Even though the foreign exchange market is the grandest financial market in the world, it is quite a new and unusual terrain to many retail traders. Until the advent and popularization of online trading a few years ago, online forex trading was chiefly the realm of huge financial firms, multinational corporations, and a few secretive hedge funds.
Things had changed a lot, and many novice investors are eager to get information on this enthralling market. Thus, whether or not you are a novice trader or someone who looks for a refresher course on currency trading basics, you can get relevant and useful facts online to learn currency trading efficiently.
Foreign Exchange Market Distinction
Unlike the futures or options trading or stock trading, currency futures trading is not transacted on a regulated exchange platform. It is not administered by any central regulating body, there are no clearing procedures to warrant the trades, and an arbitration panel is not available to pass judgment about issues or disputes. The members trading currencies with one another only base their transactions and dealings on credit agreements. Fundamentally, this business that is considered as the most liquid and largest financial market in the world relies on nothing more than internet networks and word of honor.
At first, investors who would like to learn forex online currency trading are befuddled by the process since they were used to controlled and well-structured exchanges like the CME or NYSE. However, the currency trading market’s arrangement functions remarkably well when put into practice. This is for the reason that FX participants must both contend and collaborate with one another. Self regulation grants very efficient control over the foreign exchange market. In addition, highly regarded U.S. FX dealers became National Futures Association members, which let them abide to binding arbitration in the occurrence of any dispute. Accordingly, it is essential that any retail client who would like to trade currencies must only work with an NFA member company.
The foreign exchange market is very different from other trading markets in some key ways. This is one major factor to keep in mind when learning currency trading. A commodity trading advisor can help in monitoring and making the right trades based on predetermined strategies, even if there is no firm rule in forex. Because there are no restrictions on the volume of the position, in theory, you are allowed to sell $100 million worth of currency if you have the funds to do so.
Investors who trade futures or options, or stocks normally get the services of a broker who will act as an agent in every transaction that they wish to make. The broker will take the order to an exchange platform and will try to execute it as per the instructions of the customer. For this service a commission fee is recompensed to the broker when the customer purchases or sells the tradable instruments.
The foreign exchange market does not come with commission fees. Dissimilar from exchange-based markets, forex is a “principals-only” type of market. The forex companies are called dealers, not brokers. This is a crucial characteristic that all investors must be aware of. Dealers don’t charge commissions, instead, they profit via the bid-ask spread.
In FX, you will not be allowed to purchase on the bid or sell at the offer, which takes place in exchange-based markets. Conversely, when the price already clears the cost of the spread, there are also no commissions and additional fees. Each penny gained is surefire profit to you. However, the reality that traders should at all times prevail over the bid/ask spread makes scalping much more complicated.
Understanding a Pip
Pip represents a “percentage in point” and is considered as the smallest increment of trade in the foreign exchange market. Remember that the prices in the FX market are being quoted up to the fourth decimal point.
What Do You Buy or Sell in FX?
Nothing! Note that the FX market is wholly a speculative market. There is no and will never be physical exchange of currencies to take place. All trades occur merely as computer entries and are networked depending on the market price. If you have a dollar-denominated account, all of your profits and financial losses are computed in dollars and documented on your trader account.
If you wish to become proficient in this trading platform, make use of online resources giving currency trading tips and advices. The great thing is that you can learn currency trading for free!