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What Is Forex Trading?
Forex refers to the foreign exchange market where various currencies are traded. One of the interesting features about Forex market is that it is decentralized that is there is no central marketplace and the currencies are traded electronically over the counter.
The currencies are traded 24 hours a day 5 days a week these are traded at the major financial centers of New York, Tokyo, London and others and are extremely active at any given time of the day.
There are majorly three different ways in which one can trade in Forex and these are the spot market, the futures market, and the forwards market. When people generally talk about Forex trading they refer to the spot market. The future and the forwards market are generally used by companies that are hedge their funds in foreign exchange to a specific date in future.
The spot market is the place where selling and buying of currency are done according to current market price. The market price in spot markets depends on supply and demand and it depends on factors which also influence equities. Some of these factors are economic performance, interest rates, the general perception of people and ongoing political situations.
Forex trading can be profitable if the different concepts about the foreign market are understood, for this one needs to be acquainted with the terminologies of the Forex market. Some of the Forex terms are:
Exchange rate: It refers to the value of one currency expressed in terms of other for eg. If EUR/USD is 1.32 then it means that 1 euro is worth US$1.32
PIP: Also called point or points it represents the smallest increment of price moment that a currency can make. Most of the currencies trade within a range of 100-150 pips. It is different for different currencies for example for Euro, US Dollar, British pound or Swiss franc one pip is .0001 whereas for Japanese Yen one pip would be 0.01.
Leverage: The Forex markets offer large leverages and it allows the trader to gear the account into a position greater than the total account margin for instance if a trader has $2000 of margin in his or her account and he or she opens a $200000 position with $2000, a leverage of 100 times has been used. The leverages are generally mentioned in ratios such as 10:1,15:1 and so on.
Margin: It refers to the deposit that needs to be maintained to open or maintain a position. Basically, there are two types of margins that are used and free margin, the used margin is the amount which is used to maintain an open position and the free margin refers to the amount which can be used to open new positions. In order to maintain an open position, the minimum amount needs to be maintained.
Spread: It is the difference between the sell quote and buy quote, it basically represents the brokerage service cost. The bid price is always lower than the ask price and thus the difference between ask and bid price gives spread.
Bid and Ask price: Bid price refers to the price at which the market will buy a particular currency from you. It generally represents a price at which a trader can sell a base currency to the broker. Ask price represent just the opposite that is the price at which you can buy the base currency from your broker.
To get about the dynamic nature of ever evolving and changing currencies one needs to be acquainted with the two different analysis which is fundamental analysis and technical analysis.
Most of the successful runs in the Forex market are based on strategies. A good strategy will tell you when to enter and exit the trade and also provides the risk management and position sizing. Forex trading strategies are represented by the trading styles and some of the widely used and tested are swing trading, day trading, scalping and positional trading. Generally, a swing trader holds a position for several days looking for short-term gains from short price patterns whereas the scalper holds the trade for a very short period and try to beat the spread, bid/offer and skim just a few points. Day trading refers to trades that are exited within a day and positional trading refers to long-term trading. Major Forex strategies use the price action and trend following which result in their action corresponding to the market behavior.
One should go with a live account only after studying various Forex user guides and thoroughly understand the risk management. Finally, the strategy and the investment period varies from person to person and one should be flexible enough to use the one that suits his or her way of investment.