Things to know about foreign exchange trading
Many traders may have heard of forex buying and selling, but a few may know what it means or how it is done. In the following article, we have tried to explain what foreign exchange is, what foreign exchange trading is, and also the risks involved in it.
What is foreign exchange?
- The foreign exchange trading market is also called the “forex” market.
- It is the largest financial market in the world with an everyday average turnover of about US$ 1.2 trillion.
- Foreign exchange trading is the concurrent buying of one currency and selling of another.
- The world’s currencies are on a floating trade price and are always traded in pairs, for instance, Euro/dollar or dollar/Yen.
Is the forex market centralized?
- Foreign exchange trading is not always centralized on an exchange, as with the stock and futures markets.
- Due to the fact that transactions among two counterparts are realized through the telephone or through an electronic network, this market is also considered an over-the-counter (OTC) or “Interbank” market.
Who are the participants in the forex market?
- The foreign exchange market is also referred to as an “Interbank” market due to the reality that historically, it has been ruled over by banks, including central banks, commercial banks, and investment banks.
- However, the share of different market contributors is rapidly growing and now consists of big multinational organizations, international money managers, registered dealers, worldwide money brokers, futures and options investors, and private speculators.
When is the forex market open for trading?
- The forex market is truly a 24-hour marketplace.
- The day starts with foreign exchange trading in Sydney, after which it moves around the world as the business day starts in each financial center, first in Tokyo, then London, and then New York.
- Traders can respond to forex fluctuations any time they arise, which may be triggered due to economic, social, and political events.
How risky is foreign exchange trading?
- Risks are involved in foreign exchange trading as well as in any other form of investment.
- The forex markets can revel in sharp fluctuations, similar to the stock, bond, or commodity markets. So traders are suggested to take advice from an independent financial advisor before making any transactions.
- For beginners, they should ensure that the broker is registered with the regulators, like the National Futures Association in the country, the Australian Securities and Investments Commission, and/or the Financial Conduct Authority in the UK.
How long are the positions maintained?
- About 80% of all foreign exchange trades last approximately for seven days or less, while 20% of them may remain for even less than two days.
- As a preferred rule, a position is kept open until a realization of sufficient earnings from a position, or there is a trigger in the specified stop-loss, or another position that has a higher potential appears and you need these funds.
What is a limit order and a stop-loss order?
As there are possibilities for huge gains as well as huge losses in the forex market, investors need to employ an effective trading strategy to manage their positions properly, which includes limit and stop-loss order:
- Limit order: A limit order is an order with regulations on the maximum price to be paid or the minimum price to be received. For example, if the present price of USD/YEN is 117.00/05, then a price under 117.05. (i.e., 116.50) will be the limit order to buy that USD.
- Stop-loss order: It is an order type wherein a position is automatically liquidated at a specific price. It is often used to reduce exposure to losses if the market situations move against an investor’s position.
Where is the commission in foreign exchange trading?
- Traders who trade shares, futures, or options usually use a broker who acts as an agent in the transaction.
- The broker takes an order for an exchange and attempts to execute it as per the customer’s instructions.
- The broker receives a commission for providing these services every time the customer buys and sells the tradable instruments.
Do you really sell or buy in the currency market?
- There is nothing sold or bought in the currency market.
- The FX market is purely an analytical market and no physical exchange of currencies takes place.
- All trades purely exist as computer entries and can be obtained depending on the market price.
- For accounts that are dollar-dominated, all profits and losses are calculated in terms of dollars and recorded as such in the trader’s account.