FAQ's of Forex



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FAQ's of Forex

04.10.2007 20:04 Thursday

Foreign exchange market is commonly know as Forex and is one of the largest markets there is. The Forex market has gained popularity with the advent of the Internet. Up until then it this traders in the Forex market was restricted to large financial institutions, MNC’s and other secretive hedge funds. Many, even though they may not be new to Forex trading, have a few questions that they need answered. These are generally common to people across the nation. People many a times wonder how the Forex market is different from that of the other markets. The difference is in the fact that the Forex market comes without any regulations. This may scare a few of you who are used to the strict and regulated exchange structures like the NYSE or CME. There is no central body of governance, which looks into the functions of trade and panels in charge of disputes. It is a highly competitive market with equal co-operation from the traders.

Currency trading takes place with credit agreements. In the United States, the National Futures Association (NFA) has any of the reputable retail Forex traders as members. As members of this association, they agree to the terms and conditions laid down by them. In this way, they give consent to arbitration in the event any dispute takes place. For this very reason it can be said that it is best to trade through those firms or brokers who are members of the NFA. Furthermore, there are no uptick rules and even no insider trading in the Forex market. Although this market seems to be the wildest it goes to say that it is also the most liquid and fluid. Using the currency market you can trade 24 hours a day and it generally does not have any price gaps. Apart from being the biggest, it is also one of the most accessible markets in the world.

Normally the brokers and other agents charge a commission to earn their income. In currency trading there is no commission that is paid to anybody. This is because in the Forex market there are no brokers there are only dealers present. The distinction between the two lies in the fact that the dealer becomes counterpart to the investment made by the trader. In this way, the dealer earns his money through the bid-ask spread. Unlike the exchange market, the investor cannot buy or sell the offer at a price. Nevertheless, once the price clears the cost of the spread then it results in pure profit to the investor. Pip is the ‘percentage in point’ and is known to be the smallest rise in the Forex trade.

In Forex trading the prices go up to the fourth decimal point. For example if the price of a toothpaste is $ 1.30 then in the Forex market this would be read as $ 1.3000. Now the change that occurs in this fourth decimal point is known as Pip. Another question that commonly arises is the product in the Foreign exchange market. A simple answer to this is nothing. You actually buy nothing, as this is a speculative market. There is no physical exchange of anything including the currencies. All the traders’ activities are recorded on the computer in dollars and this is entered as per the prevalent market prices.

The currencies that are traded generally in the Forex market are the seven liquid pairs in the world and they are: The Euro and the Dollar The Dollar and the Japanese yen The British pound and the Dollar and the Dollar and the Swiss franc Moreover, the three commodity pairs that are commonly used are: The Australian dollar and the Dollar The dollar and the Canadian dollar and the New Zealand dollar and the Dollar A few retail dealers provide you the opportunity to trade in different currencies the likes of the Thai baht or the Czech koruna. Another popular trade in the currency market is carry. This trade is carried out by the large hedge funds as well as by small retail speculators.

This trade is carried out keeping in mind the fact that the currencies the world over has an interest rate and these rates are declared by the central bank of the respective states. In the carry trade the trader with a high interest rate currency finances the currency of another country with a low interest rate.

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