The first thing to do before stepping into the realm of forex trading is to educate yourself about the dynamic currency market and trading concepts. Read More
In this blog, we will help you to start your trading career with all the required information. I am going to list the 6 questions that you should be able to answer before starting forex trading. The first question that you should be able to answer before venturing into forex trading is how the global currency market is different from other financial markets. First of all, the forex market is an OTC marketplace with a decentralised structure. But even though there is no physical place of business or central regulatory authority, there is a lot of transparency in the dealings and the chances of the forex currency prices being manipulated are very low in comparison to other major markets. Because the forex market is the biggest in terms of size, trading volume and daily turnover it can never be rigged as the trading activities happen on a large scale. The Forex market became popular due to its round-the-clock nature with the market hours being divided into 4 major trading sessions giving a lot of flexibility to traders around the world. It is always open for trading except on weekends and special holidays. Thus, all traders can pick their trading session based on their convenience. The forex market is also the most liquid trading market as the trading instruments are international currency pairs that are bought and sold based on exchange rate fluctuations. The currency market can be easily accessed by all irrespective of their location as you just need to find a trusted broker for opening a trading account and they will let you access and trade in the forex market with solid trading conditions. All of these unique features add to the attractiveness of the volatile currency market. In simple words, commission is a fee that your broker charges in return for executing the trades. It is different from spreads, which you pay as a part of the price while buying a currency pair. Spreads are the difference between the bid price and ask price as the brokers or market makers earn by increasing the price at which you buy the pair in comparison to the market price and you will get an amount lesser than the market price while selling a currency pair. The spreads are stated in pips just like currency prices. But commission is charged for every trade that you execute and it will be stated in monetary terms and you can calculate it by using tools like trading calculators. Trading calculators simplify the calculation and also give quick results without any manual errors. Usually, brokers charge the commission per side which is for each order that is placed for a trade, but it can also be a round turn where they state the total commission charged after buying and selling a pair for trading. Like I said earlier, pip is crucial for keeping track of the currency price fluctuations as they are so minor that one has to measure them in decimals. Thus, the pip is measured at the 4th decimal place for all currency pairs except for pairs that include Japanese Yen as for them the pip is at the 2nd decimal place. The pip value needs to be calculated in your account base currency before planning your trades as the risk and potential profit of a trade depends on the number of pips by which the price will move. As I stated earlier, in forex trading, you will be trading with different currencies that are paired together and the price of a currency pair represents the value of base currency against the quoted currency which comes second in the pair. You can use tools like currency calculators to get the live rate of one currency in another. The first currency is the base currency being bought or sold for trading. The amount of currency units that you will be buying or selling is decided by choosing a lot size which indicates the position size and optimal position sizing is important to manage the risk. There are a lot of currency pairs that are traded in the forex market and they are classified into 3 types. First is major currency pairs which include USD and other major currencies like Euro, GBP, AUD, CAD etc. These pairs have the highest trading volume and thus they are the most liquid with the lowest spreads. The 2nd category is minor or cross pairs, these pairs also have major currencies but do not include USD. They are also very liquid but are more volatile and thus spreads are a bit higher. The 3rd category is exotic currency pairs, which have high volatility and low volatility due to the exotic combination of major currencies paired with the currency of a developing or emerging economy. They are the riskiest to trade with and also have the highest spreads due to the low trading volume. Carry trading is a popular strategy where traders focus on the interest rate differential of currencies in a pair rather than the price movements. The trades that you open are held for a longer duration in carry trading as you earn profits from the swap that is credited to your trading account while holding a currency pair with a positive swap. For this, you will have to buy a currency with a high-interest rate and sell one with a lower interest. For this, you will have to find currency pairs that are suitable for carry trading based on the interest rate differential which is the basis for the swap rate. Other Forex Jargon Now, let’s have a look at some of the popular jargon that is used by forex traders. Bottom Line So, these were some basics of forex trading that a newbie trader needs to learn before taking their first step in the currency market. This blog is only a starting point as you need to learn a lot more theories and concepts for marking a successful beginning in trading.