The currency market is the largest investment market in the world and continues to grow annually as more retail traders have found Foreign Exchange to be suitable for their investment goals. Below are the answers to the most frequently asked questions about the Currency Trading.
1. What is Currency Trading?
Currency Trading is the act of buying and selling (trading) different currencies of the world. The Foreign Exchange (or Forex) is the market that allows you to trade currencies in volume.
You can learn currency trading for analyzing various commodities, as well as to know the impact of MEIs on commodity prices in order to reduce uncertainties in the currency markets.
2. How does the Forex market differ from other markets?
Forex Trading is not centralized on an exchange, as with the stock and futures markets. It is an Over the Counter (OTC) market as there is no physical place. The largest Foreign Exchange market is in London, followed by New York, Tokyo, Zurich, and Frankfurt.
Some key differences between Forex and Equities markets are:
- Many firms don’t charge commissions – you pay only the bid/to ask spreads.
- There’s 24-hour trading – you dictate when to trade and how to trade.
- You can focus on picking from a few currencies rather than from more than 5000 stocks.
- Forex is accessible – you don’t need a lot of money to get started.
3. Who trades in the Forex Market?
The Forex market is called an ‘Interbank’ market due to the fact that historically it has been dominated by banks, including central, commercial, and investment banks. However, the percentage of other market participants is rapidly growing and now includes:
- Commercial Companies
- Central Banks
- Foreign Exchange Fixing
- Investment Management Firm
- Retail Investor
4. Which currencies are traded in the Forex market?
While some dealers may trade in exotic currencies, the Forex market typically trades with the seven most liquid currency pairs in the world as follows.
5. What is a PIP?
The term ‘”PIP” is an acronym for “Percentage In Point”. Pips represent the smallest movement that a currency pair can make. This is typically equal to 1 basis point.
1pip = .0001%
6. What are you really selling or buying in the currency market?
The short answer is “nothing”. The retail Forex market is purely a speculative market. No physical exchange of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on market price.
The primary reason the Forex market exists is to facilitate the day-to-day exchange of one currency into another for large organizations that continuously trade in the foreign market and even for individuals who want to express their opinions on the economic and geopolitical events of the day.
7. How does Forex Market work?
- The exchange rate describes the price for which the currency of a country can be exchanged for another country’s currency. It shows the bid and asks the price for the currency pair.
- The bid price is the rate that your broker is willing to pay for the currency pair and represents the rate you receive if selling to the market.
- The ask price is the rate at which your broker is willing to sell and represents the rate you must pay to buy the currency pair.
- Difference between Bid and Ask rate is called Bid-Ask Spread, which represents your cost to trade with the broker. Spreads can vary significantly from broker to broker so it is very important to trade with the broker offering the tightest spreads in order to minimize your trading costs.
The two most common terms are to:
- Go Short which means you think the base currency you hold will fall relative to the other currency.
- Go Long which means you think the base currency you hold will rise relative to the other currency.
8. What is a currency carry trade?
A currency carries trade is a strategy in which an investor sells a certain currency with a relatively low-interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.
9. Is there a commission in Forex trading?
Generally, commissions in Forex trading are included in ‘Bid-Ask Spread. Three forms of commission are used by brokers in the Forex market which is fixed spread, variable spread, and some others charge a commission based on a percentage of the spread.
10. How are currency prices determined?
Currency prices are affected by a variety of economic and political conditions, but probably the most important are interest rates, international trade, inflation, and political stability. Sometimes Governments actually participate in the Forex market to influence the value of their currencies.
Overall, Forex trading is the most popular form of trading worldwide with different currency pairings chosen. The key to success is education, market knowledge and adopting the right Forex broker to suit your needs.