It is given that Forex trading is the largest financial market but there are still a bunch of retail traders who are yet to get themselves familiar with the industry. Not until it was popularized through internet trading, the said industry was mainly for huge financial institutions like hedge funds, multinational corporations, and banks. But time has changed so much and retail traders are now taking part in the trading activity. Each of these traders is hungry for information as they are convinced that it is the only way to profit in the market.
How can you compare the Forex market to other markets?
Unlike options, futures, and stocks, currency trading isn’t taking place at a regulated exchange nor is it controlled by a central governing body. There are also no arbitration panels or clearinghouses and stuff. All those who join the market are tied to each other with a credit agreement.
Understanding Forex Commission
Retail traders who are finding their luck in the market need to use a Forex broker that will help them with their transactions. The broker will then take the order into the exchange who will attempt to execute the order according to the instruction of the customer. After the transaction, the broker will receive a commission from the customer after he buys or sells any instrument.
Percentage in Point (PIP) refers to the smallest increment of trade available in the Forex market. There are four decimal points quoted in the FX market. For instance, the bar of soap available in the drugstore is priced at $1.20, when you are in the Forex market, you will see the price as 1.2000. The changes made in the fourth decimal is called 1 pip which is equal to 1/100 of 1%.
What Are You Trading in the Forex Market?
The main goal of every Forex trader is to profit from the price changes in the currency market. For those with dollar-denominated accounts, be it the profit or losses, everything is calculated in dollars and these are all recorded into the trader’s account. In the Forex market, you exchange one currency for another. This activity is very important especially to multinational corporations that need to continuously trade currencies. Huge financial institutions utilize the currency market in hedging positions as well as taking directional bets on the currency pairs according to technical or fundamental analysis. Individual traders, also known as retail traders can also speculate the market movements.
Currencies are always traded in pairs. When a trader sells one currency, he also buys the other pair. For instance, you are buying a computer from an electronics store worth $1,000. Consider that $1,000 as the short and the computer as long. The store will belong to $1,000 while it will be short of one computer under its inventory. This same principle applies in Forex trading, except that it has no physical exchange that’s taking place. Although the transaction all happens on the computer, the transaction is always considered real and legit.