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Articles

Forex Currency Trading Explained

The forex market is an international market where foreign exchange trading takes place. It is the largest market in the world with daily average volume exceeds $2.1 trillion.

Traders in forex market buy and sell different currencies having the hope of making a profit when the value of the currencies changes in their favour, due to various market events that take place in the world.

Forex currency trading can be explained in 3 ways:

Basic information about forex:

The forex market is not restricted to a particular location like stock exchange. It is much bigger than all stock exchanges put together. The trading takes place mainly with the help of telephone or internet network. The main cities where the trading is handled situated in the countries like Australia, Japan, England, United States and Germany.  

The USD, as world’s most dominant currency, is generally considered as the base currency against others like JPY(Japanese Yen),CAD(Canadian Dollar),CHF(Swiss Franc),DEM(D Marks), SFR(South African Rand), NZD(New Zeeland Dollar); but exceptions are the EUR(Euro), GBP(British Pound Sterling) and AUD (Australian Dollar).

How forex trading works:

In the trading market quotes include a bid and ask. The bid is the price to sale the  base currency by the client for exchange of counter currency and ask is the price the client can buy the base currency in exchange of the counter currency. The difference between the bid price and the ask price is called spread.

Currency exchange rate is given as the bid price and ask price. The ask price is always higher than the bid price. By selling one unit of base currency the amount will be obtained in the quoted currency (bid price) whereas to obtain one unit of base currency the amount will be obtained in the quote currency (ask price), e.g., GBP/USD: 1.8865(bid)/1.8870(ask).

Here the spread is .0005. Prices in the forex are quoted up to 4th decimal points (except JPY-quoted till 2 decimal points). One pip is equal to .00001. In forex the spread is termed in pips. Here the spread is 5pips.

There are 2 types of accounts in forex trading - one is a standard account and another is a mini account. In standard account there is a leverage of 100:1, i.e., 1contract controls $1, 00,000 of currency having a margin requirement of only $1000.

Leverage is the ratio of total available capital to actual capital. In a mini account the leverage is 200:1, i.e., 1 contract controls $10,000 of currency having a margin requirement of only $50.  If trading through a mini account, and if EUR increases against USD, 1 pip is equal to $1.

In case of standard account it will be $10. Let’s take an example: EUR/USD bought @ 1.2700 and price increased to 1.2800, the spread in case of mini account will be $100 and in case of a standard account it will be $1000.

The advantages of forex currency trading explained below:

  • Forex trade is the most liquid trade
  • 24x6 hours liquidity in a week.
  • As there is no centralized location like stock/future, there are no brokerage charges.
  • If a client were to be in open loss position which exceeds the margin requirement then the trading platform will automatically liquidate the position. So, there is no debit risk. So, there is no chance to loose money more than having in the account.
  • With very low margin, the trading is possible for big volume.
  • In forex, we can sell short as easily as buying, it’s matter of a click.
  • Prices do not fluctuate like other market, much more stable than stock market.
  • If you have knowledge and experience, extra income is very easy.
  • Learning and practising without loosing or gaining any money with a demo account.

It also must be noted that without proper risk management, due to the high leverage there could be substantial losses too.

To start trading Forex with the best broker click here

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