Top 5 Questions About Forex TradingKehinde LAWAL
In this article, you will get the answers to the top 5 question about Currency, Forex, FX Market(the largest financial market in the world). Let the questions start rolling below:
1. How Does the Forex Market Differ from other Markets?
Unlike stocks, futures or options, currency trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based on credit agreements. Essentially, business in the largest, most liquid market in the world depends on nothing more than a metaphorical handshake.
2. Where Is the Commission in Forex Trading?
Investors who trade stocks, futures or options typically use a broker, who acts as an agent in the transaction. The broker takes the order to an exchange and attempts to execute it per the customer’s instructions. The broker is paid a commission when the customer buys and sells the tradable instrument for providing this service.
The FX market does not have commissions. Unlike exchange-based markets, FX is a principals-only market. FX firms are dealers, not brokers. This is a critical distinction that all investors must understand. Unlike brokers, dealers assume market risk by serving as a counterparty to the investor’s trade. They do not charge commission; instead, they make their money through the bid-ask spread.
3. What Is a Pip in Forex Trading?
Pip stands for “percentage in point” and is the smallest increment of trade in FX. In the FX market, prices are quoted to the fourth decimal point. For example, if a bar of soap in the drugstore was priced at $1.20, in the FX market the same bar of soap would be quoted at 1.2000. The change in that fourth decimal point is called 1 pip and is typically equal to 1/100th of 1%. Click here to learn more about Pip and Pip Value.
4. What Are You Really Selling or Buying in the Currency Market?
The short answer is nothing. The retail FX market is purely a speculative market. No physical exchange of currencies ever takes place. All trades exist simply as computer entries and are netted out depending on market price. For dollar-denominated accounts, all profits or losses are calculated in dollars and recorded as such on the trader’s account.
5. Which Currencies Are Traded in the Forex Market?
Majority of dealers trade the seven most liquid currency pairs in the world, which are the four “majors”:
- EUR/USD (euro/dollar)
- USD/JPY (dollar/Japanese yen)
- GBP/USD (British pound/dollar)
- USD/CHF (dollar/Swiss franc)
and the three commodity pairs:
- AUD/USD (Australian dollar/dollar)
- USD/CAD (dollar/Canadian dollar)
- NZD/USD (New Zealand dollar/dollar)
Knowing Your Forex Jargon
Every discipline has its own jargon, and the currency market is no different. Here are some terms to know that will make you sound like a seasoned currency trader:
- Cable, sterling, pound: alternative names for the GBP
- Greenback, buck: nicknames for the U.S. dollar
- Swissie: nickname for the Swiss franc
- Aussie: nickname for the Australian dollar
- Kiwi: nickname for the New Zealand dollar
- Loonie, the little dollar: nicknames for the Canadian dollar
- Figure: FX term connoting a round number like 1.2000
- Yard: a billion units, as in “I sold a couple of yards of sterling.”