Trading in simple words
Everybody knows about "Trading". It takes place daily in the life of people, even though they may not realize this fact. But what is trading on the online financial market? What are its features?
The Principles of Trading
Trading is the process of exchanging one item to another. In everyday life, people exchange their money to things which they want to buy.
Talking about trading on the financial markets, the same principle also applies. If someone trades on the Forex market, then he buys one currency for another. If the price of the currency he buys rises, this trader can make a profit by selling back the currency pair at a higher price and vice versa. This is the main principle of trading to buy something at a certain price and then sell it back at a different price - of course in the hope that the price will increase.
Why does the price on the market increase?
Let's say that the currency pairs on Forex are like the goods on the usual market. The price of the goods rises due to their availability (supply) and the presence of demand on them. The greater demand on the goods is, if there is a definite supply on the market, the higher the price of these goods is.
It can be explained on the simple example of buying food. Let's say you've decided to buy apples, and there are only 10 apples left on the market and you can not buy apples anywhere else. If you are the only buyer on the market, the seller will most likely sell apples at a reasonable price.
However, if the conditions are different and there are for example 15 people who entered the market and want to buy apples. In order to get desired apples before someone else buys them, people are ready to pay for these fruits at a higher price. Therefore, the seller gets an opportunity to raise the price of apples, as the demand for apples has become higher than the supply on the market.
If the price reaches the level when customers think it is too expensive, then they can stop buying. This will cause the reducing of the demand on apples. Thus, the seller will have to stop raising the price or even to decrease it in order not to loose the customers.
But let's consider another situation when the big amount of customers i.e. high demand attracts more sellers to the market. With the rise of sellers' amount the supply increases and price competition between sellers occurs. This causes the reducing of the price because customers are interested in buying goods at the lowest price.
The price is called "market price", when the demand on the market is equal to the supply, so the seller and the customer agree on a specific price and quantity of apples (goods) to sell. For example, the seller agrees with the customer to sell 5 apples at a price of $10.
The concept of "supply and demand" are the same on the Forex market. But in this case big banks (liquidity providers) and traders play the roles of sellers and customers and the currency pairs are used as both money and goods. Nowadays anyone can participate in trading on the financial markets because it is possible to trade any time and anywhere using Internet. This is the reason of popularity of trading different financial instruments such as currency pairs, metals, shares, commodities, CFD, options and so on.
So as you see the principle of Forex trading is well known to everybody and easy to understand. This means that in order to start your path of the trader right now, all you need is the desire and the aspiration to learn some specific features of Forex.