The terms pips, lots, and candlesticks were once only understood by Wall Street fat cats and financial experts.
However, in the age of the internet, trading stocks, shares, and foreign currencies is no longer reserved for those in smart suits and fancy offices. Today, even someone with limited knowledge and experience can invest in everything from gold, oil, and forex with nothing more than a computer or a smartphone.
For many, the recent wave of interest in financial trading was spurred on by the surge in popularity of cryptocurrencies. When the price of Bitcoin started to soar in 2017, everyone from the technophobe to the weekend keyboard warrior wanted in on the action. As millions rushed to join crypto trading sites and buy some magical currency, chaos ensued. Networks crashed, processing times slowed and the uninitiated saw their funds vanish through inexperience.
Bitcoin makes trading fashionable
While normality eventually returned, the boom helped bring online trading to the forefront of public consciousness. However, for those in the know, the industry had been thriving long before Bitcoin went mainstream. For more than a decade, online trading sites have given amateur investors a way to speculate on a variety of financial instruments. One of the most popular is forex. The term used to describe foreign exchange, forex trading allows investors to profit from international currency fluctuations.
One of the reasons forex has become a popular option for online traders is familiarity. Anyone that’s ever been abroad will have swapped one currency for another at a bureau de change. Although there are a few additional nuances to online forex trading, the basic premise remains the same. Put simply, you’re selling one currency in order to buy another at a better price. The movement in price is where you can make a profit (or a loss). Such is the popularity of forex that daily average trading volumes now top $5 trillion/£3.9 trillion.
Other than a sense of familiarity, forex trading is accessible to the masses because it takes place in an over-the-counter (OTC) market. In other words, deals take place directly between two parties, unlike shares or commodities trading. Because of this, the nature of cutting a deal feels more natural to non-financial types. What’s more, it opens up more possibilities in terms of using brokers and obtaining leverage (being able to invest at full market value for a fraction of the cost).
Forex trading isn’t for everyone
However, it’s important to note that forex trading might not be for everyone. The swings can be dramatic, especially if leverage is used. Although you can speculate on the value of a currency increasing or decreasing, micro-movements can result in major real-time shifts. Indeed, if we circle back to the start of this article, you need to buy a batch of currency known as a "lot" – a standard lot is 100,000 units worth of whatever base currency you want to trade.
For the average trader, that’s an investment too far. Therefore, to open up the markets, brokers will offer leverage such as 1:100. In this scenario, 1 unit will have the equivalent trading power of 100 units. That’s great as it means you don’t need 100,000 units to start trading. However, it also means the impact of small changes in price are magnified. In forex, any digit after the decimal point is known as a pip. Even if just one pip shifts up or down, it can impact the value of your holding.
So, while features such as leverage make forex trading accessible, they also make it volatile. For a novice, that’s something you have to consider before you make an investment. Indeed, if the Bitcoin boom taught us anything, it’s that prices will not only rise and fall unexpectedly, but dramatically in certain situations. Those willing to accept the risks and manage their portfolio in a responsible way can certainly benefit from the trading revolution. However, it’s not something to take lightly. If corporate fat cats can make mistakes and lose billions, the average Joe needs to tread carefully, especially as a novice in the financial world.