Currency Trading : And Why Is It Different From Stocks

Among the many types of investment, currency trading is considered a profitable investment due to its high liquidity. In practice, there is no decision regarding the currency that must be traded so it is very dependent on supply and demand.

The purpose of forex trading is an investment in itself to seek profit from the difference in the sales figures made. For example, someone buys pound sterling (UK currency) but at the same time sells USD (US currency) when the value is high.

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For information, this activity is not only done by individuals, but also by countries, international companies, central banks, and so on in a network called "Forex Market". It should be understood that currency trading has its own challenges as well.

How to Profit From Trading

In the currency trading business, you can make a profit by buying or selling. Creating an open position is not difficult, the mechanism is very similar to the stock market. If you have trading experience, you can master it quickly.

The purpose of trading in forex is to exchange one currency for another with the expectation of a price change. In particular, the currency bought will increase in value compared to the one sold. The exchange rate is basically the ratio between currency pairs.

Currencies are always quoted in pairs; such as GBP/USD or USD/JPY. The reason is because, in every currency trading, it is regulated to buy one currency and sell another currency at the same time. The following is an example of the exchange rate of the British pound against the US dollar, quoted from Wikipedia, as follows:

GBP/USD = 1.51258

There are two terms you need to understand first, the first is the base currency (British pound), and the counter or quote currency (US dollar).

When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy 1 unit of the base currency. You have to pay 1.51258 US dollars to buy 1 British pound.

When selling, the exchange rate tells you how many units of the benchmark currency you got for selling 1 unit of the base currency. In the example above, you will receive 1.51258 US dollars when you sell 1 British pound.

The base currency is the “basis” for buying or selling. If you buy EUR/USD, you buy the base currency and sell the reference currency at the same time. In short, buy EUR, sell USD.

  • You will buy, if you believe that the underlying currency will rise (gain value) against the comparison currency
  • You will sell, if you believe that the base currency will depreciate (lose value) against the reference currency.

1. Long and Short

To earn from currency trading first. You have to decide if you want to buy or sell. The illustration is as follows :

- Buying ( buying the base currency and selling the reference currency ), means that you expect the value of the base currency to increase, then sell it back at a higher price.

Called "going long" or taking a "long position". long = buy.

- Selling (selling the base currency and buying the reference currency), means that you see the value of the base currency falling, then it will buy it back at a lower price.

This is called "going short" or taking a "short position". short = sell.

2. Bid, Ask and Spread

All currency trading are priced at two prices: a bid and an ask. The offer price is usually lower than the ask. The bid is the price at which the broker is willing to buy the base currency in exchange for the benchmark currency. This means that the bid is the best available price that the trader will sell to the market.

Ask is the price at which the broker will sell the base currency in exchange for the reference currency. This means that the asking price is the best available price that you will buy from the market. In other words, the ask price is the offer price.

The difference in value between bid and ask is called the SPREAD. In the EUR/USD quote above, the bid is 1.34568 and the ask is 1.34588. Take a look at how the broker makes it very easy to exchange your money.

  • If you want to sell EUR, click "Sell" and you will sell euros for 1.34568
  • If you want to buy EUR, click "Buy" and you will buy euros at 1.34588

The Difference Currency Trading and Stocks

Stocks and currency trading are liquid investments. However, there are some differences between the two. Summarizing various sources, here are the differences between currencies and stocks.

1. Stocks Have No Leverage Option

In general, the idea of ​​leverage is the use of borrowed money to increase the return on investment. In currency trading, investors can use the 'leverage' option with a certain ratio.

2. Trading Hours

The stock exchange's trading hours are limited from morning to night following the IDX (Indonesian Stock Exchange) trading schedule. While in currency trading, trading hours last for 24 hours.

3. Basic Analysis

In its operation, currency trading does not require fundamental analysis. Meanwhile, stocks are prioritizing fundamental analysis that aims to make the shares bought have a good foundation to continue rising.

4. Investment Objectives

Investments are generally aimed at long-term returns. In forex, currency values ​​tend to fluctuate, so forex is more appropriate for trading or trading rather than investing.

Although stocks can be used as a trading tool as well as an investment. Stocks with good performance tend to fluctuate continuously so they can be used as trading and investment alternatives.

5. Traded Goods

In currency trading, the commodities traded are relatively small. The majority of forex traders focus only on the value of major currency pairs such as EUR/USD, USD/JPY, GBP/USD, USD/CAD, AUD/USD, and NZD/USD.

Although stocks have many commodities or issuers. There are hundreds of issuers that can be bought and sold on the IDX. Combined with the world's stock exchanges, there are thousands of stocks that can be traded or invested.

6. Nature of The Transaction

The final difference is the time of sale. The nature of stock transactions can be said to be one way. You buy an issuer at the open of the exchange and sell it at the close of the exchange. The difference in closing price can be a win or a loss.

While in currency trading, transactions are two ways. You can buy it and then sell it in a short time, then buy it back after a while.

Conclusion

Narabasa.com will share tips on proper currency trading. First, try other investment instruments. Usually, forex trading investors are people with long enough investment experience. Therefore, it is highly recommended that you first try dollar savings or stock mutual funds that work in a similar way.

Second, learn how to trade forex. After gaining experience in other instruments, do not forget to learn forex trading through the information provided by trading applications or ask an experienced mentor.

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Third, prepare money. The most important preparation in forex trading is to prepare money as capital for buying and selling foreign currency. Start with a small nominal, then you can add it when you are more skilled at playing.

Currency trading is an investment made online from Monday to Friday for 24 hours. Therefore, to monitor fluctuations in the market, prepare gadgets and internet networks in order not to miss opportunities.

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