Forex, currency trading, little reminder.
Currency trading involves buying one currency against another, ie trading a currency pair.
For example, among the commonly traded pairs, there is EUR/USD.
In this pair, the Euro is represented by the symbol EUR and the dollar by USD.
You will not trade the Euro, but a pair of coins depending on the coast of one compared to the other. Thus, if the EUR / USD is trading at 1.3, it means that € 1 = $ 1.3. That is, you need more dollars to buy the Euro.
Currency pairs in Forex can be “major”, minor or exotic.
Major pairs are those that are most traded.
The minor pairs are, as their name indicates, less negotiated than the majors.
Exotic pairs are emerging market currencies.
However, they are generally very liquid, the number of market makers is limited and spreads are high.
For example, the Mexican Peso (MXN), or the Hong Kong Dollar (HKD), are exotic currency pairs.
This currency trading, commonly known as Forex, is an extremely simple market: the investor buys a currency, pays its value in another currency and hopes to gain a profit on the exchange.
It must be emphasized that this market is subject to influences which will cause the currencies of these currencies to fluctuate: political, economic, social or natural factors.
Traders must therefore assess the health of currencies and try to exploit its volatility in trade with other currencies, to hope to make a profit.
In fact, the more volatile a currency, the higher the profits and risks.
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Cryptocurrency trading
As far as cryptocurrencies are concerned, the principle is exactly the same. But in this case, the investor will trade a pair of virtual currencies. That is to say one Crypto currency against another. This is the principle on which the Forex is based.
However, in cryptocurrency trading, volatility is much higher and the factors influencing prices much more unpredictable.
In addition, for conventional coins, the number of coins in circulation is determined by the central banks of the different countries. While the number of cryptocurrency units is managed by algorithms.
Take the example of the most famous cryptocurrency, Bitcoin.
It is managed by an exponential algorithm that reduces inflation as the stock of money increases and controls its production.
Thus, there will be a large production of currencies at the beginning of its creation, then this production will decrease exponentially and will never exceed 21 million units.
Volatility
As we have said, the Cryptocurrency market is much more volatile than traditional markets.
Thus, Forex volatility is around 1% for extreme currency pairs. While for virtual currencies, volatility is in the range of 5% to 15%, with an average of 10%.
What Factors Influence Forex?
Moreover, the factors that affect Forex are, interest rates, public debt, economic health, or even political stability. These are the elements that will affect the inflation of a conventional currency.
While crypto currencies, they are hardly predictable, with only a few theories explaining what causes inflation of its price.
What are the differences between Forex and cryptocurrency trading?
As a result, while being completely identical in principle and in operation, Forex and crypto-currency trading have differences that are also advantages.
First, it must be said that trading virtual currencies can invest silly money sums compared to Forex trading. Because in the Forex you need very important sums to hope to reap interesting profits. Or, you will need to use leverage to increase your profits, but it also increases the risks significantly.
While for cryptocurrency you can start trading on very small positions, with minor risks.
In addition, the high volatility of crypto currencies makes it a market with a very significant profit potential.
Then, governments have no influence on the inflation of virtual currencies, and therefore on their values. Only the principle of supply and demand dictates their courses.
Finally, another advantage of cryptocurrency trading is the availability of markets 24 hours a day and 7 days a week, unlike Forex available 5 days out of 7.
In conclusion, crypto currencies have created a market that functions like Forex but has more advantages and has not yet reached its maximum potential.
