Table of Contents
- 1 Top Questions About Foreign Trading and The Foreign Exchange Market.
- 2 How Is The Foreign Exchange Marketplace Differ From The Others?
- 3 Is There Commission In Forex Trading?
- 4 What Does Pip Stand For And What Does It Mean?
- 5 What Are You Buying And Selling In This Market?
- 6 Like In Other Markets, Does Forex Trade In Pairs?
- 7 Speaking Of Currencies, What Currencies Are Typically Traded In The Foreign Exchange Marketplace?
- 8 What Is The Carry Trade Strategy?
- 9 How Do I Sound Like A Professional Even If I’m A Novice?
- 10 Where Can I Learn more About Forex Trading
Top Questions About Foreign Trading and The Foreign Exchange Market.
Last Updated on 29th July 2016: Foreign exchange trading is the biggest financial market in the world. Even though its popularity has grown drastically in the last few years, forex is still very unfamiliar for many retail traders and investors. Before the increase of trading via the internet, forex was comprised mostly of some of the biggest financial organisations and multinational businesses. But just like with any industry, forex trading has morphed into so much more. Due to the rapid growth, the ever expanding and changing forex market has left many traders, investors and interested parties curious for more information.
Expert forex trader in need of a refresh? Or are you a novice just starting out for the first time? Whichever you may be, below you’ll find answers to some of the top questions regarding currency trading and its practices.
How Is The Foreign Exchange Marketplace Differ From The Others?
Currency trading doesn’t take place on a regulated platform like with stocks nor is it controlled by an overarching governing organisation. There are also no clearing houses to assure legitimate trades or an arbitration panel for disputes. All trades are based upon credit agreements. This business which is housed in the biggest, most liquid worldwide market is finalised via a mutual understanding and virtual handshake.
But that’s not the only way in which the forex market differs from others. Some other ways include:
- Uptick rule doesn’t exist like it does in stocks
- No limits on trade size. If you have the capital, you can trade it
- Insider trading is nonexistent. In fact, European financial data is often leaked way before it’s officially released
While forex trading might seem like the wild wild west right about now, like we mentioned above it is the most liquid and fluid market in the world. Encompassing countries in all continents, the sheer size and scope make this market the most readily available in the world. Trading occurs 24 hours a day Sunday through Friday, and there are rarely gaps in prices.
Is There Commission In Forex Trading?
To put it simply, no. Unlike the stock market that you’re probably used to, forex trading is a principals-only market. And unlike these exchange and physical-based markets, here firms are called dealers and not brokers. Dealers accept market risk by being the contra party to the investing trade. While brokers charge commission, dealers make their compensation via the bid-ask spread.
What exactly is the bid-ask spread? This spread is the difference in the amount of the ask price and the bid. Often, the ask price surpasses the bid. In this rule, every gain (or profit from the difference) down to the very last penny is considered to be a profit and given to the investor. However, this bid-ask spread is quite tough to overcome and makes scalping in this marketplace that much more difficult.
What Does Pip Stand For And What Does It Mean?
Standing for percentage in point, pip is the smallest increment or price change that can occur in exchange. In this market, prices are typically cited to this fourth decimal place (1/100th of 1%) and the pip is equal to exactly that. To give an example, a bottle of shampoo at a drugstore would be priced at $3.50 and in the FX market, it would be priced at $3.5000.
What Are You Buying And Selling In This Market?
Nothing. In the retail forex trading market, there is no tangible exchange ever. All FX trades exist virtually in a computer and are computed out per market price.
So why then does the FX market even exist? To simplify the day-to-day exchange of one currency into another for large organisations that continuously trade in the foreign market. More often than not, the main reason that FX markets exist is so that these multi-billion institutions can “express” their opinions on day-to-day fiscal and political events occurring in the world. This “trading” is, of course, purely speculative.
Like In Other Markets, Does Forex Trade In Pairs?
Yes, all currencies are always traded in pairs. Knowing this, traders always know that he/she will always have “more” of one currency and “less” of the other. For example, when trading from EUR/USD, the exchange of euros to dollars would mean that the trader has “less” euros and “more” dollars. Despite the fact that there is no physical interchange in FX trading, the principle and consequences are very much just as real as any.
Speaking Of Currencies, What Currencies Are Typically Traded In The Foreign Exchange Marketplace?
While some dealers may trade in exotic currencies, the forex market typically trades with the seven most liquid currency pairs in the world:
- Euro to US Dollar
- US Dollar to Japanese Yen
- British Pound to Dollar
- Dollar to Swiss Franc
- Australian Dollar to US Dollar
- US Dollar to Canadian Dollar
- New Zealand Dollar to US Dollar
These currency pairs along with various combinations of the above, such as the Euro to the New Zealand Dollar, make up a high percentage of all FX trading.
What Is The Carry Trade Strategy?
Being the most prevalent type of trade in the forex market, the carry trade is based upon the principle that every currency has an interest rate.
Put simply, the trader invests in the currency with the high-interest rate and finances it with the currency with the low-interest rate. Depending on the marketplace and timing of investment, the yearly return from the difference in interest rates between the respective currencies could be extremely high and yield very little appreciation.
While you might be inclined to run out and buy the next high-yielding pair, it’s important to be cautious as the carry trade can have severe and rapid declines. Known as the carry trade liquidation, this occurs when it’s decided upon that the carry trade won’t have any future potential. Once this is called, every trader and investor starts to seek his/her exit strategy. Then bids will start to disappear, and ultimately profits from the difference in interest rates aren’t nearly enough to cover all the capital losses. Essentially for the carry trade strategy to successfully work, anticipation is key.
How Do I Sound Like A Professional Even If I’m A Novice?
Every market and industry have their own vocabulary and the foreign exchange market really is no different. Below are some popular terms that will make you sound like a professional in just about no time:
- Base currency: first currency cited in a pair
- Authorised dealer: institution approved to work in the foreign exchange market
- High/Low: daily traded price
- Spot price: current market value
At first glance, forex trading may seem like an ad-hoc arrangement, especially compared to those structured exchanges such as the NYSE. While bewildering, forex trading actually works exceedingly well. Why? Participants in FX must compete and cooperate with each other. This self-regulation drives effective control over the market. But not to worry, as reputable U.S. FX dealers become a member of the National Futures Association (NFA) which means they agree to binding arbitration in the event of a dispute.
Where Can I Learn more About Forex Trading
Well you’re in the right place to start with. We just finished a post titled: Learn Forex Trading In 30 Days PDF this is our ebook talking about how you can get started in as little as a month!
Knowing the answers to some of these top questions about currency trading will not only help you to better understand this market but will ultimately help you to become a successful forex trader.
If you haven’t yet done so be sure to sign up to updates in the column right —>