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May 18, 2018

FOREX Trading Questions Answered


Trading in foreign currency is an exciting and potentially highly profitable market which is open to just about anyone with the knowledge and the capital. As with any form of trading, be it equity or FOREX, there is a great deal of technical learning which you must do, in order to put yourself in the best position to make money. With this in mind, here are some of the most frequently asked questions about FOREX, with the answers that can help you to feel more comfortable in the market.

What Impacts Currency Prices?

There are two ways that a country’s currency can become more valuable; either when there is an increase in demand for a particular currency, brought on by any number of variables, and when the number of currency units are reduced - such as when the Fed decides to increase interest rates, thus reducing spending.

What Are Pips, Ticks and Points?

The difference between these three terms are in their numerical value, although they are often used with similar meanings. A point is the smallest possible change in price, represented on the lefts side of the decimal point. A tick is the same as a pip, which represents the smallest possible change to the right of the decimal point, crucial in FOREX trading.

What is the Spread, and What is Spread Betting?

Many people wonder what is spread betting but first we need to understand the what the spread is. The spread is the difference between the buy price and the sell price, for example if USD/EUR is 1.302/04, the spread here will be 2 pips. Spread betting is when traders bet on the price movement of a pair of currencies, here you will be offered the buy (sell) and the ask (buy) price, and then you will bet on the movement, either higher or lower, of the spread. If the spread on a currency pair is narrow, it can provide a good opportunity for spread betting.

How Can I Trade 24 Hours Per Day?

Unlike with equity trading, there is no central location for FOREX trading as it is traded electronically. Given the high demand for currencies, and the global nature of this type of trading, the market is open from 5pm EST on Sunday, until 4pm EST on Friday, giving you plenty of time to get involved.

What is Leveraging?

Leveraging is necessary in FOREX because of the low value on the spread, the idea behind it is that the broker lends money to the client in order to open a position. In basic terms leveraging is the action between the exposure of your account versus the capital of it. For example, if you have a margin requirement of $1,000, your broker may offer you a ratio of 100:1 which means that you can open positions up to $100,000.

What is Arbitrage?

Arbitrage is a method used by some traders which involves buying a security on one market whilst selling in another market at the same time, for a higher price. For example, some traders may buy a stock on the FOREX, where the price has not yet been amended for the changing rate of exchange. The price of this stock is lower in value when compared with the local exchange, and the trader can make a profit from such a situation.

FOREX can be profitable but you first must ensure that you know exactly what you are doing.


The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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