What is currency trading?
In currency trading the term forex is very common, also known as foreign exchange. It is a global decentralised or over-the-counter (OTC) market for the trading of currencies. The currency market is the largest market in the world, around 5 trillion dollars is exchanged everyday between buyers and sellers. In comparison to commodities or stocks there is no central marketplace for currency trading as it operates 24 hours a day, 5 days a week from Monday to Friday. These are some of the most flexible trading hours in the financial market.
The currency market is heavily influenced by economic factors, including interest rates, employment figures, inflation and the gross domestic product (GDP), these factors affect forex prices. The enormous amount of volume of currency traded upon macroeconomic events occurs at a very fast pace leading it to be the largest and most volatile financial market.
In the currency market, the financial instruments are always traded in pairs, such as AUD/USD. The currency pairing informs us several things:
- *The first currency mentioned in the pairing (AUD) is the base currency and the second mentioned currency is the quoted or counter currency (USD)
- *When you trade a currency pairing and for instance want to go long (buying) on the pair, in the example of the AUD/USD you will be buying the AUD but selling the USD. Vice-versa applies if you are going short (selling).
Margins & Leverage
The key aspect behind trading on the Forex market is built around the basis of margin trading or trading with leverage. The Forex market offers some of the highest leverage (and therefore low margin rates), making it a very attractive Investment for traders.
Leverage involves borrowing a certain amount of money to invest into the market by scaling your equity.
This is a double-edged sword you can have higher gains/losses by increasing your exposure in the market, generally equating to a higher level of risk.
In this case leverage is often borrowed from the broker, so you can open larger positions.
|First Index||Indices, Forex & other trading instruments|
|Leverage Maximum||Up to 500:1 Including 100:1, 200:1, 300:1, 400:1|
Margin can be thought as the deposit required to open and maintain positions. This is not a fee or a transaction cost, but a portion of your account equity set aside and allocated as a margin deposit. Margin is normally expressed as a percentage of position size (e.g. 2% or 5%).
Also, being considered as taking a short-term loan from the broker.