The forex market has thrown open an avenue of profit to many traders and investors. But, to make a profit from it, one has to know how to operate in the forex market.
The mechanism of operation in this market is different from any other equity based financial market. So, before going to conduct transactions in the forex market, any beginners should have a complete idea about the operation in the forex market.
The features of the operations are as follows –
v In the forex market, to buy one currency, you have to pay in another currency. That is while buying one particular currency, you also do the selling in another currency at that time.
Hence, the transactions or the purchasing or selling of the currencies are done in pair. So, in effect, it is possible to make a profit only when you resale the currency that you bought in the currency you bought it up, when it increases in value.
Till that actually happens, this position is called an open trade in the forex market.
v Quoting of the currency is also a feature of the forex market. The first currency in the pair of the transaction in forex market is called the base or primary currency and the other is the quote currency.
Generally the US dollar is considered as the base currency in most transactions barring in some cased where the pound sterling, the euro and the Australian dollar.
v Bids are always done in the forex market operations. The bid price is the base price that the purchaser is willing to pay in exchange of the quote currency.
Similarly, the price that is offered in exchange of the base currency is called the ask price. Spread is the difference between the ask price and the bid price.
v The spread is always the factor that tells about the market positions. It is desirable to have smallest spread to cover up the spread to have profitable market. The spread is always expressed in terms of a five-digit number.
v The amount that is to be deposited in the traders account to cover up the losses that might accrue in future is called a margin. And higher the margin, the more the leverages the traders can offer. The general leverage that the traders offer is in the range of 100:1.
These are the things that one should be aware of before venturing into the forex trading. Although they are like any other equity market in terms of making a fast profit, yet, they differ in the above-mentioned ways from it.
Since the difference is mainly in terms of the operational mechanism, it is prudent to become familiar with all the features of it. This acquires greater significance due to the fact that, as in all the markets of extreme liquidity, there is a possibility of incurring huge losses.
The risks involved with the forex market are also different from any other equity market. Hence, along with the operational matters, a thorough knowledge of it should also be attained.