Forex Trading
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FX Trading Facts
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Currency Trading
7 facts you should know when trading
foreign currencies
| FX Trading has recently gained recognition as one of the most liquid investment tools in the world with $1.5 trillion worth of turnover each day. Apart from that, the internet has also helped to facilitate its increasing popularity by providing a more streamlined and convenient trading facility through online transactions. |
However, before venturing into FX Trading, traders should first be aware of the following facts:
1. Margin Financing
Most FX trading brokers allows traders up to a 2% margin of financing. This means that traders only need to provide cash deposits of only 2% of the total currency value that they are transacting. However, this rate may differ between brokers, with some brokers adopting alternate margin financing policies.
2. Bid, Ask and Spread
The bid price is the price of the purchase of a certain currency while the ask price is the selling price. The spread is the difference between these two and is measured by pips. Basically, pips are the differences between the last decimal points of the bid and ask prices.
3. Risk management
Any financial investment tool assumes a certain level of risk with which should be managed wisely. It is the same for FX trading and thus elements such as stop loss and limit order points should be set when a trade is made. With a stop loss, the currency purchased will be automatically sold if the exchange rates dip below a certain level pre-specified by the trader. The opposite works on setting limit orders.
4. 24-hour market
With currency foreign exchange centers located all over the world, such as in New York, Hong Kong, Singapore and London, FX transactions is a 24 hour business. This provides vast opportunities for trade as well as a quick market reaction to market news all over the world.
5. Common currencies traded
Although all currencies are available for trade in FX trading, the most popular currencies are those from countries with a stable political and economical outlook. Therefore, currencies such as the US Dollar, Japanese Yen, British pounds, Swiss frank and Australia Dollar are the most popular among foreign exchange traders.
6. Liquidity
The availability of online foreign currency transactions has drawn the attention of many small time traders. With this, the total volume of FX trading increased thus improving liquidity within the market. This meant that it becomes easy for a bid or and ask transaction to be successful with higher volumes of sellers and buyers.
7. No bears and bulls
Unlike the equities market, there are no bull and bear markets. This is because when a currency is bought, a corresponding amount of another currency is purchased. Therefore, an opposite position can be taken to counter an unfavorable trade.