International Foreign exchange is unfamiliar terrain for all retail traders, though foreign exchange market is the biggest expanded financial market in the world. Till the time, internet trading became popular, Forex was earlier the only path of large and big financial institutions, companies hedging funds, and multinational companies. Now, time has changed. Nowadays, individual and private investors are hungry for taking all the data and information about forex. Whether you need a fresher course based on currency trading or you are a forex novice, here, we have answers for some of the most asked questions that are concerning with the foreign exchange market.
Currency trading does not take place on the basis of regulated exchange, like futures, stocks, and options. The central governing body of any country does not control the currency trading. To guarantee the currency trades, there are no clearinghouses, and there is no arbitration panel for these problems. All the members trade with each other on the basis of credit agreements. Businesses depend on nothing more than the metaphorical handshake in the largest and most liquid market in the world.
Investors in forex market usually use a broker. A broker is an agent for the transactions. He takes an order from investors to an exchange and attempts to execute. Investors pay a commission to brokers when the investors buy or sell their tradable instruments to provide Business Financing services.
Pip is the abbreviation for percentage in point, and it is the smallest increment of trade in the forex market. In the foreign exchange market, the prices are quoted up to the fourth decimal point. For example, is a soap bar was priced at $1.20 in the drugstore, the same soap bar would be priced at 1.2000 in the foreign exchange market. This change in the fourth decimal point is called one pip, which is equal to 1/10th of 1%. There is an exception regarding this rule for the Japanese yen among all the major currencies in the world. 1$= 100 Japanese yen, so in the pair of these both currencies, the quotation is only taken up to two decimal points.
If we give a short answer to this question, then we would say nothing is really traded. The forex market is a speculative market. There is no physical exchange of currencies between the dealers or traders. All the trades are done on the computer and are done depending upon the market price. All profits and losses in the transactions are calculated in dollars for all dollar-denominated accounts and in the same way, are recorded in traders’ account.
Some retail dealers of the world trade with the foreign currencies of the world like the Thai baht or the Czech Koruna. Most of the retail dealers’ trade forex with these seven most liquid pairs of currencies of the world. The four major currencies those trade in forex.
•EUR/ USD (euro/ dollar)
•USD/ JPY (Dollar/ Japanese yen)
•GBP/ USD (British pound/ dollar)
•USD/ CHF (dollar/ Swiss franc)
Three commodity pairs of currencies traded in forex are;
•AUD/ USD (Australian dollar/ dollar)
•USD/ CAD (dollar/ Canadian dollar)
•NZD/ USD (New Zealand dollar/ dollar)
All these currency pairs with their various combinations account for above 95% of all speculative trading in Foreign Currency Trading Services. The foreign exchange market is concentrated even more than the stock exchange market. Only 18 pairs and the crosses are actively traded with the given small number of trading instruments.
Carry trade is the most famous trade in the currency exchange services market, which is practiced by both the smallest retail speculators and the significant hedge funds. This trade is based on the simple fact that all currencies in the world have an associated interest. The central banks of all these countries set up these short term interest rates. For example, the Bank of Japan in Japan, the Federal Reserve in the US, and the Bank of England in the UK.
The concept of carrying trade is very simple. The carry traders go along with their currency with a high rate of interest and finances which purchase with a currency having a low rate of interest. For example, the best currency pairings were of the Newzealand dollar and Japanese Yen cross in the year 2005.
Forex market does not have a central exchange like a stock market. There is no central exchange for the price of a currency pair, but the currency pair can arrive through banks, investment companies, and hedge funds. The foreign exchange market is referred to as the inter-bank market.
If we technical speak about it, we do not buy or sell anything in the forex market like in the stock market. Actually, all transactions take place on computer on market prices. Physical transactions do not take place in the forex market. All the transactions in the forex market are speculative.