Top 7 Questions About Currency Trading

[ganthiraj]

How does the forex market differ from other markets?

Unlike stocks, futures or options, currency trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based on credit agreements. Essentially, business in the largest, most liquid market in the world depends on nothing more than a metaphorical handshake.At first glance, this ad-hoc arrangement must seem bewildering to investors who are used to structured exchanges such as the NYSE or CME. (To learn more, see Getting To Know Stock Exchanges.) However, this arrangement works exceedingly well in practice; because participants in FX must both compete and cooperate with each other, self regulation provides very effective control over the market. Furthermore, reputable retail FX dealers in the United States become members of the National Futures Association (NFA), and by doing so they agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through an NFA member firm.

 

 

The FX market is different from other markets in some other key ways that are sure to raise eyebrows. Think that the EUR/USD is going to spiral downward? Feel free to short the pair at will. There is no uptick rule in FX as there is in stocks. There are also no limits on the size of your position (as there are in futures); so, in theory, you could sell $100 billion worth of currency if you had the capital to do it. If your biggest Japanese client, who also happens to golf with the governor of the Bank of Japan tells you on the golf course that BOJ is planning to raise rates at its next meeting, you could go right ahead and buy as much yen as you like. No one will ever prosecute you for insider trading should your bet pay off. 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.

 

Before we leave you with the impression that FX is the Wild West of finance, we should note that this is the most liquid and fluid market in the world. It trades 24 hours a day, from 5pm EST Sunday to 4pm EST Friday, and it rarely has any gaps in price. Its sheer size and scope (from Asia to Europe to North America) makes the currency market the most accessible market in the world.

 

Where is the commission in forex trading?

Investors who trade stocks, futures or options typically use a broker, who acts as an agent in the transaction. The broker takes the order to an exchange and attempts to execute it as per the customer's instructions. For providing this service, the broker is paid a commission when the customer buys and sells the tradable instrument. (For further reading, see our Brokers And Online Trading tutorial.)

 

The FX market does not have commissions. Unlike exchange-based markets, FX is a principals-only market. FX firms are dealers, not brokers. This is a critical distinction that all investors must understand. Unlike brokers, dealers assume market risk by serving as a counterparty to the investor's trade. They do not charge commission; instead, they make their money through the bid-ask spread.

 

Try Currency Trading Risk-Free at FOREX.com

In FX, the investor cannot attempt to buy on the bid or sell at the offer like in exchange-based markets. On the other hand, once the price clears the cost of the spread, there are no additional fees or commissions. Every single penny gain is pure profit to the investor. Nevertheless, the fact that traders must always overcome the bid/ask spread makes scalping much more difficult in FX. (To learn more, see Scalping: Small Quick Profits Can Add Up.)

 

What is a pip?

Pip stands for "percentage in point" and is the smallest increment of trade in FX. In the FX market, prices are quoted to the fourth decimal point. For example, if a bar of soap in the drugstore was priced at $1.20, in the FX market the same bar of soap would be quoted at 1.2000. The change in that fourth decimal point is called 1 pip and is typically equal to 1/100th of 1%. Among the major currencies, the only exception to that rule is the Japanese yen. One Japanese yen is now worth approximately US$0.01; so, in the USD/JPY pair, the quotation is only taken out to two decimal points (i.e. to 1/100th of yen, as opposed to 1/1000th with other major currencies).

 

What are you really selling or buying in the currency market?

The short answer is "nothing". The retail FX 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. For dollar-denominated accounts, all profits or losses are calculated in dollars and recorded as such on the trader's account.

 

The primary reason the FX market exists is to facilitate the exchange of one currency into another for multinational corporations that need to trade currencies continually (for example, for payroll, payment for costs of goods and services from foreign vendors, and merger and acquisition activity). However, these day-to-day corporate needs comprise only about 20% of the market volume. Fully 80% of trades in the currency market are speculative in nature, put on by large financial institutions, multibillion dollar hedge funds and even individuals who want to express their opinions on the economic and geopolitical events of the day.

 

Because currencies always trade in pairs, when a trader makes a trade he or she is always long one currency and short the other. For example, if a trader sells one standard lot (equivalent to 100,000 units) of EUR/USD, she would, in essence, have exchanged euros for dollars and would now be "short" euros and "long" dollars. To better understand this dynamic, let's use a concrete example. If you went into an electronics store and purchased a computer for $1,000, what would you be doing? You would be exchanging your dollars for a computer. You would basically be "short" $1,000 and "long" one computer. The store would be "long" $1,000 but now "short" one computer in its inventory. The exact same principle applies to the FX market, except that no physical exchange takes place. While all transactions are simply computer entries, the consequences are no less real.

 

Which currencies are traded in the forex market?

Although some retail dealers trade exotic currencies such as the Thai baht or the Czech koruna, the majority trade the seven most liquid currency pairs in the world, which are the four "majors":

 

EUR/USD (euro/dollar)

USD/JPY (dollar/Japanese yen)

GBP/USD (British pound/dollar)

USD/CHF (dollar/Swiss franc)

and the three commodity pairs:

 

AUD/USD (Australian dollar/dollar)

USD/CAD (dollar/Canadian dollar)

NZD/USD (New Zealand dollar/dollar)

These currency pairs, along with their various combinations (such as EUR/JPY, GBP/JPY and EUR/GBP), account for more than 95% of all speculative trading in FX. Given the small number of trading instruments - only 18 pairs and crosses are actively traded - the FX market is far more concentrated than the stock market. (To read more, check out Popular Forex Currencies.)

 

What is a currency carry trade?

Carry is the most popular trade in the currency market, practiced by both the largest hedge funds and the smallest retail speculators. The carry trade rests on the fact that every currency in the world has an interest rate attached to it. These short-term interest rates are set by the central banks of these countries: the Federal Reserve in the U.S., the Bank of Japan in Japan and the Bank of England in the U.K.

 

The idea behind the carry is quite straightforward. The trader goes long the currency with a high interest rate and finances that purchase with a currency with a low interest rate. For example, in 2005, one of the best pairings was the NZD/JPY cross. The New Zealand economy, spurred by huge commodity demand from China and a hot housing market, saw its rates rise to 7.25% and stay there, while Japanese rates remained at 0%. A trader going long the NZD/JPY could have harvested 725 basis points in yield alone. On a 10:1 leverage basis, the carry trade in NZD/JPY could have produced a 72.5% annual return from interest rate differentials, without any contribution from capital appreciation. Now you can understand why the carry trade is so popular!

 

But before you rush out and buy the next high-yield pair, be aware that when the carry trade is unwound, the declines can be rapid and severe. This process is known as carry trade liquidation and occurs when the majority of speculators decide that the carry trade may not have future potential. With every trader seeking to exit his or her position at once, bids disappear and the profits from interest rate differentials are not nearly enough to offset the capital losses. Anticipation is the key to success: the best time to position in the carry is at the beginning of the rate-tightening cycle, allowing the trader to ride the move as interest rate differentials increase. (To learn more about this type of trade, see Currency Carry Trades 101.)

 

Forex Market Jargon

Every discipline has its own jargon, and the currency market is no different. Here are some terms to know that will make you sound like a seasoned currency trader:

 

Cable, sterling, pound - alternative names for the GBP

Greenback, buck - nicknames for the U.S. dollar

Swissie - nickname for the Swiss franc

Aussie - nickname for the Australian dollar

Kiwi - nickname for the New Zealand dollar

Loonie, the little dollar - nicknames for the Canadian dollar

Figure - FX term connoting a round number like 1.2000

Yard - a billion units, as in "I sold a couple of yards of sterling."

[hardworks]

Cable, sterling, pound - alternative names for the GBP

Greenback, buck - nicknames for the U.S. dollar

Swissie - nickname for the Swiss franc

Aussie - nickname for the Australian dollar

Kiwi - nickname for the New Zealand dollar

Loonie, the little dollar - nicknames for the Canadian dollar

Figure - FX term connoting a round number like 1.2000

Yard - a billion units, as in "I sold a couple of yards of sterling."

 

Thank you so much for this sharing.

I also like to know which organisation or a group is owner of Forex market. There are so many brokers for Forex trading, but who is controlling the main market. And i read some threads from here, that forex earning in trillions. Actually, who is the beneficiary. Let us discuss.

[standart]

 

Thank you so much for this sharing.

I also like to know which organisation or a group is owner of Forex market. There are so many brokers for Forex trading, but who is controlling the main market. And i read some threads from here, that forex earning in trillions. Actually, who is the beneficiary. Let us discuss.

 

all traders have part in controlling the market, but that have big part in controlling the market is big player such as bank and financial institution. its because they have huge capital to make it happen. retail traders can take advantage from the market movement by following the price flow created by big player.

[euro]

This is an excellent post. Yes, those are some of the questions that we must know as a rookie. A newbie would also ask themselves if they know how to set their trades right cause not setting it right would yield to all losses as well. For example, not using stop loss or not taking profit when you need to step away from your screen is a risk too or trading in a poor market or trend or the wrong time. Some of these are things to ask as well. Also, they need to know the current market news and condition in order to understand long term movement of the price curve. 

[appscoin]

thank for share

[mcliffi]

Thanks  for the infomation.Very dtailed and good share.We have learned alot.Though i have been in forex there have been things i have been unable to understand of graps.Now i know.

[myregister]

all traders have part in controlling the market, but that have big part in controlling the market is big player such as bank and financial institution. its because they have huge capital to make it happen. retail traders can take advantage from the market movement by following the price flow created by big player.

Very true retail traders like us have no place to control the market, but we can only find loopholes and exploit those holes for the sake of making more profit by following the current trend and not against it. The key to control the market is trade with lower leverage and also has millions dollar money in forex market.

[pepy]

We have no control on the market but remember that if we are unite retail trader will be able to drive the price to higher extent and as you all know forex is near perfect market compared to the other type of business. Big players are exist but they are mostly banks and also could drive the price and the one that actually created hype that followed by massive retail traders(speculator).

[myregister]

I assume what you mean as currency trading here is Foreign exchange or forex. Your questions above are good enough to enlighten newbie, but i want to add that we sell and buy currency, well that is speculative because that is our main point, but we don't sell or buy "nothing". We just speculate here.

[yakdivine]

predecting the market is a very hard task. though many succeed in trading by following some set rules, but i can tell you from experince that the only way to succeed in trading is; buying when the market is at it's lowest point and salling when the market is at it hightest point.

[silent192]

Thank you so much for this sharing.

I also like to know which organisation or a group is owner of Forex market. There are so many brokers for Forex trading, but who is controlling the main market. And i read some threads from here, that forex earning in trillions. Actually, who is the beneficiary. Let us discuss.

Market is controled by free market rules, meaning supply and demand control the prices.

If something is in high demand but there is not much supply the price will go up and if there is an abundance of something but not much demand for the same thing the price will go down.

Now who is behind that huge demand and supply I would say big banks and such institutions us retail traders can only follow the path they carve for us.

[Sininfinity]

Very true retail traders like us have no place to control the market, but we can only find loopholes and exploit those holes for the sake of making more profit by following the current trend and not against it. The key to control the market is trade with lower leverage and also has millions dollar money in forex market.

 

No one either small or big has any control over the forex market. Yeah big entities can move the forex market but not for more than a few moments. We retail traders on the other hand, have to follow our trading plans.

[Cairdarsy]

in general, there can be much more such questions in the course of work, it all depends on the situation

[Gidencenti]

in the course of work, such questions can be much more, because everyone has their own situations, and you also need to look for a solution

[Vaabum]

It will be too small top, as for me. Usually, in order to get the answer to the right questions, traders are interested in much more.