This article looks at and answers different questions regarding the forex rates trading market.
New traders often enter the foreign exchange market with thousands of questions regarding how to trade the market and what the market actually is. Of course, all these questions can be answered by undergoing forex training courses making it imperative that you complete a programme. However, there are other educational resources that can provide information on the forex rates market. This article will attempt to answer some of the more common queries about the foreign exchange industry.
1. How does the forex rates market differ to other markets?
One of the most unique features of the forex rates market is that it does not operate via a regulated exchange. This means that the forex rates trades are not controlled by a central governing authority and do not require any clearing. Instead, traders will complete transactions directly based on agreements or metaphorical handshakes.
While this flexible nature seems beneficial, it does have some drawbacks. This self-regulation requires a great degree of self-control and co-operation; however, if a trader does not honour his side of the agreement there is no authority to call regarding recourse. Each trader is responsible for his own trade.
Another unique feature of the foreign exchange market is its online format. Previously, the foreign exchange trading market was accessible by large corporations and banks exclusively. However, due to the introduction of the internet, the average individual is now able to trade along with the major players. Furthermore, one’s location is no longer a concern as a trader can trade from any location as long as you have a computer and reliable internet connection.
2. What is a pip?
A pip is an acronym for ‘percentage in point.’ In the forex market prices are quoted to the fourth decimal point, and the pip refers to the smallest increment of trade. For example, if a bottle of shampoo in the store was priced at $1.20, it would be quoted at 1.2000 on the forex market.
The change in the fourth decimal point would be 1 pip and equivalent to 1/100 of 1%. The majority of currencies utilise this number of decimal points, except for the Japanese yen that presents quotes with two decimal points.
3. Is there commission in forex rates trading?
Unlike the stock market, the foreign exchange broker does not take a commission for his services. The foreign exchange market is a principals-only market where forex brokers earn their money off a spread rather than a commission. The spread is calculated as the variance between the bid and the ask price on a trade. It is important that a trader conduct research into the different brokers as the amount of spreads offered will vary between brokerages.
There are two types of spreads – the fixed spread and the variable spread. The variable spread is the most common and it varies according to the trade executed. A fixed spread can be described as a set charge per trade. It is the onus of a trader to determine which is more beneficial to trading before registering with the broker.