In simple terms, FOREX is the short form for Foreign Exchange, though FOREX trading refers to an orderly exchange between a pair of two distinct currencies. These currencies may be the UK British sterling pound, and US dollar, or the Japanese Yen and UK British sterling pound. We trade currencies all the time, e.g. when we travel to foreign countries or buy goods on the internet from Japan or China.
However, FOREX trading is the structured exchange, where the trader takes advantage of an arbitrage that exists between two currencies to make profits. It occurs globally, and it is the most active equity trading market in the world. On a given day more than $5.0 Trillion worth of currencies are traded offering ample opportunities for some phenomenal profits.
Let’s have a look at Basic Terminologies used in FOREX Trading:
Forex trading or FX trading can be done in more than 80 currencies. These are fiat currencies that are typically backed by their respective sovereign Governments – hence they are sovereign currencies also. Out of these about 85% of the market exchange occurs among the USD and a few other currencies, e.g. British pound, and Euro.
These pairs having USD, as one of the constituent currencies are called ‘Majors, while the pairs that do not include USD are called, Cross Currency Pairs. The majors are the most liquid pairs and offer a proportionately higher degree of arbitrage to make profits. The third category constitutes exotic pairs-though they are least liquid and so used mostly by the business entities dealing in those far-out emerging economies.
Just know what is Required to Start FX Trading?
Many of you are familiar with online trading in equity and options markets. Online FX trading is no different from online trading. Albeit, you open a forex trading account with firms like FOREX.com, AMERITRADE, or ONADA.com. A salient feature of these firms is that they allow a training account, where you can practice and hone your skills until you feel comfortable with doing the real trading. Not only that, there are FX trading courses and Institutions like Platinum Trading Institute (PTI) that provide one-on-one mentoring in FX trading.
In addition, you need a relatively fast laptop or a PC with preferably a gaming video card. It allows real-time streaming of the currency price action data and permits rather faster execution of the trade. Successful FX trading also requires patience, consistency in the execution of trades, and experience-based knowledge. Institutional traders often keep a log of all the trades to wood out and learn from the losing trades.
A successful FX trader also needs to understand the impact of global events on FX currency markets. This may involve Macroeconomic forces like Government policies to micro-events such as a flood and drought in a given part of the country.