Foreign exchange, one of the most popularly traded markets globally, is also referred to as forex trading or FX. It refers to the exchange of currencies on a determined exchange price. Today, forex trading brings out profits amount to more than $4 trillion each day. This niche has become quite popular, even better than the New York Stock Exchange with turnovers of almost $50 billion each day. Simply put, forex trading is one of the largest financial trading niches globally.
Through the power of speculation, forex traders usually exchange one currency for the other through buying and selling for profit. At any time, the currency value of any denomination can depreciate or appreciate which can be attributable to a variety of factors. These include geopolitics and economic constraints. Using information on the recent trades, forex traders speculate the way forward for any currency and use this information to gain profits through selling or buying different binary boom currencies.
Contrary to the normal financial markets, forex markets don’t have an exact physical location, specific timeline for trading or central exchange points. Rather, any one from any part of the world can trade day and night and gain profit accordingly. There are no requirements or restrictions on which individuals can participate in these trades and so participants can range from individuals to banks or businesses. Every single passing second, a currency can depreciate or appreciate giving the trader a chance to make a fortune or not from any transaction.
Features Of Forex Trading
• 24 Hours Trading
This is one of the reasons why forex trading has become quite popular all over the world. From Sunday evening all through the week to the wee hours of Friday night, you can make your transaction without time running out. In the Australian continent, trading opens up on Monday morning followed closely by the Asian continent (which mostly happens in Singapore and Tokyo) then the London markets open up throughout the week until Friday night when New York forex markets make the last call.
Price gapping, a practice where currency prices jump from one level to the other without any trading, is considerably reduced thanks to the 24 hour clock on the forex markets. Even better, forex traders can make their trades and take a stand any time they feel like doing so. To be honest, forex markets can be quite dull at times which means that the trading volumes are lower than average. However this widens the market spreads considerably.
In order to make a transaction in the forex exchange markets, you are required to deposit a smaller percentage of the whole sum. Therefore, foreign exchange trades are leveraged and marginalized depending on the current market situations. The risk of a loss or the probability of gaining profit from any trade depending on the initial capital can be quite higher than traditional financial trading methods.
All the currencies exchanged on the forex markets are paired against one another for effective pricing. They are simply divided into counter currency found on the right and the base currency found on the left side of the pairing. An example currency pairing is EUR/USD where the base currency is Euros and the counter currency is the dollar.
Depending on the nature of appreciating or depreciating of forex currency, the price movements are triggered considerably. For instance, if the price for the EUR/USD currency pairing was to depreciate, this would mean that the counter currency (USD) was actually increasing while the other (EUR) was decreasing.
Therefore, when forex traders are buying a specific currency pair, they do so with the assumption that the base currency price will increase rather than the counter currency. On the other hand, forex traders make a sale with the assumption that the base currency will depreciate in value while the counter currency increases.
• Percentage In Points (Pips)
Most of the currency pairs used in forex trading are quoted up to 5 decimal places. Change can occur from the 4th decimal place which is what is referred to as a pip. For instance, f the pairing of the EUR/USD changed from 1.33600 to 1.33720, the change would be stated as 12 pips (which is 72-60).
• Market Spreads
The difference between the bid/ask price of the currency pair is referred to as the market spread. For instance, if the pair EUR/USD is trading at 1.33600/1.33608 (which the spread would be 0.8 pips or simply 0.00008). There are a few exceptions to this are the currency pairs with the Japanese currency. For instance the pairing USD/JPY is to 2 decimal places rather than 5. As such as a pairing of USD/JPY with the price of 97.61/97.64, would result in a spread of 3 pips.
Determinants Of The Forex Price
Forex prices can be influenced by issues such as political stability/instability, economic conditions, investment flows, international trade, currency intervention, monetary policy or natural disasters. Prices can change immediately depending on short-term situations or news which gives forex traders more opportunities.