Currency Trading (Forex)

Forex refers to trading in foreign exchange markets, i.e. trading with currency. The name Forex originates from the English term FOReign Exchange, which means: currency or coins. With daily sales of more than 5 trillion US dollars, it is the largest liquid financial market in the world. You can also take advantage of the changes in value in the international foreign exchange market.

Make the most of the advantages offered by Varengold FX Bank:

  • Excellent profit opportunities 
  • Leverage effect of 1:200 
  • No intervention from agents (execution of orders through STP) 
  • Possibility of protecting earnings and losses 
  • Low spreads, for example 1 Pip EUR/USD 
  • No costs or commission

The trading of currency is based on the simultaneous nature of the purchase and sale of different currencies on the interbank market. These transactions generate the exchange rates, therefore the value of any currency can be expressed in terms of any other currency. Currencies are always traded in pairs. Therefore, it is not possible to buy or sell just dollars. Euros are bought or sold for dollars, dollars for yen, etc.

Currency trading uses the so-called leverage effects. A leverage of 1:200, for example, means that the trade becomes effective on the amount of capital invested multiplied by 200. Thus the opportunities of making a profit increase substantially. The decisive advantage of trading currency is in the limitation of losses (stop-loss-orders), whilst the opportunities for making profits are unlimited.

Example of Currency Trading

When trading with a batch (100,000 units of currency, for example USD) the value of the Pip (smallest possible change in the value of a currency) is 10 USD. You believe that the Euro will increase against the USD, you buy the Euro for 1.1605 and sell it for 1.1625.Your profit: 20 Pips (difference between 1.1625 and 1.1605). 20 * 10 USD = 200 USD. Which is a profit of 40% on an investment of 500 USD.The usual changes are normally about 100 Pips per day.

Bear in mind that in currency trading the possible losses are the same amount.


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More about the World of Currencies

World of currency trading

Currency Pairs

This is the most critical instrument for trading in foreign exchange markets, the most traded market in the world. Currency pairs can be described as the rate of currency exchange relative to another currency. Some of the most traded pairs of currencies in the forex market are; GBP/USD – Pound, EUR/USD – Euro, USD/JPY – Yen, USD/CAD – Canadian Dollar, USD/CHF – Swiss Franc and the AUD/USD – Aussie. It is estimated that these currency pairs constitute up to 85% of the entire volume in the global foreign exchange market.

Bid/Ask Spread

Most currencies are quoted with a bid price and an ask price. The bid price is usually quoted lower than the ask price because the bid price is the price at which the broker is willing to buy; it is therefore the price that the trader receives if he wishes to sell. On the other hand, the ask price is the price at which the broker is willing to sell; this price should entice the trader take the marked-price and buy. For example EUR/USD 1.2546/49, or 1.2546/9, means that the bid price is set at 1.2546 while the corresponding ask price is set to 1.2549.

Pip

This represents the smallest incremental move that is made possible through currency trading on the global futures exchanges. Many brokers quote currency pairs to one extra decimal place so that the price can actually move in fractions of a pip. The term stands for price interest point. For example a change in EUR/USD currency pairing from 1.2747 to 1.2762 is a move of 15 pips.

Margin Calls

If the balance available in the trading account falls short of the maintenance margin, which is the required capital for keeping a position open, a margin call will occur. When a margin call arises, the broker will either buy back in the event where a short position has been taken by the trader or sell-off the entire trades if the trader has bought. If this occurs, the trader is left with only the maintenance margin left in his account, which is a stable low risk holding position. Margin calls can also occur in situations where there is an occurrence of improper money management.

Margin Leverage

In trading many financial markets, it is often a requirement to pay the full value of the trade before it is executed by the broker. However, in forex trading all that is required for you to have available is a deposit for the margin and the remaining amount is covered by the broker.

Forex Exchange Market Dynamics

To demonstrate the market mechanics of a foreign exchange market trade, a situation may arise where a trader believes that the British Pound is likely to rise in value. The trader then decides to take action and put to risk 30 pips, thereafter in an event that sees the market move in the opposite direction to the trader's position, the trader will end up losing 30 pips. On the other hand, if the trade moves according to the trader's beliefs, the trader will gain 60 pips. Recent developments in technology have seen a rise in accessibility of the forex market. This factor has resulted in the growth in trading opportunities such as on-line trading platforms. Another huge benefit today concerning currency trading is that players do not have to be big money hotshots or money managers to begin trading. What this means is that any willing investor can enter and trade in this huge market.

Currency Trading Precautions

Traders and investors willing to invest in the forex market should understand that trading in foreign exchange on the basis of margin calls carries with it a high level of risk. This essentially means that the forex trading market is not meant for every interested investor. Potential forex currency traders should carefully consider their investment options, risk appetite and level of trading experience before taking up currency trading. It is always critical before you decide to indulge in currency trading to have a good grasp of the foreign exchange trading basics, including the basic concepts and more complex strategies. Some of the pertinent issues that you need to focus on prior to opening a live currency trading account include; risk management and trading psychology as well as any dynamics of the financial markets. Forex trading may lead you to lose part or your entire investment portfolio; this means that traders should be careful not to invest money they believe they cannot afford to risk. In case you are in doubt about any trading move or if forex trading is suitable for you, it is recommended to seek advice from a qualified independent financial advisor or an investment authority.

Find out more about the advantages of online trading in the Forex market >>