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The World of Online Forex Trading

Online Forex trading

Online Forex trading

Online Forex trading is the exchange of one currency for another simultaneously, using a trading platform.  Online trading platforms allow traders to speculate on the exchange rate between two different currencies.  With online trading software, you can carry out a Forex trade in an attempt to make a profit directly from your personal computer.  The foreign exchange market has more daily volume from traders and purchasers than all other financial markets in the world.  In addition, the currency market is available 24 hours a day and trades 5 days out of the week.  The reported volume of trades in the currency market is estimated to be $4.3 trillion globally.  This enormous volume makes online Forex trading one of the most exciting investment opportunities available.  Before online currency trading, central, investment and commercial banks were the primary participants in the Forex market.  However, now that technology has allowed individuals to access this market, there are a fairly large number of individual currency traders. 

Currency Pair Quotes

Currencies are always quoted in a pair like EUR/USD or USD/JPY.  Currency that is listed first is referred to as the base currency and the second listed currency is the quoted or counter currency. The base currency is currency on which the trade is based upon.  For instance, if you purchase USD/JPY you have purchased JPY while you traded USD.  You would open this trade with the hopes that the USD would appreciate compared to JPY.

Purchasing and Trading Currency Pairs

First, you will need to decide whether you wish to trade or purchase a particular currency pair.  If you would like to enter a short order (an order that generates a profit if the exchange rate decreases) then you simply need to select ‘Sell’.  On the other hand, you can open a buy by selecting ‘Buy’ if you believe the exchange rate will increase.  There are always two prices for every currency pair and the difference between the two prices is known as the spread.  As an example, let’s say the spread is 3 pips.  If you have a 10,000 unit position on EUR/USD then a pip is worth $1. 

Margin and Leverage

Margin allows you to hold a position that is much greater than the value of your Forex account.  Most online trading platforms allow you to customize your margin level with a limit of 1% to 2%.  However, you should not leverage any more than 10 times the value of your account.  Leverage does increase your potential profit but at the same time it increases your potential losses.  Even when the market is calm you can generate large losses and profits with leverage.  In most cases, if the leverage is larger than the allowable amount then the online trading software will close all of your open positions. This prevents your account from incurring a negative balance even in a fast moving and volatile market.  

Rollover

In the spot foreign exchange market trades have to be completed in 2 business days.  For instance, if an investor trades 100,000 EUR on Monday then the investor must provide 100,000 EUR on Wednesday unless rollover is used.  Many online trading platforms offer rollover which allows you to change the time of the trade settlement until 5:00pmNew Yorktime the next day.  When you use rollover, you are exchanging your position for another position which will be settled the next day.  The positions are generally not valued at the same price and the difference can vary significantly depending on the interest rate, currency pair, differential between currencies and the daily fluctuations of market prices.


 

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 TradingCenter.org, October, 7th 2013

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