What is Forex trading and how to gain a level of profitability in this trading?
The Forex trading market also known as FX or Forex is the market where various currencies of the world are traded. It is a global market where currencies are exchanged 24 hours a day. For example a company situated in US purchases some goods from a Mexican company. To do the transaction, the US company needs to convert dollars into Mexican Pesos. That is where the foreign exchange market comes in and the transaction of currencies takes place all the time. This is largest market in the world where transaction of trillions of dollars takes place each and every day.
Currency exchange market is entirely different from other markets like the stock market. Although good traders can handle any market but the fact is that Forex requires a different trading approach.
The most important difference between Forex and stock market is a time frame. Stock market remains open just for eight hours in a day but Forex market is a unique market that can be viewed as 24 hours. The trading activity takes place in all time zones during the week. The lack of exchange is the next reason which makes it different from other markets. Forex trading takes place over the counter and there is no NYSE of Forex. While trading stocks, traders have to choose from thousands of stock but there a few currencies. Therefore choosing a currency pair for currency trading is not very tough.
Inter-bank market is a way by which Forex trading transaction can be done on the large scale, which means banks exchange currencies on behalf of their customers. Large traders can also operate through inter-bank market where they can easily carry out multi-million dollar trade. Small individual traders exchange currencies through dealers and brokers. Direct trade with the brokers and lack of an exchange creates another difference between Forex online trading and stock trading. The brokers generally charge commission in the Forex market for each sell and buy transaction. In the currency market, brokers do not charge any commission but they earn profit only by making the spread between offer and bid prices.
The foreign exchange market is a 100% margin-based market. This is a very common thing for those who are familiar with future trading. Basically you do not take the actual possession of any currency in Forex trading but a theoretical agreement is done and you can get the benefit of price changes. For this you have to deposit some money in your trading account to provide surety against any loss that you may acquire. The deposition of money asked by the brokers varies. Some of the brokers ask for only 1/2% but some expect 1%-2% on the value of the position taken by a Forex trader. Margin trading in Forex market does not mean margin loans because your broker is not lending you money and therefore no interest is charged by them. Spot Forex trades are performed on a trading day basis and therefore they get closed at the end of each day. If you want to hold your position then your broker rolls out your position for the next trading day.
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