Forex, being the largest market in the world, is not just the area of financial giants, banks or multinationals anymore, it has spread its wings to the doors of the common man who is willing to utilize it as a medium of investment. However, novice traders still remain oblivious of the ways of trading. In such an age, the advent of internet has paved a path for the traders willing to invest in Forex. There are many online sources, giving directions on deriving optimum profit from the currency business.
Here are the 5 frequently asked questions about Forex that investors can find their answers in Top of Form
What is meant by Forex trading?
Forex trading means purchasing one currency against another for the purpose of gaining profit. It means forming a deal that comprises buying and selling of different currency pairs circulating in the Forex market. The most common currency pair is EUR/USD. It is envisaged while buying the currency that one will have its rates increased in competition with the other. The trader makes money by selling the pair at the time he deems best for its base that is the common currency.
1: How is forex market different from other financial markets?
Forex market differs from other financial markets in several ways. It does not take place on a set policy nor follow a defined rule like the stock or futures markets. There is no central governing body that regulates the actions of the traders nor work as mediator among them to settle issues. There is direct trade among the participants of the trading market, merely based on words and personal terms.
The order of the market seems quite mismanaged to some investors coming from big Exchanges. But, where all of it seems quite unorganized, it has its benefits. Traders resolve disputes on a personal level without letting coldness affect their trade. There is an environment of competition and cooperation working simultaneously. The bigger giants of the forex market, on the other hand, can become members of NFA, National Futures Association. NFA works as a council which works for the maintenance of harmonized relations within the traders’ community. So, it carries great value that any retail who decides to do the trading, does so through an NFA member company.
Forex market is different in many ways from other financial markets. If at any point one feels like the EUR/USD pair is rolling down in price, one can sell it immediately, without waiting for any sort of configuration from the market. The business is done typically at the trader’s will. The forex business doesn’t follow a rulebook like stock market does. There are no limitations attached with the volume of the currency or your place in the market. If you have the necessary amount of money/currency and a will to trade, you can do it.
There are fair opportunities where personal contacts can be used to gather knowledge and use it to your benefit by putting the right information in the right place. For instance, if a trader finds out about the possibility of a future event, he/she can immediately make a transaction and win. This is called insider trading, where you incorporate general information smartly in your business. The forex market has the largest pool of money as a source. It is also the most active and accessible financial market in the world, that starts at Monday, 8 in the morning and closes at Friday 11.59, without any stops or much gaps in the rates. There is no such thing as insider trading in FX; in fact, European economic data, such as German employment figures, are often leaked days before they are officially released.
2: What is the meaning of Percentage in Point?
Percentage in Point is usually abbreviated as PIP and shows even a little increase in the trade. The increase rate in the forex market is measured by the prices quoted in the decimal point. A shift in the price before the decimal is considered a great change, while most trade in everyday routine is dependent on the increase or decrease taking place after the decimal point. A change in the fourth digit after the decimal point is the real determiner of the price change and is denoted as 1 pip.
3: What are you selling or buying in the currency market?
The market of Forex thrives on estimations only. There is no material exchange of currencies happening in the market. Since the trade is primarily based on speculations, all the profit and losses are only recorded in the computer and are gauged against dollar as the common currency.
The only forex available in physical form is that which is provided to the MNCs that are majorly dependent on currency exchange and are always in need of it for domestic purposes like issuance of salary, payments and other services. But these needs of corporations do not exceed over 20% of the market volume. The rest of the 80% trade in markets is still speculative.
It’s the nature of forex trading to have currencies being traded in pairs. When a trader buys a currency pair, he/she buys one currency against the other, which means that it’s inevitable to have one currency more than the other in the pair. When a trader buys a pair that is of JPY/USD, Japanese Yen is bought against the USD, so the trader is long one currency and short the other.
4: How do you make commission in Forex?
Investors use brokers for any kind of trade they are investing into, whether futures trade, stocks or options. An investor always requires a broker to act as a mediator in the deal. The broker books the deal and manifests it the way the customer demands it. He is given a commission for providing services to the customer and earns a specific amount on each trading transaction that the customer makes.
Unlike other markets, the Foreign Exchange market does not offer any commissions. Foreign Exchange firms primarily seal the deal, a broker does not do this. An investor is supposed to understand the difference between broker and dealer. A broker sets the deal whereas a firm works as an opponent to the trader. The firms neither charges commission nor makes money through setting the deal. They know the market risks as they themselves are one of the participants of the FX market.
In Forex, an investor cannot purchase a bid or sell at a market like in stock exchange. After the commission to the broker is paid, all the profit then stays with the trader.
5: What are the common currency pairs in the market?
- There are 7 most common currency pairs in the foreign exchange world market, which are present in abundance and are most liquid. Besides the common pairs, some traders choose to trade in the exotic currency pairs as well.
The major currency pairs include
- GBP/USD (British pound/dollar)
- EUR/USD (euro/dollar)
- USD/CHF (dollar/Swiss franc)
- USD/JPY (dollar/Japanese yen)
While the commodity pairs are
- AUD/USD (Australian dollar/dollar)
- USD/CAD (dollar/Canadian dollar)
- NZD/USD (New Zealand dollar/dollar
The forex market is more saturated than the stock market. Currency pairs like
JPY/EUR, EUR/GBP, GBP/JPY make more than 90% of the total estimated market volume.