Since the 1990s were characterized by a real run of private and small investors on the world’s stock markets, another financial market for private market players has become increasingly popular over the past decade: namely the Forex market or, to put it another way, the Foreign Exchange Market. In Forex trading, the seasoned trader takes the chance of an exchange rate fluctuation between different currencies in the world, but here, as with all other financial instruments, there is a risk that a Forex trader is exposed to.
Why is there foreign exchange trading?
In a world that is divided into different countries and therefore also currency areas, the currencies concerned must be exchanged continuously, as a result of which international trade can take place. Among other things, trips outside the euro zone can only be undertaken if a small portion of the available money is exchanged for the local currency.
What currencies can be traded on the Forex market?
In terms of its role as the primary reserve currency, the US $ (USD) is the most important in the world. The USD is followed by the euro (EUR). The latter is a peculiarity in that it does not in any way represent a single economy, but an association of 17 states, namely the EU zone. Other important currencies with strong trading volumes on the foreign exchange market are the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Swiss franc (CHF) as well as the Canadian dollar (CAD).
Forex currency pairs and quotes
Currencies can only be bought or sold in relation to exactly another currency (SELL or BUY). As a result, they trade currency pairs or, in other words, currency pairs such as EUR / USD, GBP / USD (Cable) or EUR / JPY. The currency shown first is therefore the base currency or, more specifically, “base currency”. Their value is expressed in the 2nd currency, the price currency or “quote currency”. A case study: If the EUR / USD is currently 1.3024, this means that one euro is worth 1.3024 US dollars. Your profit or loss on this trade results from the exchange rate currency that fell or increased at the time of sale in relation to the base currency. In addition to many currencies that can be found on the Forex,
What do “pips” and “lots” mean in forex trading and what are they used for?
A pip represents the smallest possible fluctuation unit between a currency pair. Because the quotation for Forex trading usually contains four decimal places, a pip corresponds to one ten-thousandth of the currency of the currency. Currency pairs are not traded in arbitrary quantities, but in standardized quantities, the so-called lots. A standard lot corresponds to 100,000, a mini lot 10,000 and a micro lot 10,000 currency units. Currency fluctuation in US $ from a pip is equivalent to $10 for the standard lot size, $1 for the mini lot and 10 US cents for the micro lot. Despite such small amounts, you can move large sums even with low capital investment. With the help of a lever (leverage), which is based on borrowed capital,
Bid, ask and spread
As with other trading instruments, you will receive a purchase price (BID) and a sales price (ASK) in your trading program when trading Forex. When EUR / USD = 1.3138 / 1.3140, the difference, also called the spread, is two pips, for example. So, you can buy a euro for a value of 1.3140 USD or deduct it for 1.3138. With a currency pair, you always buy or sell the base currency at the price of the exchange rate currency.
STP Forex Broker
There are two different types of Forex brokers: Market Maker (STP Forex Broker) and ECNs. With a market maker, that kind of business takes place, so to speak, in-house. He creates binding bid and asked courses, brings together buyers and sellers, and ensures the necessary creditworthiness. The STP broker gets his profit from the spread, ergo the difference between the buying and selling rates of foreign exchange, which he offers to all Forex traders trading on his platform. The advantages of this type of broker include the elimination of commission fees for transactions and usually a user-friendly and easy-to-understand interface. A certain disadvantage is the fact that an MM, who is known to set the course himself, can also trade or trade against you. On the whole, price manipulation on the Forex exchange is prevented due to the fierce competition between brokers. A Forex speculator who is always given “unfavorable” Forex courses has a variety of alternatives in the form of other Forex brokers.
ECN Forex Broker
The other providers of Forex accounts are called ECNs, Electronic Communications Networks. Unlike securities trading, Forex trading does not take place on exchanges or other centralized trading places. Your orders are forwarded directly to other market participants such as banks via an ECN broker. Impairment of the exchange rates by means of ECNs is not possible under any circumstances, however you have to pay a commission fee for every transaction made. The Forex spreads can be higher than with a market maker and the user-friendliness is usually less pronounced.
Where can I get more information about Forex Trading?
As everywhere in life, the exchange of information with other people offer the best opportunity to acquire new knowledge. If you are interested in foreign exchange trading, you should register in a Forex forum . Here you will find reviews of various brokers, learn about Forex strategies and meet a lot of like-minded Forex traders.