📊 Your guide to trading FX

FX Market – does it ever sleep?

The foreign exchange (FX) market, also known as the FX market, has a long history dating back to ancient times. However, the modern FX market as we know it today began to take shape in the 1970s with the collapse of the Bretton Woods system and the emergence of floating exchange rates. Since then, the FX market has grown to become the largest and most liquid financial market in the world, with daily trading volumes in excess of $5 trillion.

What you should know:

1. The FX market is highly liquid, allowing traders to enter and exit positions easily, even with large amounts of currency. This makes the market more efficient and reduces the risk of significant price fluctuations due to large trades. High liquidity also means that spreads are very narrow and with most brokers charging no commissions on FX, this makes the cost to transact on the FX market pretty low.
2. Leverage on the FX market works by allowing traders to borrow capital from their broker to control a large position with a relatively small amount of capital. For example, if you deposit $10,000 and get a leverage of 10:1, you can trade with $100,000. This amplifies potential profits but also increases risk, making it important to manage positions carefully and use risk management strategies.
3. Trading both long and short positions* in the FX market means that traders can buy or sell currencies depending on their market view. This allows for potential profits in both rising and falling markets, increasing the number of trading opportunities available.

• To trade long in the FX market means to buy a currency with the expectation that its value will increase. To trade short means to sell a currency with the expectation that its value will decrease.

EUR/USD, USD/JPY, GBP/USD, and USD/CHF. These pairs are widely traded because they involve the world's largest economies and financial centers, making them highly liquid and offering a wide range of trading opportunities. 

Want to trade FX? You need to keep this in mind!

The FX market is sensitive to a wide range of events and publications. Traders should watch out for economic data, central bank policy, geopolitical events, natural disasters, and other factors that can move currencies. Other key drivers include:

In the early 1990s, the British pound was tied to the German Deutsche Mark as part of the European Exchange Rate Mechanism (ERM). George Soros, along with other investors, believed that the pound was overvalued and began betting against it, using leveraged positions that magnified their exposure, and with it, the potential profits and losses. As selling pressure on the pound increased, the Bank of England tried to prop up the currency by buying pounds and raising interest rates. However, the Bank was ultimately unable to maintain the pound's peg to the Deutsche Mark and was forced to withdraw from the ERM. Soros and other investors profited massively from the trade, while the Bank of England suffered significant losses. The event highlighted the risks of currency speculation and the importance of central bank policy in determining exchange rates.

AI everywhere?

Artificial intelligence (AI) has become increasingly important in trading FX, with algorithms used to analyze vast amounts of data and identify profitable trading opportunities. AI can also be used to automate trades and manage risk. However, there are challenges associated with using AI in trading, such as the risk of overfitting and the need to ensure transparency and accountability in decision-making processes.

Talk about economic cooperation!

Did you know that 20 countries in Europe have decided to give up their national currencies and adopt a single currency and create what we call the Eurozone? The creation of the Eurozone was a significant step towards greater economic integration and a common market within the EU. The euro replaced several national currencies, including the French franc, German mark, Italian lira, and Spanish peseta.

With the creation of the euro, it is now the European Central Bank (ECB) that oversees the Eurozone, making it one of the most powerful and impactful central banks in the world, along the US Federal Reserve.

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