Long-Awaited Currency Trading Answers Revealed
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With the rise of internet trading, the online trading market has been made accessible to many more traders. Previously, this market was dominated by corporations and financial institutions but now there is a huge wave of individuals who wish dive into online trading. Forex is the biggest financial market in the world but it is still unfamiliar to many traders. So, whether you are a beginner in Forex trading or just want a refresher on the basics of Forex, there are some universal questions that you want answers to.
What are the Differences Between the Forex Market and Other Markets?
First, the Forex market does not take place on a regulated exchange as in futures, stocks and options trades. The Forex market is not regulated by a single governing body, there is no arbitration team to handle disputes and there is no regulation that guarantees trades. This may seem astonishing to some, but this system works very well because there is competition and corporation between trading participants. This creates an effective system of self-regulation and market control.
In addition, reputable Forex brokers are usually members of a regulatory body which will handle any disputes that may arise. Another important difference in the Forex market is that there are no limitations set in terms of the size of your position – you could sell $200 billion in currency if you had the money to do so. Finally, the Forex market trades for 24 hours a day and seldom experiences price gaps, making it the most accessible market in the world.
Do Forex Brokers Receive Commission?
Unlike other markets, there is no commission in the Forex market. Forex is ‘principals-only’ and not an exchange-based market. Also, Forex brokers are actually dealers – an important distinction. Brokers initiate a trade according to their client’s wishes and take a commission when that trade is executed. On the other hand, dealers act as a counter to their client’s trades by assuming market risk. Dealers do not take a commission but rather make money from the ask-bid price.
Definition of a Pip
Pip is an abbreviation for percentage in point – this is the minimum trade increment in Forex trading. The prices in the Forex market are quoted to the 4th decimal point. As an example, let’s say a tube of toothpaste costs $2.20 at the drugstore. In the Forex market, that tube of toothpaste would be quoted as 2.2000. The 4th decimal place is equal to 1 pip or 0.0001.
What are you Actually Trading in the Forex Market?
The simple answer is that you are trading ‘nothing concrete’. The Forex market is just speculative and there is no actual exchange of currency. Trades occur as computerized entries by which profits and losses are given out based on the market price. Losses and profits are calculated in the currency that you use for your trading account and are credited to your account in that same currency.
The Forex market exists to allow the exchange of currencies for international corporations as payments and other company-related activities. However, this type of exchange only consists of 20% of the Forex market while the other 80% is made up of individual speculators, hedge funds and financial institutions.
Additionally, currency is always traded in pairs. This means when you trade currency, you will be short on one currency and long on the other. As an example, if you decide to trade a standard size lot of EUR/USD (100,000 units) you are essentially exchanging euros for U.S. dollars and are short on euros but long on dollars. In order to get a more in-depth understanding of this, let’s take a more tangible example. Let’s say you go to an electronics store and decide to buy a computer for $900 – in essence, what are doing?
You are actually making an exchange for the computer with your dollars. In this case, you will be long on the computer and short on dollars. On the other hand, the store would be long on dollars but short on the computer. This is the principal that is used in the Forex market but there is no material exchange of currency. It is true that the transactions only exist in a computer, but the consequences are as real as can be.
What Currencies Can Be Traded in the Forex Market?
There are some brokers that allow the trade of more uncommon currencies but most forex brokers offer the following currency pairs:
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