If you are new to Forex trading, then you are probably very curious to know more about this very intriguing subject. You will find below the answers to some of the most common questions asked about Forex.
1.What do you buy and sell when you are Forex trading?
You may be surprised to know that the answer is nothing. Forex is simply a speculative market. You never be involved in any physical exchange of currencies. You will discover that all your Forex positions will exist as computer records only, which will eventually be zeroed depending on market price. All your losses and profits will be determined in dollars and registered as such on your dollar-denominated accounts.
2. How does Forex differ from other markets?
You need to realize that Forex does not take place on a regulated exchange unlike the trading of futures, options or stocks. In addition, Forex is not governed by any central controlling body. You will find that there your trades will not be guaranteed by any clearing houses.
Also, you will have no arbitration panel to resolve disputes. You will simply be a trader with other Forex participants based upon credit agreements. You will be astonished to know that all Forex business in the world’s most liquid and largest market depends simply on a handshake.
3. Where is the commission in Forex?
When you start Forex trading, then you will need to use a broker, who will act as your agent in all your Forex transaction. Your broker will attempt to process your orders exactly as you specified. Your broker will charge you a commission for providing this service when you sell and buy your chosen currency pairs.
The Forex market does not charge commissions itself.
4. Which currencies are traded?
You will find that most Forex participants trade the seven most liquid currency pairs in the world. These are the four ‘majors’ and three commodity pairs.
The majors are:-
GBP/USD (British pound/dollar)
USD/JPY (dollar/Japanese yen)
USD/CHF (dollar/Swiss franc)
The three commodity pairs are:-
AUD/USD (Australian dollar/dollar)
NZD/USD (New Zealand dollar/dollar)
USD/CAD (dollar/Canadian dollar)
5. What is carry?
Both the largest hedge funds and the smallest retail speculators practice the very popular Forex trade called carry. This type of trade depends upon that fact that all global currencies exhibit interest rates.
The central banks of the relevant countries set these short-term interest rates on a regular basis, e.g. the Federal Reserve in the U.S., the Bank of England in the U.K and the Bank of Japan in Japan, etc.
You conduct a carry trade by purchasing a currency that has a high interest rate against one that has a low interest rate.
7. What is a pip?
Percentage in point is more commonly known as pip and represents the smallest increment of a currency pair. In addition, currency pairs are quoted to the fourth decimal point. This unit of 0.0001 equals a pip.