What is Forex Market?
Before going to trade into
Forex Market you must know what is forex or basic concept of
forex ? It is basically describes the buying and selling of
currency in foreign exchange market ,especially by traders and investors like
you and me. The familiar saying “Buy low and Sell high” It is
certainly applies to currency trading. In Forex Currency Market traders
purchases currencies like these Currency Pairs GBP/USD or EUR/USD or
USD/JPY that are undervalued and sells currencies that overvalued just
like Stock trading.
Foreign exchange (Forex or FX)
is the largest market in the world with daily trading volume over 4
$trillion, the 24 hour market has attracted investors around the globe with
it’s high liquidity, low transaction cost. The following articles aim
to introduce the key concepts in forex trading, the terminologies and
characteristics.
This article first introduce
the concept of “spread or difference of bid /ask”, which is most
important transaction cost in forex trading, and how the spread presented in
price quotes, what is the signification of this and what is tricked behind it.
Many retail customers trade with margin account you must have to know the
signification of margin, how to trade and how to choose the correct leverage
ratio.
Forex market is
over-the-counter(OTC) market, which mean there is no central exchange or
clearing house where order are matched. It is different level of access,
currencies are traded in different market makers.
1. The Interbank Market
Large commercial banks trade
with each other through the Electronic Brokerage System (EBS). Banks will make
their quotes available in this market only to those banks with which they
trade. This market is not directly accessible to retail traders.
2- Online Market Maker
Retail traders can access the
FX market through online market makers that trade primarily out of the US and
the UK. These market makers typically have a relationship with several banks on
EBS; the larger the trading volume of the market maker, the more relationships
it likely has.
3. Marker Hours
Forex
is a market that trades actively as long as there are banks open in one of the
major financial centers of the world. This is effectively from the beginning of
Monday morning in Tokyo until the afternoon of Friday in New York. In terms of
GMT, the trading week occurs from Sunday night until Friday night, or roughly 5
days, 24 hours per day.
4. Spread
there
are two prices for each currency pair, a “bid” (or sell) price and an “ask” (or
buy) price. The bid price is the rate at which traders can sell to the Market
Makers, while the ask price is the rate at which traders can buy from the
Market Makers.
5. Margin
It is the amount of equity that
must be maintained in a trading account to keep a position open. It acts as a
good faith deposit by the trader to ensure against trading losses. A margin
account allows customers to open positions with higher value than the amount of
funds they have deposited in their account.
Trading a margin account is
also described as trading on a leveraged basis. Most online forex firms offer
up to 200 times leverage on a mini contract account. The mini contract size is
usually 10,000 currency unit, 1/200th of 10,000 equals to 50 currency unit,
meaning only 0.5% margin is required for open positions. Compare to future
contracts, which require 10% margin for most contracts, and equities require
50% margin to the average investor and 10% margin to the professional equity
traders, foreign exchange market offers the highest leverage among the other
trading instruments.
The equity in excess of the
margin requirement in a trading account acts as a cushion for the trader. If
the trader loses on a position to the point that equity is below the minimum
margin requirement, meaning the cushion has completely worn out, then a margin
call will result. Generally, in online forex trading, the trader must deposit
more funds before the margin call or the position will be closed. Since no
calls are issued before the liquidation, the margin call is better known as
‘margin out’ in this case.
The account will be margined out, meaning all the
positions will be closed, once the equity falls below the margin requirement.
Thanks for reading this article
next will more attractive… stay tuned
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