FX is the acronym for foreign exchange. Most of us would be familiar with money changers. When we are preparing for our overseas trip, we go to the money changer to exchange some USD into a foreign currency (e.g. EUR).
When we do this, we are actually making a FX trade with the money changer. We would give the money changer some USD in return for €1, depending on the money changer’s exchange rate.
Here are some forex trading questions that people often ask about the forex market.
What Is The FX Market?
Instead of trading with the money changer, you can trade FX in the open market. The FX market is a decentralized global market where all the world’s currencies trade. It is by far the largest, most traded and most liquid market in the world. The FX market transacts US$5.1T per day in 2016.
What Are The Operating Hours Of The FX Market?
The FX market allows you to trade 24 hours a day for 5 full days a week. FX trading can start anytime from New Zealand markets open on Mondays to the time when the US market closes on Fridays.
What Is FX Currency Pair?
FX currencies are usually quoted in pairs known as currency pairs. A currency pair is the quotation and pricing structure of the currencies traded in the forex market. Since currency itself is a function of value, it needs to be compared to another currency to determine its value.
For example, €1 is equivalent to US$1.18. Thus, if you want to exchange your USD into EUR, you are technically buying a EUR/USD pair. The currency stated on the left is the base currency and the currency on the right is the quote currency.
Are There Commission Involved?
Unlike stocks, there are no commission involved in FX trading. Instead, you pay a small fee known as spread to your broker. The spread is the price difference between buying and selling price of willing buyers and sellers respectively.
What Is FX Trading And How Do You Make Money From That?
The aim of FX trading is simple. You want to buy a currency pair at a low price and sell it at a higher price. You can also short sell currency pairs at a high price and then buy them back at a lower price. In both scenarios, you get to make some profit from the difference.
In FX trading, you need to formulate a view on how the value of a currency (e.g. EUR) will fluctuate in comparison to another currency (e.g. USD). You then take a position in the currency pair (EUR/USD) based on your view and then exit the position. If you think that EUR will strengthen and increase in value versus USD, you will buy EUR/USD and hold it. Once the value of EUR/USD appreciates, you sell your EUR/USD holdings for a higher price.
Currency Pair: EUR/USD
Buying Price: 1.5000
Selling Price: 1.5200
How Do You Make A Lot Of Money From FX Trading?
In FX trading, you have the option to take on leverage to increase your profit. Leverage can range anywhere from 2:1 to 50:1. For a leverage of 50:1, it means that for every $100 you have, you can invest in $5,000 worth of FX.
Your profit is thus maximised by the leverage while keeping your possible losses to $100.