At worldsforextradings, we recognize that is knowledge is power. We realize the importance of educating our traders about trading forex on the forex market. Our aim to enable traders to trade forex with confidence, while at the same time understanding the basic characteristics of the forex market. This contains both potential risks and gains.
Making a transaction on the forex market is simple and the process is similar to other markets. The forex market is based on the basic business model of buying and selling. Forex trading is quite simple; traders buy and sell foreign currencies against each other, and gamble on the constantly changing foreign exchange rates. Unlike with the stock market, a forex trader is not charged any commission for trading. Instead, the forex broker is compensated through the buy and sell differential.
IMPROVE YOUR FX TRADING KNOWLEDGE
Buying and Selling (B/S) on the Forex Market
The Buying and Selling model is an easy process for the beginner. There is one simple role for buying and selling – you buy one currency pair while selling another. For each currency pair, such as the commonly traded GBP/USD cross, there are two prices. There is the bid price (price at which the market buys) and the ask price (price at which the market sells). The difference between these is referred to as the spread.
When placing an order, you first need to choose an amount (how much you want to buy or sell). For instance, if you make a decision to sell 100,000 GBP/USD. Then by clicking BUY/SELL you are actively opening a position in the market, and you will automatically receive a notification on your trading platform. You can also do the opposite of your initial operation by closing your position in the fx market (BUY/SELL 100,000 USD/EUR in this case). Read more about placing orders.
Another important aspect to consider is that the forex Buy and Sell rates are influenced by a variety of different reasons. These may include currency rate differentials, global economic trends, political events, weather, extreme situations such as war or terrorism and so on. These are often referred to as fundamentals. Read more about fundamental reasons that influence forex trading.
FOREX TRADING MARGINS
The margin is the amount of collateral required by forex traders to maintain their open positions on the forex market. Unlike stocks and commodities, there are no margin calls in forex. If an account falls below the required margin requirements, then all open positions are automatically closed. For instance, if an fx trader buys one mini lot of the GBP/USD pair for 1.50 at 1:100 leverage, then they will need $150 of their account in margin to maintain that open position. Read more about leverage and margins.
FOREX CURRENCIES QUOTATION SYSTEM
In the forex market, currencies are quoted in pairs, for instance, the GBP/USD or USD/JPY. The first currency in the pair is called the “base currency” and the second is called the “counter currency”. The foundation for buying and selling is the “base currency”. For instance, if a trader wants to buy EUR/USD, then he will buy Euros and sell Dollars. This means that he expects the Euro to gain against the Dollar. Every transaction on the fx market is double-sided, and performed with a buyll order.
If a trader holds an fx trade in the spot forex market overnight, this position is rolled over. In most cases, you are likely to either pay or receive a rollover fee. The rollover fee is determined by the difference between the interest rates which are priced into the two currencies that are being traded in the currency pair. The trade transaction is settled after two days. If positions are held overnight, then the forex broker closes forex trades at the conclusion of the trading day, (5 PM EST) and new trades are simultaneously opened.
For instance, the USD/JPY pair is traded at 1.40, the JPY interest rate is 3.5% and the USD interest rate is 1.5%. The pip differentiation is 0.60 pips. As a consequence, if you were to be long on JPY and short on USD, your trade would be found at 0.60 pips higher than previously. The example was calculated out by completing the following calculation: (base currency interest ÷ counter currency interest) × (day/days) × (traded rate).
LEVERAGE ON THE FOREX MARKET
Leverage allows forex traders to control more currency in a trade than they have deposited in their trading account. This is where the real power of forex trading lies. So, trading with the leverage system wisely can work in your favor, and bring you big profits or big losses.
With 1:100 leverage, the trader needs 1 unit of currency to control 100 units in the forex market. Thus, it would only take 100 units to control 1 mini lot (10K) in the fx market or 1000 units to control 1 standard lot (100K). Read more about leverage.
FOREX TRADING HOURS
The fx market is based on “spot transactions”. The reason for this is that trading takes place 24 hours per day, 5 days a week. Trading never ceases in the forex market, apart for weekends and holidays. This includes Christmas and New Year’s Eve, when the forex market closes early.