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FOREX TRADING : Easy Means to MAKE MONEY
INTRODUCTION
This short write-up dwells on the several important points of forex trading.
First, you would learn about this specialized form of trading; secondly, it would point out the differences between the ‘Forex trading‘ and ‘Stock trading’; third, you would also learn about the advantages of trading in Forex online.
Further, it will equip you to tap on the opportunities by identifying the risks of the world’s most liquid market. In other words, you would know which is the best time to trade (the ‘bull’ phase) and when not to (the ‘bear’ phase).
A glossary of the terms used in forex (currency) trading is also given at the end of the write-up.
FOREX: WHAT IS IT?
‘Forex’ or ‘FX’ or ‘Foreign exchange’, are terms referring to the trading process of the world’s different currencies.
FOREX MARKET
This is the world’s largest market. Its daily trade volume crosses the USD 1.5 trillion-mark — 100 times more than that of the New York Stock Exchange (NYSE).
SPECULATION & FOREX TRADING
Speculation forms the major mode of trading in the forex market. As much as 99 per cent of forex trading is speculative by nature. Approximately one per cent of its market activity pertains to the fundamental currency conversion needs of various governments and companies.
DIFFERENCE BETWEEN THE FOREX MARKET & THE STOCK MARKET
There is a major difference between the forex market and the stock market.
The stock market trading is monitored by a central or an apex exchange.
However, forex trading is directly conducted between the two parties concerned. It is carried out either via the telephone or through electronic networks across the globe.
HOW IS FOREX TRADING DONE?
Forex trading is done on the “interbank” – a worldwide distribution of such trading points. It is a 24-hour ‘Over the counter’ (OTC) market. It refers to the process of simultaneous selling of one currency and buying of another.
The primary centres for forex trading are New York, London, Frankfurt, Tokyo, and Sydney.
THE SPOT MARKET
The ‘Spot market’ conducts the largest volume in the forex sector. It is the most important forex market also because the tradings are settled “on the spot” or immediately. If done through the banks, these activities would take up two normal days.
FOREX CURRENCY COMBINATION BASKET
The forex currency combination is termed a ‘cross’. The combination basket is made up of the Japanese Yen/GB Pound/ US Dollar/Euro. The most commonly traded currencies are the ‘Majors’, viz., USDJPY , GBPUSD, EURUSD and USDCHF.
TWO TYPES OF TRADING
There are two ways in which forex trading takes place. They are called ‘Trading on Margin’ and ‘Forward Outrights’.
TRADING ON MARGIN
When you ‘Trade on margin’ you sell and buy assets that reflect more the value of the assets rather than the capital you possess in your account. It is worth remembering that you can conduct forex trading with margin deposits which are quite small.
Advantages
Trading on margin gives you the advantage of tapping the fluctuating exchange currency rate. Put in numbers, you can trade USD 1,000,00 with just $10,000 in your account. This is called a margin of 1.0%. In other words, a margin of 1% is equal to 100:1 gearing (or ‘leverage’). This is because 1% of 1,000,000 is USD 10,000.
Such a gearing can bring in huge profits in a short time.
Disadvantage
On the other hand, one can also get totally wiped out as the huge volatility can lead to great risk and heavy loss.
Maximising your leverage
Therefore, one should never maximize one’s leveraging. The risks can be very high. For more information on the trading conditions of any Bank, go to the Account Summary on your Trader and open the section entitled ‘Trading Conditions’ located on the top right-hand corner of the Account Summary.
FORWARD OUTRIGHTS
In ‘Forward outrights’ trading, there is a differential of interest rate. Here also the trade is carried out immediately, but the settlement leaves out a small interest rate calculation. That means the value date settlement leaves something more for future transaction.
This interest rate is usually varies according to the cross one trades in. While you may have to bear a large interest rate differential on NOKJPY, that on the USDCHF is small.
The reason is simple, though: When one trades in NOKJPY, one gets in Norway roughly 7% interest annually in Norway while in Japan it will be almost 0%. Therefore, one has a positive differential when one borrows money in Japan, to buy NOK and also finance the trade. Obviously, such a positive differential must be added to one’s account. Hence we see that there can be either a positive or a negative differential. Hence, see where you put your finger. It may very well get burnt or you may have a yummy taste of the cake as you trade.
However, the aforementioned differential (of interest rate) won’t affect trade factors in the short term. But, ‘Forward outrights’ (interest rate differential) trading may adversely affect your trade consideration position if you hold on to the rate for long.
BASE CURRENCY VERSUS VARIABLE CURRENCY
In the forex sector, an investor trades in two currencies. This combination of dual currency also involves the two vital aspects to the forex trading, namely the long (bought) and the short (sold) side. For instance, you wish to buy Euro and sell US dollars or for that matter buy Japanese yen while selling Euro. This can be equally true for any other combination of currencies. In other words,
When you trade, you will always trade a combination of two currencies. For example, you will buy US dollars and sell Euro. Or buy Euro and sell Japanese yen, or any other combination of dozens of widely traded currencies. But there is always a long (bought) and a short (sold) side to a trade, which means that you are speculating on the prospect of one of the currencies strengthening in relation to the other.
The trade currency is normally, but not always, the currency with the highest value. When trading US dollars against German marks, the normal way to trade is buying or selling a fixed amount of US dollars, i.e. USD 1,000,000. When closing the position, the opposite trade is done, again USD 1,000,000. The profit or loss will be apparent in the change of the amount of Euro credited and debited for the two transactions. In other words, your profit or loss will be denominated in Euro, which is known as the price currency. As part of our service, Saxo Bank will automatically exchange your profits and losses into your base currency if you require this.
This way of trading is different to the futures markets, for example, where the marks, francs and yen are the fixed trade currency, resulting in a US dollar denominated profit or loss. You can, however, also choose to trade in this reciprocal manner in foreign exchange markets but it is not the norm.
