Best Free Online Forex and Currency Trading Websites and Companies
In this detailed article on online forex and currency trading, we will cover a lot of basic points which you should know. There are a lot of online websites and companies which will help you in forex and currency trading. But before forex trading, you must know some basic things about online forex and currency trading. We will discuss some basic terminologies used in online forex and currency market later in this article.
What is Online Forex Currency Trading Market?
The foreign exchange online market or forex market as it is often called is the online market in which currencies are traded. Currency Trading is the world’s largest market consisting of almost $2 trillion in daily volume and as investors learn more and become more interested, the market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets.
Currency trading is the act of buying and selling international currencies. Very often, banks and financial trading institutions engage in the act of currency trading. Individual investors can also engage in currency trading, attempting to benefit from variations in the exchange rate of the currencies. The currency market, (FOREX) market is the biggest and the fastest growing market in the world economy. Its daily turnover is more than 2.5 trillion dollars, which is 100 times greater than the NASDAQ daily turnover. Every day more than U.S. $3 trillion in currencies change hands in a highly professional interbank market, in which electronic trading platforms link currency traders from banks across the world directly. FX markets are effectively open 24 hours a day thanks to global cooperation among currency traders. At the end of each business day in Asia, traders pass their open currency positions on to their colleagues in Europe, who – at the end of their business day – pass their open positions on to American traders, who just begin their working day and pass positions on to Asia at the end of their business day. And there, the circle begins anew. This makes FX truly global and very liquid.
Economic variables which affect foreign exchange market
Interest rates, inflation, and GDP numbers are the main variables; however other economic indicators such as unemployment rate, bop, trade deficit, fiscal deficit, manufacturing indices, consumer prices and retail sales amongst others. News and information regarding a country's economy can have a direct impact on the direction that the country's currency is heading in much the same way that current events and financial news affect stock prices, hence the importance of economic factors. The following eight economic factors will directly affect a currency's movements in the Forex market. Interest rates, inflation, and GDP numbers are the main variables; however other economic indicators such as unemployment rate, bop, trade deficit, fiscal deficit, manufacturing indices, consumer prices and retail sales amongst others.
News and information regarding a country's economy can have a direct impact on the direction that the country's currency is heading in much the same way that current events and financial news affect stock prices, hence the importance of economic factors.
Online Forex Currency Trading Basics
The foreign exchange market is the term given to the worldwide financial market which is both decentralized and over-the-counter, which specializes in trading back and forth between different types of currencies. This market is also known as the Forex market. In recent times, both investors and traders located all around the world have begun to notice and recognize the foreign exchange market as an area of interest, which is speculated to contain opportunity.
However, before considering treading these waters, it is important to first understand how transactions are conducted within the foreign exchange market. It is also necessary to first explain what the basics are of trading foreign currency. Failure to fully and completely understand this art prior to journeying off into this market would render a person lost in a matter of minutes, just where they would never expect it. Thus, this article has been presented, intending to explain currency trading basics thoroughly.
What is traded within the foreign exchange market?
The one instrument that foreign exchange market investors and traders constantly utilize are currency pairs. This is a term used to describe what the rate of exchange for one currency is over another currency. In the whole of the market, the following are the currency pairs that of which are traded most often:
EUR / USD – Euro
GBP / USD – Pound
USD / CAD – Canadian Dollar
USD / JPY – Yen
USD / CHF – Swiss Franc and
AUD / USD – Aussie
GBP / USD – Pound
USD / CAD – Canadian Dollar
USD / JPY – Yen
USD / CHF – Swiss Franc and
AUD / USD – Aussie
In the whole of the foreign exchange market, the previously listed currency pairs generate up to 85% of the volume.
If a trader ends up going long or goes ahead and buys the Euro, he or she is also, at the same time, buying Euro and selling the United States Dollar. In the event that this same trader ends up going short or goes ahead and buys the Aussie, he or she will also, at the same time, be selling the Aussie and purchasing the United States Dollar.
In each currency pair, the former currency is the base currency, where the latter currency is typically in reference to the quote or the counter currency. Each pair is generally expressed in units of the quote or the counter currency that of which are needed in order to receive a single unit of the base currency.
To illustrate, if the quote or the price of a EUR / USD currency pair is 1.2545, this would mean that one would require 1.2545 United States Dollars in order to receive a single Euro.
Bid / Ask Spread
It is common for any currency pair to be quoted with both a bid and an ask price. The former, which is always a lower price than the ask, is the price at which a broker is ready and willing to buy, which is the price at which the trader should sell. The ask price, on the other hand, is the price at which the broker is ready and willing to sell, meaning the trader should jump at that price and buy.
To illustrate, if the following pair were provided as such:
EUR / USD 1.2545/48 OR 1.2545/8
Then the bidding price is set for 1.2545 with the ask price set to 1.2548.
The minimum incremental move that of which is made possible by a currency pair is otherwise known as a pip, which simply stands for price interest point. For example, a move in the EUR / USD currency pair from 1.2545 to 1.2560 would be equivalent to 15 pips, whereas a move in the USD / JPY currency pair from 112.05 to 113.05 would be equivalent to 105 pips.
What is Margin?
Margin is a performance bond that insures against trading losses. Margin requirements in the FX marketplace allow you to hold positions much larger than the asset value of your account. Trading with Forex Capital Management includes a pre-trade check for margin availability, the trade is executed only if there are sufficient margin funds in your account. The Forex Capital Management trading system calculates cash on hand necessary to cover current positions, and provides this information to you in real time. If funds in your account fall below margin requirements, the system will close all open positions. This prevents your account from falling below your available equity, which is a key protection in this volatile, fast moving marketplace.
The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin.
Marking-to-market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor's gain or loss depending upon the futures closing price which is known as marking-to-market.
Margin Trading (Leverage)
In other financial markets, it would generally be required to have the full deposit of the amount that of which is traded. However, in the foreign exchange market, all that of which is required would be a margin deposit, with the remainder being granted by the broker.
Some brokers will provide leverage that will rise up to 400:1. In essence, this means only 1/400 in balance is required to open a position, or .25%. The majority of brokers, however, will only offer 100:1, meaning 1% is required in balance in order to open a position.
A typical lot size within the foreign exchange market is roughly $100,000 United States Dollars.
When a trader would desire obtaining a long lot within the EUR / USD currency pair, where the leverage amounts to about 100:1, in order to open such a position would require $1,000 United States Dollars in balance, or 1%.
It is not recommended, of course, to open such a position when the trading balance retains such limited funds. In the event that the trade should go against the trader, the broker will close the position. This will bring the focus onto the next term.
In the event that the balance of a trading account should end up falling below the maintenance margin, which is the capital required to open a position (1% in a 100:1 leverage, 2% in a 50:1 leverage, so on and so forth), a margin call will occur. At the moment that this margin call occurs, the broker will either sell off all of the trades or buy back in the event of short positions. This will theoretically leave the trader with the maintenance margin.
Margin calls generally occur in the event that money management is not applied in a proper manner.
The price at which a currency trades in the spot market. In the case of USD/INR, spot value is T + 2.
The price at which the futures contract trades in the futures market.
The currency futures contracts on the SEBI recognized exchanges have one-month, two-month, and three-month up to twelve-month expiry cycles. Hence, these exchanges will have 12 contracts outstanding at any given point in time.
Final settlement date
The last business day of the month will be termed the Value date/ Final Settlement date of each contract.
It is the date specified in the futures contract. All contracts expire on the last working day (excluding Saturdays) of the contract months. The last day for the trading of the contract shall be two working days prior to the final settlement date or value date.
In the case of USD/INR it is USD 1000; EUR/INR it is EUR 1000; GBP/INR it is GBP 1000 and in case of JPY/INR it is JPY 100,000. ( Ref. RBI Circular: RBI/2009-10/290, dated 19th January, by which RBI has allowed trade in EUR/INR, JPY/INR and GBP/INR pairs.)
Basis can be defined as the futures price minus the spot price. In a normal market, basis will be positive. Futures prices normally exceed spot prices.
Cost of carry
The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures (in commodity markets) the storage cost plus the interest that is paid to finance or ‘carry’ the asset till delivery less the income earned on the asset. For currency derivatives carry cost is the rate of interest.
A foreign exchange deal
Its always been done in currency pairs, for example, US Dollar – Indian Rupee contract (USD–INR); British Pound – INR (GBP-INR), Japanese Yen – U.S. Dollar (JPYUSD), U.S. Dollar – Swiss Franc (USD-CHF) etc. Some of the liquid currencies in the world are USD, JPY, EURO, GBP, and CHF and some of the liquid currency contracts are on USD-JPY, USD-EURO, EURO-JPY, USD-GBP, and USD-CHF.
What are “short” and “long” positions?
Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from changing market prices. Remember! Since currencies are traded in pairs, every forex position inevitably requires the investor to go short in one currency and long in the other.
What are the mechanics of a foreign exchange market trade?
To illustrate an example, after extensive analysis, a trader concludes it is likely for the British pound to rise in price. This trader decides it is worth going long and risking 30 pips, intending to wind up being rewarded with 60 pips. In the event that the market goes against this trader�s decision, they will end up losing 30 pips. However, should the market go as intended, they will gain 60 pips.
The British pound has a quote that is precisely 1.8524/27, 4 pips spread. The trader in question will go long at 1.8530, or ask. Once the market either reaches the target or the risk point, the trader will need to sell it at the bid price. To make 40 pips, the profit level would need to be 1.8590. Should the target be hit by the market, then the market has run 64 pips. Otherwise, the market will have run 30 against.
As one may have gathered at this point, it is generally a very good idea in order to fully understand the basics of currency trading, from the very basic concepts to the more complex issues, before deciding to tread the waters of the foreign exchange market. Make sure every single aspect of the subject is mastered, including trading psychology, trade and risk management, as well as everything else, prior to making the decision to opening a live trading account.