the GBP\USD (British pound/ US dollar).
In any currency quote, the currency on the left side of the pair is referred to as the Base currency, while the one on the right, is referred to as the Counter currency. Any currency quote will always show the amount to pay in units of the counter currency in order to buy one unit of the base currency. Similarly, the quote will also show the amount in units of the counter currency you will receive if you sell one unit of the base currency. For instance, if the current spot quote of the EURUSD is 1.1500, it essentially means that at that particular time, €1 (euro being the base currency) is worth $1.15 (US dollars being the counter currency). When trading in the currency market, all forex rates always include a two-way price: the bid and ask prices.
Understanding Important Terms in Currency Trading
Bid, Ask and Spread
The bid price is always lower than the ask price. The bid represents the price the broker is willing to buy the base currency for in exchange for the counter currency. It is this price that traders sell at. The ask price represents the price the broker is willing to sell the base currency at, in exchange for the counter currency. It is this price that traders buy at. The difference between the bid and ask price is known as the spread. For currency traders, the spread represents the cost of opening a trade in the currency market.
Let us look at an example:
Let’s have a look at the forex rate above. In this example, the base currency is the US dollar (USD), while the counter currency is the Japanese yen (JPY). The bid price is 102.34, while the ask price is 102.37. The difference between the two price quotes is 3 points, which means that the spread for the USDJPY at that particular time is 3 pips. Therefore, the transaction cost of opening a USD-JPY trade is 3 pips. If you are trading with a standard lot size, where one pip equals $10, the cost of opening a USDJPY trade will be $30.
One of the most important currency trading tips for traders is to always watch the spread. The logic is simple: because you are trading currency to make money, you need to always keep track of your costs. With most brokers, spreads are usually variable; meaning that sometimes they narrow, other times they widen. To enhance your profitability, you should always trade currencies when the spread is minimal.
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Which Currencies Are Traded in the Currency Market?
There are 3 currency pair types available in the forex market:
Major Currency Pairs
Major currency pairs are the most traded currency pairs in the world. They have high volume and massive liquidity and can virtually be traded at any time. There are 7 majors in the currency market. They include the EURUSD, GBP – USD, USDJPY, USDCAD, USDCHF, AUDUSD and NZDUSD.
In currency trading, it is price movement that offers opportunity for making money. The majors guarantee volatility always and their High liquidity and low volatility ensures that their spreads are very low. As noticeable above, all major currency pairs have the US dollar (USD) as either the base or counter currency. The reason is simple: the US dollar is the most widely used currency in the world, either in circulation or held in reserve.
Minor Currency Pairs
Minor currency pairs are less traded, and consequently, less liquid compared to the majors. As a rule of thumb, minors are currency pairs (from the majors) that do not include the US dollar. They are also known as crosses or cross-currency pairs. Minors usually have spreads wider than majors. They include the GBPJPY, EURJPY, GBPAUD, EURAUD, CADJPY, EURCAD and EURGBP.
Exotic Currency Pairs
Exotic currencies are currencies of emerging nations, such as Brazil and South Africa. An exotic currency pair will include a major currency, matched up with a currency from an emerging nation. Exotics are highly illiquid and are characterized by much wider spreads and fewer market makers. Examples of exotic currencies include the Turkish lira (TRY), Mexican peso (MXN), Hong Kong dollar (HKD), Norwegian krone (NOK), South African rand (ZAR), Singapore dollar (SGD), South Korean won (KRW), Russian ruble (RUB) and the Indian rupee (INR).
Now that you’ve got the scoop of the different types of currencies, open an account at AvaTrade to begin trading your favourite major, minor and exotic currency pairs today.
How to Trade Currencies Effectively
When trading currencies, money is made from price movements. There are only two trading options: going long or going short. To go long means buying the base currency and simultaneously selling the counter currency; while to go short, means selling the base currency and simultaneously buying the counter currency.
When going long, we expect the current exchange rate price to rise. For instance, if the current EUR -USD quote is 1.1500 (for illustration purposes, spreads will be discounted) and a trader expects prices to rise, they will open a long trade on the pair. If the trader is using a standard lot size, where 1 pip equals $10, and the price advances to 1.1550, they will earn $500 (50 pips*$10) on that EURUSD trade. If, instead, the price falls to, for example, 1.1480, they will lose $200 (20 pips*$10).
On the other hand, if the trader speculates that prices will fall, they will open a short trade on the pair. If, for example, prices fall to 1.1450, they will make a profit of $500; but if prices rise to 1.1530, the trader will suffer a loss of $300.
To determine whether to go long or short, traders always employ either fundamental or technical analysis (or both) on their preferred currency pairs. In simple terms, fundamental analysis seeks to determine ‘which’ currencies, while technical analysis answers the question ‘when to trade’.
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Fundamental Analysis on Currency Pairs
Fundamental analysis involves the study of the underlying economic, social and political factors that impact supply and demand of any particular currency. The fundamental data that may impact the value of any country’s currency include growth, inflation, interest rates, employment numbers, manufacturing figures, trade and the overall economic outlook. Before you panic, relax; you do not need to be an economics professor to perform fundamental analysis in the currency market. Fundamental currency analysts understand both expected and unexpected price movements in the market, as well as the principal forces behind the moves. Fundamental analysis also helps in determining long term trends in the markets, so traders can always identify high quality currency trade opportunities.
Most of such data is always priced in the prevailing currency exchange rate price. But when any major fundamental data enters the market in a sudden way, it triggers massive price movements on the underlying currency. To track the release of such data, currency traders always use the economic calendar tool. To assist our traders, there is one available for free on the AvaTrade UK main site. This tool lists the major events set for release in any particular day, their likely impact on the underlying currencies, as well as the market expectation.
Use the free AvaTrade global Economic Calendar to stay on top of all fundamental news that move financial markets and enhance your trading activity.
Technical Analysis on Currency Pairs
Technical analysis in currency trade online involves forecasting potential future price behavior based on historical movements. For technical currency analysts, the primary belief is that history repeats itself. They suppose that within the chaos that is the currency market, patterns occur, and these patterns can, as well, recur in the future. Technical analysts simply watch the price; because they believe every fundamental data is reflected on the prevailing exchange rate price. Thus, for a technical analyst, the price chart is everything.
- Candlestick charts,
- Line charts and
- Tick charts.
To decipher price information, technical currency traders use various price indicators. AvaTrade UK currency traders have access to over 500 indicators measuring different price parameters:
- Trend Indicators, Moving Averages and Parabolic SAR help traders identify the direction of the prevailing dominant trend in the market.
- Volatility Indicators, such as Bollinger Bands, help traders assess the frequency and severity of price fluctuations in their favourite currency pairs.
- Oscillators (or Momentum Indicators), such as Stochastics and RSI, help traders to determine overbought or oversold conditions in any particular currency market.
- Volume Indicators, such as Volumes and the Money Flow Index, help traders to establish the volume of trades that are backing any specific price movement in the currency market.
- Market Cycle Indicators, such as Elliot Waves and Gann Cycles, help traders to anticipate the different phases of price movement which include: rising, peaking, falling and bottoming out.
AvaTrade provides all our traders with access to a wide range of indicators that enable you to analyse the markets and pinpoint trading opportunities.
Why Trade Currencies with AvaTrade UK?
If you are ready to trade your favourite currencies, open an account at AvaTrade and enjoy leverage of up to 400:1. You will also gain direct access to a comprehensive education centre, intuitive automated trading platforms that are easy to use, access to a choice of trading tools and features and the support of a multilingual professional and responsive customer support team.
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