What Is Currency Trading & How Does It Work?
Forex trading represents about 3.2 trillion U.S dollars in daily trading volume per day. It’s the world’s largest market. Compare that with the New York Stock Exchange, which has an average daily trading volume of $55 billion. If you put all of the world’s equity and futures markets together, their combined trading volume would only equal a quarter of the Forex market
Forex currency trading transactions always consists when you buy and sell money on the foreign exchange (or “Forex”) market with the intent to make money. They are always quoted in pairs. Fore example, the Euro and the U.S. dollar. The currency exchange rate is the rate at which one currency can be exchanged for another. The exchange rates can fluctuate based on economic factors like industrial production, inflation, and geopolitical events. These factors will impact on whether a trader will buy or sell a currency pair.
Forex trading is largely unregulated, so a it makes sense for a Forex trader to look for a Forex broker who belongs to a regulated organization like the National Futures Association.
The Forex market is like other securities markets. It negotiates prices using a bid/ask price system. A buyer makes a bid and a seller states an asking price. In Forex trading there is something called the “spread”. This spread represents the difference between the bid and the ask price. Retail brokers usually mark up the spread by anywhere from 1-20 pips depending on the currency pair your trading. The spread is the fee the broker keeps on every transaction instead of charging a commission.
What Is Currency Trading? Let’s Look At An Example of a Forex Trade:
Lets say you were interested in trading the Euro/USD. Here’s the breakdown.
The EUR/USD rate represents the number of US Dollars one Euro can purchase. If you bet that the Euro will increase in value against the US Dollar, you will buy Euros with US Dollars. If the exchange rate rises, you will sell the Euros back, making a profit.
What Is Currency Trading & How is Forex Traded?
The mechanics of a Forex trade is very similar to trading other markets. The only difference is that you’re buying one currency and selling another at the same time. That’s why currencies are quoted in pairs, like EUR/USD or USD/JPY. The exchange rate represents the purchase price between the two currencies.
Example: the EUR/USD rate represents the number of USD one EUR can buy. If you think the Euro will increase in value against the US Dollar, you buy Euros with US Dollars. If the exchange rate rises, you sell the Euros back, and you cash in your profit.
What Is Currency Trading & What Are The Benefits?
1. Forex brokers usually don’t charge commissions. You only pay the difference between the bid/ask spreads.
2. The Forex market is open 24 hour a day, 6 days a week. You have the benefit of choosing when to trade.
3. You can start trading with as little as $500.00 with some brokers.
4. Leverage. This is what makes Forex trading so popular, and high risk. You can trade with very low margin requirements. With leverage as high as 400 to 1. This means you can put down 1/400 of a standard lot size of $100,000 worth of currency with as little as $250.00. The Forex trader “borrows” the remainder of the money from the broker. Usually, for a time period of 24 hours since most Forex trades are settled within the same day. If you hold the trade over night till the next day the broker charges interest. But this can be a double-edged sword. You can make a lot and also lose a lot.
5. Focus on trading just a few currencies rather than from 5000 stocks.
What is Currency Trading & The Profit And Risks Involved?
Forex traders are attracted to the very low margin requirements in order to trade currencies. For starters, lets examine what a PIP means. It stands for Price Interest Point. A pip is the smallest price increment is Forex trading.
Prices are quoted to the fourth decimal point. For example, the EUR/USD might have a bid price of 1.1914 and ask price at 1.1917. Therefore the spread is 3 pips difference. If you wanted to trade 1 standard Lot size it would mean trading $100,000 and the change in exchange rate of just 1 Pip would be equal to $10.00 and a change of 1 penny. 100 Pips equals $1000.00. As a result a trader can make or lose a lot of money.
What Is Currency Trading & Why Is Not For Everyone
Warning: Be Aware of the risks
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for everyone. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. Remember, you could sustain a loss of some or all of your initial investment, which means that you should not invest money that you cannot afford to lose. If you have any doubts, it is advisable to seek advice from an independent financial advisor and get educated before you trade.
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