When you start looking into trading forex rates you may have a number of questions which need to be answered. While every trader will have questions that relate to their use of the forex rates market there are certain questions which are considered common. There are 5 such questions that you need to know about and understand the answers to. When you know the answers to these questions you will have a better understanding of the market and how you can trade on it. With the answers to these questions you can also consider whether or not the forex rates market is the best option for you.
How Does the Forex Rates Market Compare to Other Markets?
The difference between the forex market and other investment markets, such as the stock exchange, are numerous. Firstly, there is no central governing body or clearing houses. This is a disadvantage as there is no authority where one can settle disputes of questionable trades. However, it is also an advantage as it encourages the markets fluidity encouraging constant trading.
Another advantage involves the sizes of trades. On certain markets there are set limits, however the forex market does not have these restrictions. There are also no uptake rules when trading stocks, nor are there any trading hours as the forex market operates online and in different time zones allowing for 24-hour operation.
What Do You Trade With Forex?
Truthfully, forex traders aren’t trading anything – at least, not anything tangible. The forex market is based on speculation, similar to the stock exchange, and no physical items ever pass between the traders. All trades are virtual and the computer data is recorded in the traders brokerage account for future reference.
Which Currencies Should You Trade?
Traders are permitted to trade any currency, but it should be noted that there are some currencies which are more ‘popular’ than others. Currencies are traded in pairs with a trade consisting of 7 currency pairs – 4 major and 3 commodity. Major pairs are often US Dollar/Yen, US Dollar/Euro, US Dollar/Swiss Franc and GBP/US Dollar. The commodity pairs are often US Dollar/Canadian Dollar, AUS Dollar/US Dollar and NZ Dollar/US Dollar.
What is a Pip?
Just as with all occupations, there is some jargon which must be learned when working in the forex industry. One of the most important terms is PIP, and this stands for ‘percentage in point’. Percentage in point refers to the smallest trade increment available in the market. As all forex prices are noted to 4 decimal points, any change in the 4th decimal is known as the PIP. This is most seen with most currencies, except the Yen as it uses only 2 decimal points.
How do Brokers Make Their Money?
Unlike the stock exchange, the foreign currency exchange does not have a commission incentive. This is due to the elimination of the middle man in the forex market, and thus there is no need for a commission base. Do not fear; even though you are not taking a commission the trades can certainly make you money.