Forex trading refers to the selling of one currency with the intent of buying another currency. Are you a new trader in the forex market looking for more information on what entails forex trading? Read on to find out more aspects about forex trading.
The currencies being traded are quoted in pairs to represent the currency being sold and the currency being bought. The naming of the currencies is done in a three letter word where the first two letters represent the region where the currency is used and the last letter represents the currency itself. USD/GBP for example is a pair of currencies involving the US dollar and the Great Britain pound. In this instance you are buying US dollar and selling the pound sterling.
Base and Quote Currency
The currencies are put in a pair and the currency on the left represent the base currency while the one on the right represent the quote currency. The price of the pair of currencies is valued in terms of the quote currency. If in the forex trading Australia GB/USD is valued at 1.35361 then one pound sterling is worth 1.35361 dollars.
If there is a boom in the market and the pound rises against the US dollar then this implies that the pair will increase and the pound will be worth much more than the dollar. This scenario represents the best niche for you to buy the pair when the base currency is gaining strength against the quote currency.
The value of the currencies in the forex keeps on changing from time to time due to various factors. This dynamic nature of the market brings up a new breed of traders known as Carry traders. They are known of looking opportunities to exploit where they can anticipate increase in the currency value. Learning how the market works is important so as to successfully identify the direction of the interest rates. Pairing a strong currency against a weak one is not the key to the success of this strategy but monitoring of the direction of the spread.
Spread refers to the difference that occurs between the buy and sell prices of a pair of currencies that is quoted when one opens a trading account. You can go long by taking the buying price which is usually set at a level above the market price or go short by taking up the selling price which is lower than the market price.
Yield and return
When you take part in a spot exchange in the forex market, you are buying and selling a pair of underlying currencies. In the process of this exchange you are using the returns from the sale transaction to buy the other currency. The central bank sets an interest rate that is attached to each currency and when you sell the currency you have an obligation to pay the interest rate for the currency you are selling. On the other hand you stand to gain from the interest rate attached to the currency that you are buying.
Most forex brokers offer their client standard lot sizes of 100000 currency units but you can also trade at times with mini lots worth 10000 currency units. Since many traders do not have the financial muscle for of 100000 currency units, they opt for leveraged trading.
What is leveraged trading?
Leverage allows traders to get exposed to huge amounts of currency without necessarily having to put in a lot of capital. It allows you to open a position without paying the full value of the trade upfront. Forex trading Australia offers an amazing leverage of 100;1 which is interpreted as the ability to control assets worth $10,000 with $100 capital. You should however be careful as leverage works like a double-edged sword where you will reap highly if you are correct and also loss big if you are on the wrong side.