How to Equip Yourself before Jumping Into the Currency Trading Market?
- About Currency Market
Forex market is a term used for worldwide financial market which is over the counter as well as decentralized and is specialized for trading different types of currencies. Today, both traders and investors are recognizing the currency market as an area of interest. However before entering this market, it is important to understand that how transactions are done within the foreign exchange market. It is very essential to know the basics of currency trading. Not only is it the biggest market in the world but it is the most liquid market which makes it different from the other financial markets.
- Currency Pairs / Products
The instrument that the Forex traders use is currency pair. This term is used to describe the rate of exchange of one currency over the other. EUR/USD, USD/CAD, GBP/USD, USD/JPY, AUD/USD and USD/CHF are the currency pairs that are traded most often. The first currency in a currency trading pair is known as base currency and the latter is known as the counter currency.
- Use of Leveraging
Other financial markets need full deposit of the amount that is to be traded. However, in the online trading market only small margin money is needed and the remaining money is granted by the broker. Some Forex brokers provide leverage as high as 400:1, means only 1/400 amount is needed to open a position. Majority of brokers offer only 100:1 leverage which means that only 1% money is needed to open a position. A typical lot size for trading in the currency market is $10,000 USD. It is not recommended to open a position when the trading account retains limited funds. If the trade goes against the trader, the broker closes the position.
- Rollover rates
Rollover rates are another important component in the Forex trading. While trading a currency pair, you borrow the bottom pair and purchase the top pair. For example if you are trading USD/JPY you are borrowing yen and purchasing the USD. You receive an interest by holding a currency in your account but you pay interest if you borrow a currency. Since currency trading is highly leveraged and you control large amount of money, the swap rates should be accounted for in your trading. The Forex dealers either charge or pay you the swap rates depending on the position holding by you.
Let us look at the USD/JPY currency exchange pair. While taking this position you are borrowing yen at a lower interest rate and using it to buy dollar which pays a higher interest. If you are short on this pair, you will be paying daily interest but if you are long, you will get daily interest from your dealer. The Forex trading dealers charge a little more than they pay for facilitating the process.
- Manual or Auto Execution of Orders
Forex order can be executed either manually or automatically. Automatic execution can be done without the intervention of dealer. Slippage is the difference between the order price and the executed price which occurs in volatile and fast moving markets or where the trades are executed manually. Drawdown is a decline in account balance of currency trading from top to bottom which is reported in percentage terms. A technical price level where buyers outweigh sellers which makes prices to bounce off is known as support. A technical price level where sellers outweigh buyers and makes the price to bounce off is known as resistance.
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