Foreign exchange trading (forex or FX) is the global market for exchanging foreign currencies. Forex has the largest market in the world. There are more than 170 currencies in the whole world; the ‘USD’ is the most widely traded currency. The prominent currency in the forex market is also the ‘euro’. Other major currencies are such as: the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the New Zealand dollar (NZD), and the Swiss franc (CHF).
What is Forex Trading?
When a trader buys one currency and sells another, the exchange rates randomly deviate based on supply and demand. Currencies are traded in the foreign exchange market, a global market that's open 24 hours a day from Monday to Friday. Forex trading is normally conducted over the counter (OTC).
The majority of forex trade activity mainly occurs between institutional traders. In general, traders practice speculation and hedging against future exchange rate fluctuations.
How Forex Trading Works?
The transaction is like when a trader buys a currency; in the case of forex, the market price tells a trader how much one currency is required to buy another. For example, the current market price of the GBP/USD demonstrates how many dollars it would take to buy one pound. Every currency has its own ticker, which helps traders recognize it as one of the combinations of currencies.
Trading Terminology: Forex Trading Notes (for Beginners)?
Let’s understand some of the key terminologies for the beginners before delving into the sea of forex trading as follows:
Spot Forex: The spot forex trading involves buying and selling in the real currency. For instance, a trader buys a pound and exchange it for euros, when the currency value appreciates the then the traders tends to exchange it again to see a profit.
CFDs: These are basically leveraged derivative financial instrument, and are a contract used to, for price movement of the respective instruments. In Forex terms, rather than owning a currency, someone may take the advantage of price fluctuations without having to own the asset itself.
Pip: A pip is the base unit in the price of the currency pair or 0.0001 of the quoted price. When a bid price for the EUR/USD pair goes from let’s say 1.14988 to 1.14998 that highlights a difference of 1 pip.
Spread: The spread is a difference between the buy and sell price of a currency pair. For example; buy price of a currency is 1.14988 and sell price is 1.14998; the decimal difference is called the spread.
Margin: The margin is basically work as buffer in the trading account to support the trade. Retail trader very often lacks the necessary margin to trade at a volume high enough to make good profit. Brokers increase the buffer limit for many forex traders.
Leverage: The capital supported by the broker for the forex traders to increase the trading volume, so that customers can make more profit and the same time it generates commissions for them.
Is Forex Trading Legal in Australia?
Australia has been well known for its stringent laws and welcoming environment for forex trading. The legal aspects of forex trading in Australia, as well as the rules and tax repercussions, must be well known to forex traders. A trader should be well aware of the Australian Security and Investment Commission's (ASIC) formulated guidelines and the tax implications of forex trading in Australia.
Advantages and Disadvantages of Forex Trading
Here are some of the advantages of forex trading, as follows:
Flexibility: This is because traders have no limit on capital investment and trades can be executed at any time they want.
Transparency: The forex market is a very large market that operates across various time zones. Information regarding the forex market is easily available.
Trading options: Traders have many ways to trade in the forex market. Traders can trade in hundreds of currency pairs, spot currency trade, and currency futures agreements as well.
Leverage: Forex markets provide the most leverage amongst the financial instruments in other markets. The forex market supports traders with 20- to 30-x leverage to trade in the market.
Now let’s look at some disadvantages of forex market
Counterparty risks: Forex market is global market, therefore regulation is a difficult task because it pertains to the sovereignty of the currencies of many country.
Leverage risks: The gearing ratio to 20 to 30 times imply massive risk. The reality is that there are no limits to movement that could happen in the forex market. A trader might wipe entire capital in a matter of minutes. Beginners are more prone to commit mistakes, because of the lack of market experience.
Operational risks: Forex markets are operational 24 hours a day, while humans are not. Therefore, traders have to resort to algorithms to protect the value of their investments when they are not in front of the systems. Therefore, for traders with smaller capital and inadequate knowledge as to how to manage, it might be a recipe for disaster.
Frequently Asked Questions (FAQ)
Who controls the Australian dollar?
The major trading currencies in the world is generally controlled by the governing body that is, central bank of the issuing country. Reserve Bank of Australia controls the Australian dollar.
What's a pip in forex trading?
A pip is basically the base unit in the price of the currency pair or 0.0001 of the quoted price. When a bid price for the EUR/USD pair goes from let’s say 1.14988 to 1.14998 that highlights a difference of 1 pip.
What risks are involved in forex trading?
There are the following risks involved in trading forex:
Exchange rate risk: A risk of loss arises due to the change in a ‘currency pair's relative values after a trader decides to buy or sell at a particular rate.
Country risk: a risk of loss arises due to the instability or devaluation of its currency.
Margin risk: The shortfall of margin arises due to price movement against an intended position.
What are the trading hours in Australia?
Currencies are traded in the foreign exchange market, a global market that's open 24 hours a day from Monday to Friday. Forex trading is normally conducted over the counter (OTC).
What factors affect the forex market?
The broader macroeconomic influences, such as inflation, have the greatest impact on forex markets. Financial instruments such as stocks, bonds, and commodities also have a strong influence on exchange rates. Trade deficits and surpluses play a significant role in forex markets.
What is the difference between stock trading and forex trading?
The forex market is generally less regulated due to its complex and broader market size than stock trading, and forex traders have access to much more leverage than stock traders. Forex trading executes trades in pairs of currencies, so the trade depends on the performance of two economies rather than a single stock.
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