Top 6 Questions About Currency Trading (2024)

Although forex is the largest financial market in the world, forex is a relatively foreign field for retail traders. Until the popularization of internet commerce a few years ago, forex (FX) was primarily the domain of large financial institutions, multinational companies and hedge funds. But times have changed, and individual investors are hungry for information about this interesting market. Whether you are an FX beginner or just need a refresher course on the basics of currency trading, we will answer some of the most frequently asked questions about the FX market.

1. How do Forex Markets differ from other markets?

Unlike stocks, futures or options, currency trading does not occur on regulated exchanges. It is not controlled by the central government body, there is no clearinghouse to guarantee trade and there is no arbitration panel to adjudicate disputes. All members trade with each other based on a credit agreement. Basically, businesses in the largest, most liquid markets in the world depend on nothing more than a metaphorical handshake.

At first glance, this ad-hoc arrangement must be confusing for investors who are familiar with structured exchanges such as the NYSE or CME. However, this arrangement works very well in practice. Independent regulation provides very effective control of the market because FX participants must compete with each other and work together. Furthermore, the leading retail retail dealer in the US becomes a member of the National Futures Association (NFA), and thus agrees to binding arbitration in the event of a dispute. Therefore, it is very important that each retail customer who contemplates the trading currency do so only through the NFA member company.

The FX market is different from other markets in several other key ways that will definitely raise eyebrows. Think that EUR / USD will spin down? Feel short for couples as they please. There is no increase rule on FX because it is in stock. There is also no limit to the size of your position (because it is in the future); so, in theory, you can sell $ 100 billion in currency if you have capital. Interestingly enough, if your biggest Japanese client, who also plays golf with the governor of the Bank of Japan, tells you on the golf course that the BOJ plans to raise interest rates at the next meeting, you can just buy and buy as much as possible. yen as you like. Nothing will require you for insider trading if your bet pays. There is no such thing as insider trading on FX; in fact, European economic data, such as German employment figures, often leak a few days before they are officially released.

Before we leave you with the impression that FX is Wild West of finance, we must note that this is the most liquid and liquid market in the world. This is traded 24 hours a day, starting at 5 pm EST Sunday to 4pm EST Friday, and there is rarely a price gap. The sheer size and coverage (from Asia to Europe to North America) make the currency market the most accessible in the world.

Top 5 Questions About Currency Trading Answered

2. Where is the Forex Trade Commission?

Investors who trade stocks, futures or options usually use brokers, who act as agents in transactions. Brokers take orders to the exchange and try to run them according to customer instructions. Brokers are paid commissions when customers buy and sell tradable instruments to provide this service.

The FX market has no commission. Unlike exchange-based markets, FX is a specialized market for offenders. FX companies are dealers, not brokers. This is a critical difference that all investors must understand. Unlike brokers, dealers assume market risk by serving as partners for investor trading. They do not charge commissions; instead, they make money through bid-ask spreads.

In FX, investors cannot try to buy on offers or sell on offers like in exchange-based markets. On the other hand, once the price clears the spread costs, there are no additional fees or commissions. Every penny earned is a pure profit for investors. However, the fact that traders must always deal with the bid / ask spread makes scalping much more difficult on FX.

3. What is Pip in Forex Trading?

Pip stands for "percentage in points" and is the smallest trade increase in FX. In the FX market, the price is quoted to the fourth decimal point. For example, if a bar of soap in a drug store is valued at $ 1.20, on the Forex market the same soap will be quoted at 1.2000. The fourth decimal point change is called 1 pip and is usually equal to 1/100 of 1%. Among the major currencies, the only exception to that rule is the Japanese yen. One Japanese yen is now worth around US $ 0.01; so, in the USD / JPY pair, quotes are only taken up to two decimal points (eg to 1/100 yen, as opposed to 1/1000 with other major currencies).

4. What Do You Really Sell or Buy on the Currency Market?

The short answer is nothing. The retail FX market is purely a speculative market. No physical exchange of currencies has ever occurred. All trades exist only as computer entries and are filtered depending on market prices. For dollar-denominated accounts, all profits or losses are calculated in dollars and recorded in the merchant account.

The main reason for the Forex market is to facilitate the exchange of one currency to another for multinational companies that need to continue trading currencies (eg, for payroll, payments for the costs of goods and services from foreign vendors, and mergers and acquisitions). However, the company's daily needs are only around 20% of market volume. There is 80% of trading on the currency market that is speculative, carried out by large financial institutions, billions of dollars in hedging funds and even individuals who want to express their opinions about the economic and geopolitical events of the time.

Because currencies always trade in pairs, when a trader trades they are always one currency long and the other short. For example, if a trader sells one standard lot (equivalent to 100,000 units) from EUR / USD, they will exchange euros for dollars and will now be "short" and "long" dollars. To better understand this dynamic, if you go to an electronics store and buy a $ 1,000 computer, what will you do? You will exchange your dollars with a computer. You will basically "short" $ 1,000 and "long" one computer. The store will be "long" $ 1,000, but now "short" one computer is in stock. The same principle applies to the FX market, except that no physical exchange occurs. While all transactions are just computer entries, the consequences are no less real.

5. Which Currency is Traded in the Forex Market?

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

EUR / USD (euro / dollar)

USD / JPY (dollar / Japanese yen)

GBP / USD (pound / British dollar)

USD / CHF (dollar / Swiss franc)

and three commodity pairs:

AUD / USD (Australian Dollar / dollar)

USD / CAD (dollar / Canadian dollar)

NZD / USD (New Zealand Dollar / dollar)

These currency pairs, together with their various combinations (such as EUR / JPY, GBP / JPY and EUR / GBP), constitute more than 95% of all speculative trading in FX. Given the small number of trading instruments - only 18 pairs and actively traded pairs - the FX market is far more concentrated than the stock market.

6. What is Currency Trading?

Carry is the most popular trade in the currency market, practiced by the largest hedge funds and smallest retail speculators. The carry trade rests on the fact that every currency in the world has an interest rate attached to it. This short-term interest rate is set by the central banks of these countries: the Federal Reserve in the US, the Japanese Bank in Japan, and the British Bank in the United Kingdom.

The idea behind carrying is quite easy. Traders miss high-interest and financial currencies that buy with currencies that have low interest rates. For example, in 2005, one of the best pairs was the NZD / JPY pair. The New Zealand economy, driven by large commodity demand from China and the hot housing market, saw the rate of increase to 7.25% and stay there, while the Japanese rate remained at 0%. NZD / JPY traders can harvest only 725 basis points in yields. On the basis of 10: 1 leverage, carry trade in NZD / JPY can produce an annual return of 72.5% of the difference in interest rates, without contributions from capital appreciation. Now you can understand why trade in goods is so popular!

But before you rush and buy the next high-yielding pair, be aware that when the carry trade is canceled, the decline can be fast and severe. This process is known as liquidation of trade in goods and occurs when the majority of speculators decide that trade in goods may not have potential in the future. With each trader trying to get out of his position at once, the offer disappears and the profit from the interest rate difference is hardly enough to compensate for capital losses. Anticipation is the key to success: the best time to position carry is at the beginning of the interest rate tightening cycle, which allows traders to rise as interest rates rise.

Knowing your Forex 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 an experienced currency trader:

• Cable, sterling, pound: alternative name for GBP
• Greenback, money: nickname for US dollars
• Swissie: nickname for Swiss francs
• Aussie: nickname for the Australian dollar
• Kiwi: nickname for New Zealand dollars
• Loonie, small dollar: nickname for Canadian dollars
• Image: An FX term that connects round numbers like 1.2000
• Yard: one billion units, as in "I sell several sterling meters."

The Bottom Line

Forex can be a profitable but volatile trading strategy for even experienced investors. While accessing the market - through brokers, for example - is easier than before, being able to understand the answers to the six questions above will serve as a strong primer before entering this sector.

TopAsiaFx.comhelps you compare and choose your preferred Forex Broker. We suggest keeping the following checklist in mind when making your decision:

• Is the Forex Broker regulated?
• Account Details: Ideally, your broker should offer either a selection of account types or some element of customizability. Competitive spreads and easy deposits/withdrawals are good indicators too.
• Numberof Currency Pairs offered: The variety of currency pairs on offer, as well as the quantity, should be considered (the more of both, the better).
• Availability of Customer Service.
• Quality of the Trading Platform: look for a platform that is easy to use, straightforward and offers a collection of technical and analytical tools to enhance your trading experience.

Rank	Broker Name	Special Offer	Minimum Deposit	Spread	User Score	Maximum Leverage	Regulation	Start Trading
1	NordFX	55% Deposit Bonus	$10	0.0 Pips	96	1:1000	VFSC	Open Account
2	SGT Markets	Refer a friend $10	$500	0.0	95	1:400	IFSC	Open Account
3	OctaFX	50% Deposit Bonus	$100	0.4	94	1:500	IBC	Open Account
4	Exness	No	$1	0.1	93	1:2000	FCA,CySEC,IBC	Open Account
5	IC Markets	No	$200	0.0	92	1:500	ASIC	Open Account
6	Tickmill	$30 Welcome Account	$100	0.0	91	1:500	FSA,FCA	Open Account
7	Axiory	$50 Deposit Bonus	$200	0.0	90	1:400	IFSC	Open Account
8	Justforex	100% Deposit Bonus	$1	0.0	89	1:3000	IFSC	Open Account
9	ThinkMarkets	No	$250	0.4	88	1:400	ASIC,FCA	Open Account
10	XM	$30 Welcome Account	$5	0.0	87	1:888	ASIC,FCA,IFSC	Open Account
11	FBS	$50 Welcome Account	$1	0.0	86	1:3000	IFSC	Open Account
12	HotForex	No	$5	0.0	85	1:1000	INC	Open Account