Top 6 Questions about Currency Trading Answered
For novice traders Forex is a phenomenon associated with lots of questions. It is evident that Forex is a very lucrative trade, one that comes with lots of advantages. To enjoy this set of benefits a rookie should always enter the market with a clear vision and view. It is only possible then to get the best out of this liquid trade.
Whether you are an investor or a broker, complete market vision and awareness will allow you to head towards the right direction. Formerly Forex market was only limited to large financial institutions and multi-million dollar industries. With the passage of time and growth of the internet, now individuals are also dealing in this domain.
To start in this space, newcomers come up with a lot of questions the answers to which are important because they teach them how to avoid obstacles and make better return on their investments. Some of the questions in this regard are as follows:
How does the Forex market differ from other markets?
Forex differs a lot from the other online as well as offline trading markets. Forex is a 24/7 trading environment which is not country specific. There is a seamless continuity in Forex trading which is not linked to any other trade type. Markets open and when they are about to close new markets take over. Forex is the largest market of the world with very high liquidity. Unlike any other commodity currency values is never zeroed and the traders can hold their short positions for long. Unlike stock or any other market there is no price gap at all.
The scope of Forex trading is also large and therefore the traders and investors from all over the world access the market with great ease and flexibility. There is no central or governing body that regulates the Forex trade like it is in the case of stock market. Forex market solely depends upon the credit agreements and therefore it is right to say that only metaphorical business is what is being conducted across the world. Another important point to note is that there are no micro or macro-economic indicators that are associated to Forex trade. Unlike equity or stock market all these parameters are absent and have nothing to do with the daily trade.
Where is the commission in Forex trading?
Spread is the difference between the buying and selling price of the currency on the chosen platform. It is the spread which has the broker commission. Every broker has different ask and bid price so their commissions also vary accordingly. The other commission earning point is the money transfer to and off the brokers. However the point to note is that both of these values are small and sometimes negligible as brokers are not dealing one client at a time so at the end of the day they earn handsome money and this cycle goes on. Every new transaction or trade also has commissions associated to it.
What is a pip?
Pip stands for “Price Interest Point”. It is the change in currency rate of every currency pair offered by the broker. The currency pairs depend upon the other currencies like USD currency pairs or Yen currency pairs. It is a standard according to which currency quote can change. For US dollar currency pair the value is $0.0001. Yen is an exception and the pip for the related currency pairs is displayed to 2 decimal places i.e. 0.01. For more precision some brokers provide fractional pips with an extra digit. The fractional pip is 1/10th of a pip.
Which currencies are traded in the Forex market?
The answer is every currency of the world. However it is hard to find dealers offering Thai Baht or Russian Ruble. The currencies are traded as pairs and there are seven most liquid pairs in the world that attract majority of investment all over the world. The major ones are as follows:
• EUR/USD (Euro/Dollar)
• USD/JPY (Dollar/Japanese Yen)
• GBP/USD (British pound/Dollar)
• USD/CHF (Dollar/Swiss Franc)
There are also commodity pairs that are traded in Forex markets. These currencies are from the countries possessing large amount of commodities and are paired with USD:
• AUD/USD (Australian Dollar/Dollar)
• USD/CAD (Dollar/Canadian Dollar)
• NZD/USD (New Zealand Dollar/Dollar)
The commodity based pairs are always associated to the other popular currencies of the world and therefore account to almost 95% of total Forex market trade being conducted all over the world. To be precise 18 pairs are mostly traded in Forex market. The Forex market is much more concentrated than the stock market.
What is a currency carry trade?
Currency carry trade is the most popular term that is used in Forex market. Under this process the trader borrows currency at low interest rate and purchases the other currency that has a higher interest rate. This trade depends upon the fact that there is a particular interest rate associated to every currency of the world. The interest rates are determined by Federal Reserve of the USA, Bank of Japan and Bank of England.
However with the currency carry trade come losses that can be rapid as the decline with this trade is very uncertain. This issue is also known as carrying trade liquidation and it always occurs when most of the traders decide that there is no potential in currency carry trade.
What are you really selling or buying in the currency market?
The Forex market is purely speculative. The fact is that no real transactions or currency trading takes place. About 80% of the total Forex markets of the world work on this idea. The trade is carried out in form of computer entries depending upon the market price.
Another fact to be noted is that only multi-billion dollar corporations are the ones keeping up the Forex market. It is because they need to trade currencies continuously to carry out their day to day operations in different countries. However the real currency transaction there is only 20%. The rest is speculation and is carried out as computer entries.
You can learn more about Forex trade in Nigeria HERE