Understanding Primer on Forex Trading

As the domain of hedge funds, massive international corporations and government, commercial and investment banks, the Forex market trades 24/7 and circulates more than $3-trillion a day. With all the advancements in modern technology, trading in the Forex market is already easily accessible to individual investors who wish to take advantage of the world’s largest and most liquid market.

Forex Trading

Forex is short for Foreign Exchange; it refers to trading currencies from different countries based on the prevailing foreign exchange rates. For example, when a Canadian investor wishes to buy US exchange listed stocks, he buys US dollars using its equivalent in Canadian dollars. This is a sample of currency trading.

Since there isn’t a centralized marketplace for Forex trading, investors and brokers form all over the world do most of their currency trading transactions through computer networks. The widely globalized market’s international reach plays a major role in the world’s business environment.

Dealer Compensation

Currency trading transactions are typically done through market makers or brokers. In the stock exchange market, the brokers are responsible for taking the trade orders to the stock exchange market, ensuring the proper execution of the trade, and, afterwards, they charge commissions for their services. In the Forex market however, dealers generally take on the same responsibilities but do not charge commissions for the transactions they oversee. As counter parties to the trades they are involved in, they take the risks that come with each transaction and also reap their rewards by taking cuts through the bid-offer or bid-ask spread.

Bid-offer Spread

Also called the bid-ask spread, this is simply the difference between the highest price that is acceptable to the buyer and the lowest price a seller is glad to accept. The lower the number of buyers and sellers that are trading in the market at any given time, the higher the bid-offer spreads. Because the market is highly liquid, spreads are usually small. These movements are measured in pips.

Pip or Percentage in Point

This is the smallest price movement in a trade made in the Forex market; the higher the pips, the higher the profit.

As one can immediately see, Forex trading is more complicated and requires a different set of knowledge and skills from those required by equity markets. Along with the countless trading opportunities, strong trends, chances for huge profits, and high leverage levels, the currency trading market also comes with huge potential risks even for the most advanced trader. For this reason, investors should take their time to learn all that they can when it comes to good risk management methods.

Content source: Admiralmarkets.in – A forex trading broker from India
*ElectroFX.com is not associated with Admiral Markets.
*ElectroFX.com has not yet used Admiral Markets to be able to comment on them as a Broker.