Traders of all experience levels can gain exposure to foreign exchange markets with the aid of a reputable forex broker. In the foreign exchange markets, traders can buy or sell currencies in real-time and profit from the volatility that is created by new economic developments as they emerge.The foreign exchange market is active 24 hours per day and the currency financial sector typically encounters trading volumes that surpass $4 trillion (far larger than any global bond or stock market).
Forex traders are able to establish bullish or bearish positions using individual currency pairs. Each currency pair is composed of two different world currencies (for example, the Australian dollar, British pound, or Swiss franc). These currency pairs calculate the relevant exchange rates that exist between each world currency. Bullish positions are often referred to as “long” positions while bearish positions are often referred to as “short” positions. Long trades make profits when market exchange rates travel upward. In contrast, short trades make money when the market exchange rate travels downward. Unlike traders in the stock markets, there is no need to borrow funds in order to establish short positions. However, in some cases, forex traders will be required to pay rollover fees.
When a forex brokerage account is opened, funds are held in a secure account that can change in value as trends in the currency market unfold. Profits and losses that are accumulated each day will be included with any relevant fees and commissions that are charged by individual forex brokers. The best forex brokers will provide access to educational materials and expert trading advice so that traders can make the most informed trading decisions.
Choosing a Foreign Exchange Broker
Making the selection to choose a foreign exchange broker will generally require traders to make a few key assessments that help to define profitability goals and to determine which trading style best suits each individual investor. Individual forex brokers might feature certain characteristics that might include both advantages and disadvantages, depending on the needs and goals of each trader. For these reasons, forex traders of all experience levels must take the time to research all of the available options in the market and to choose the forex broker that works best for specific trading styles.
Some important factors to consider include software security, financial regulation, transaction fees, and access to customer service outlets. Foreign exchange brokers might also show differences in terms of the transaction fees or trading platforms that are made available to individual traders. Before you make the decision to trade with a specific broker, remember to make a list of which financial factors are most important and work in accordance with your unique approach to trading in the market.
Currency Pairs in Forex Markets
Before getting started in trading a forex brokerage account, it’s essential for traders to understand the basics of forex trading and this includes a firm understanding of currency pairs. Essentially, currency pairs can show the relative value of two alternate global currencies. Every currency pair consists of a quote currency and a base currency.
For example, the AUD/USD currency pair uses the Australian dollar (AUD) as the base currency and the U.S. dollar (USD) as the quote currency. A brokerage quote in the AUD/USD currency pair will be converted to a ratio matching the value of the exchange rate that exists between these two currencies. Each currency price might display values with decimals and these values are eventually used to determine the profit or loss levels in any forex trade.
Historically, market participants in countries from around the world might establish long positions or short positions using the local currency as the quote currency. However, this trend began to change one the massive popularity of the foreign exchange market skyrocketed in the early 2000s. These days, currency traders from around the globe tend to focus on the foreign exchange pairs that are associated with the highest volumes. Of course, this can be helpful in lowering trading costs but traders are usually not restricted from selecting lower volume trading pairs if a certain investment strategy calls for this type of approach.
Popular trading strategies will often find currency pairs with a minimal spread between the Bid and Ask prices, as these help to determine the total trading costs that are implemented in each transaction. Forex traders are often able to capture substantial profits using high-liquidity trading pairs like the AUD/USD, EUR/GBP, or the NZD/JPY. In long positions, profits can be made when valuations grow to become more expensive. In short positions, profits can be made when valuations fall to become less expensive.
Profits and Pips
Forex pairs essentially as the expression of two ratios, with the upper Ask price and the cheaper bid price. In any forex pair, the final decimal numerals are the focus on active traders (for example, those of us that are using day trading strategies). The final decimal places are often displayed in a larger font size because many forex trades are based on relatively small price moves.
Profits are calculated using the number of percentage points (or pips) which are either captured or lost while the position is active. Each forex position begins with minimal losses because currencies are purchased at Ask prices and sold at Bid prices. Of course, the price distance that exists between the Bid price and the Ask price will be referred to as the spread. For most forex brokers, this procedure is normal because most of the market’s foreign exchange brokerages do not charge fees or commissions in association with each trade execution. In most cases, the major currency pairs are associated with smaller Bid/Ask spreads when compared to what is typically available for the more minor pairs. However, many forex brokers offer fixed price spreads, which means that the trading fees do not change based on market conditions. Of course, there are many different types of forex brokers that are currently available in the market and it is always a good idea to compare forex brokers before establishing an account.