If you’re studying or working in some field related to finance or business, there’s a high chance that you’ve heard of forex trading. What is forex? What is the meaning of forex trading? Why is everyone attracted to it. Let’s find out today.
Forex trading means the exchange of foreign currency pairs based on market price. Traders make profits from forex based on the price difference between currencies. Forex is short for foreign exchange. Sometimes it can be called fx. It is currently the largest market in the world in terms of trading volume.
In order to succeed in forex trading, traders need to have certain knowledge about terms, features of forex. Let us take you for a quick tour around the market.
A forex broker is a financial company or a firm that creates, designs, and opens platforms for people to trade forex on. Since it is their platform, they can decide a lot of features as well as tools of it. Is it easy for brokers to become scammers? No. The government understand this problem so they established financial organizations to help monitor brokers. Brokers are controlled by forex regulations and traders should only trade with regulated brokers since they are safer.
Spread is the difference between the bid (buy) price and the ask (sell) price of a certain currency pair. For example, if you buy US dollar at 1.12345 and sell it at 1.12356, the spread is 0.00011, or 1.1 pips. What is the pip in forex? Pip (point in percentage) is a unit used for measuring spread in the forex market. It is the fourth decimal point of the quote. It is usually used for US dollar. 1 pip is 0.0001 US dollar.
Commission is an amount of money brokers charge you when you use their platforms for trading. Commission is usually understood as spread when traders choose regular accounts. That’s why all regular accounts have zero commission because brokers already charge you spread. However, when you trade ECN accounts, which means spread is now very little (almost zero), brokers will charge you a separate commission.
Slippage is a notification or a message popping up on your trading platform to let you know that the price you entered earlier no longer exist in the market. Slippage happens when you enter a price, the platform processes your request for so long the market price has changed and your price is no longer valid. Choose a broker with strong servers and you will hardly meet any slippages.
Margin is an amount of money that brokers keep from traders in order to prevent traders from losing all of their money. Traders can use leverage as a way to maximize their profit. However, it is also applied to their loss. Brokers use margin as a way to keep trader’s funds from going negative. When you start losing too much, there will be a margin call (a notification) that you cannot continue with this trade anymore.
Now I hope that after this article, you can now know what is the meaning of forex trading. This knowledge will get you prepared for the trades ahead of you. Good luck to your trades.