Saturday, 5 October 2013

An Introduction to Forex Trading

          Many of us are familiar with stock and commodity trading. But most of us are new to Forex. In Forex currencies are bought and sold.
          Forex is short form of Foreign Exchange. Forex is the biggest fiscal market in the world. The daily turnover of Forex is reputed to be more than  trillion dollars. Forex is the most liquid market in the world.

Advantages of Forex Market

          The advantages of Forex market are:
  1. High Leverage: - Forex trading offers very high leverage as compared to that offered in the stock or commodity market. The leverage offered in Forex market varies from broker to broker and in the range of 1:100 to 1:500. For example in 1:300 Forex account a deposit of $1000 will gives you the purchase power of $300,000 in the currency market.
  2. 24 Hours Trading Opportunity: - The Forex market is open from Sunday evening to Friday afternoon.  This gives an investor an opportunity to choose his trading hours. This is the most convenient part of Forex trading.
  3. Highest Liquidity: - Because of its huge size Forex market is extremely liquid. That means at any time you can sale any thing in the Forex market.  You don't have to weight for any thing.
  4. Free Demo Account: - Most of the online Forex firms offer free "Demo" accounts for trading practice.  This will provide an opportunity to maximize the skills with virtual money before opening a live trading account.  The trader can open both live and demo account at the same time and check the possibility and amount of profit at various percents of investment. After checking he can perform a live trade.
  5. Profit in both 'bull' and 'bear' market: - One of the most exciting advantages of  Forex market is the ability to generate in the bullish or bearish market.  Trader can long the position in bullish market and short the position in bearish market.
Major Currencies involved in Forex Trading

          The 6 most traded currencies in the Forex trading are:
  1. U.S. Dollar (USD): -The United States dollar is the official currency of the United States of America. The U.S. dollar is the most traded currency in the Forex Market and is also one of the world's reserve currencies.  U.S. dollar is considered as the most safe currency in the world.
  2. European Euro (EUR): - The euro is the official currency of the euro-zone: 17 of the 28 Member States of the European Union. The euro is the second largest reserve currency as well as the second most traded currency in the world after the U.S. dollar.
  3. Japanese Yen (JPY): - The Japanese Yen is the official currency of Japan. It is third most traded currency in the Forex market. It is also widely used as reserve currency after the U.S. dollar, the euro and the pound sterling. It is also known for its high liquidity.
  4. British Pound (GBP): - British Pound is official currency of the United Kingdom(UK). Pound Sterling is the third largest reserve and fourth most traded currency in the Forex market.
  5. Swiss Franc (CHEF): - The franc is the official currency of Switzerland. It is believed that Swiss franc is the most stable currency in the world.
  6. Australian Dollar (AUD): - The Australian dollar is the official currency of Australia.  Although in low percentage but still it is known as the major currency in the Forex market.
Currency Pair

          In the Forex market, currencies are always traded in pairs and known as currency pair. The eight major currency pairs that are mainly traded are EUR/USD, USD/JPY, GBP/USD, CHF/USD, EUR/JPY, EUR/GBP, GBP/JPY and GBP/CHF. Other than these major currency pairs there are some minor currency pairs like AUD/USD, USD/CAD andUSD/INR etc are also traded.
          In the currency pair, the first currency is referred as the base currency and the second currency is known as the quote or counter currency. The exchange rate indicates the worth of the base currency in terms of the counter currency.  For example a USD/EUR pair rate of 0.74 implies that the 0.74 Euros must be paid to obtain one U.S. dollar.

Types of  Orders

          There are two types of orders to be placed to buy or sell any currency pair.
  1. Market Order: - It is an order to buy or sell a currency pair at the current rates at which is dealing.
  2. Limit Order: - It is an order to buy or sell a currency pair when it reaches a specific price level. After you have placed entry order, you can place a stop loss order to safeguard yourself.

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