Q&A: Frequently Asked Questions About Forex Trading, Answered
Forex is considered the largest financial market in the world. Despite that, it is also an unfamiliar place full of uncertainties and failures if you lack knowledge about how it really runs. Gone were the days when Forex trades are only for huge financial institutions, secretive hedge funds, and multinational corporations. Nowadays, individual investors are looking for more information about this fascinating market. Whether you are a beginner in Forex trade or just want to have a refresher course, these questions and answers are definitely right for you.
Question No. 1: “What is the difference of Forex market from other markets?”
Answer: The difference of Forex market from all kinds of markets is its inability to take on a regulated exchange. Forex market is not controlled by any governing body, no clearing houses that will guarantee the success of every trade and no support panel that caters all disputes. Through credit agreements, members trade freely with each other, making it the most liquid market all over the world.
For novice investors, everything seems to be exciting, full of fun and money in Forex trade. However, Forex trading works perfectly if the trader has the right knowledge towards this uncertain market. Because participants in this market compete with one another, it is best to practice trading from time to time.
Question No. 2: “Where is the commission in Forex Trading?”
Answer: Forex market does not deliver commissions. Different from other exchange-based markets, this Forex market is a principals market only. Forex firms are not brokers, they are called dealers. This difference must be understood by every investor. Different from brokers, these Forex dealers assume the risks offered by the market and serves as a counterparty against the investor’s trade. These dealers also do not have a commission, they make money out of the bid-ask spread.
Question No. 3: “What is pip?”
Answer: Pip, also known as “percentage in point” is the smallest amount of trade in Forex. For instance, if a shampoo is priced at $1.10 at the supermarket, in the Forex market, it is quoted as 1.2000 because it uses up to four decimal point. That fourth decimal point is called 1 pip.
Question No. 4: “What are you really selling or buying in the Forex market?”
Answer: NOTHING. In reality, the Forex market is just a speculative market. There is no specific physical exchange of currencies. All trades exist depending on the market value. Those dollar accounts are calculated and recorded in the trader’s account.
Question No. 5: “What are the currencies that are used in Forex trading?”
Answer: There are Forex traders that use exotic currencies just like Czech koruna and Thai Baht. However, major currencies used in Forex trading include EUR/USD (euro/dollar), USD/JPY (dollar/Japanese yen), GBP/USD (British pound/dollar), and USD/CHF (dollar/Swiss franc).
Conclusion
Each of us have our own question that needs a specific answer. With Forex trade, you don’t jump off and trade just because you think you are good enough to do so. You need proper education to do so. Ask as many question as possible before investing your money in the Forex marke.