Everything you need to know about Forex

Largest Market in the World

Forex is a marketplace where various national currencies are exchanged. It is the largest, most liquid market in the world. Forex is much larger than the NYSE (New York Stock Exchange). The average daily trading volume from the NYSE is about $22.4 billion, while Forex trades about $6.6 trillion in daily trading volume. The exchange is done on an electronic network, meaning there is no central location and it is mostly done between banks and brokers. The market is in constant flux as the exchange rates are changing every second.

Easily Accessible

Forex is accessible to everyone. It used to be limited to governments and large corporations. Investment firms, banks, and brokers give people the opportunity to open an account so they can start trading. Forex is open five days a week and exchanges of currencies can be done 24 hours a day (depending on the country, the market is closed on holidays).

Rollover Rates

Rollover Rates are a trader’s overnight net interest return of a currency position. This occurs when an investor borrows one form of currency to buy another one. The interest that was paid or earned overnight for holding that position is what leads to a Rollover Rate. To have a currency position held overnight, it has to be open after 5 p.m. To calculate your rollover rate, you need to subtract the base currency’s interest rate from the quote currency’s interest rate. Once you do that you then divide that amount by 365 and then you multiply that amount by the base exchange rate.

Forex

Leverage

Leverage in Forex can be enormous, as much as 50 to 1 by some brokers. It is very common and plays a major role. Leverage is the use of borrowed money to invest in the selected currency. These leverages are borrowed from brokers so the investors can trade large positions for a currency. However, leverage acts as a double-edged sword as the movement results can lead to a return having massive gains or losses. It is best that investors learn to manage leverage and risk management.

Example

Traders will take a position with a certain currency with no physical contact. Let’s say one trader wants to trade the US Dollar versus the British Pound. If GBP/USD is trading at 1.32179 this means that a buyer would pay $1.32179 to purchase 1 British Pound and a seller would receive 1 U.S. Dollar for selling 1 GBP. The buyer wants the GBP to appreciate in value and the seller of the pair of currencies wants the GBP to depreciate. In other words, the buyer is investing in a “share” of the British economy hoping that it will do well.

“Pips” and “Lots”

In the FX Market currencies trade-in “pips” and “lots” not ticks and shares like stocks. A “pip” is an acronym for “price in percentage” and is the smallest agreed-upon price increment a currency pair can move. A pip is 1/100 of 1% or .0001. FX currency pairs trade in “lots.” There are micro, mini, and standard lots. A micro lot is 1,000, a mini is 10,000 and a standard is 100,000 a given currency.

Conclusion

To wrap up, the pros for Forex is that it is online and decentralized with few rules and regulations, it is open five days a week and twenty-four hours a day, it is highly liquid, there are no commissions although most brokers widen their Bid/Ask spread to earn a profit, and Forex brokers allow for a great deal of leverage. Forex is accessible to everyone.

Expert Tip:

Look for a broker that doesn’t utilize a Dealing Desk. This means that your FX order goes straight to the market and not through a middle man. Also, find a broker with competitive spreads no wider than 1 pip or so during major sessions on major currency pairs such as the EUR/USD.

References:

BabyPips.com. (2011, April 18). What Is Traded In Forex? Retrieved November 06, 2020, from https://www.babypips.com/learn/forex/what-is-traded-in-forex

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