Forex Volatility
Trade The Forex Market
What is Forex Currency Trading?
Trading of foreign currencies happens on the biggest international market in the world called the foreign exchange market; daily average volume exceeds 2.1 trillion. Traders in the Forex market buy and sell currency pairs with hopes of profiting from correct predictions about price direction of the currency pairs. World events and economic news reports are the primary catalysts that drive the forex market.
Forex Basics:
The forex trading market is not limited to a physical location like stock markets are. The forex market is much bigger than all the world’s stock markets combined. Forex trades are typically executed over the phone or over the world wide web. Forex trading primarily takes place in the major cities of the United States, England, Australia, Japan and Germany.
The first currency in a currency pair is known as the base currency, the second currency is known as the quote currency, counter currency, or terms currency. Currency exchange rates are quoted in terms of the base currency, for example, the exchange rate between the US dollar and the euro will be indentified as EUR/USD, so the number will be the amount of US dollars that can be traded for one euro.
At the present time the euro has highest precedence as base currency, this means that all the currency pairs containing it will have euro as the base currency. The hierarchy for base currency is as follows: Euro, Pound Sterling, Australian Dollar, New Zeeland Dollar, United States Dollar, Canadian Dollar, Swiss Franc, and Japanese Yen.
How Forex trading works:
In the foreign exchange currency market quotes include a bid and an ask price. The bid is the price to sell the base currency in exchange of the counter currency. The “ask” is the price sellers are willing to sell the currency pair at, or the price being “asked” for the currency pair. The difference between the bid price and the ask price of a currency pair is known as the spread. Forex brokers act as market-makers; they provide a place where market participants can buy and sell currencies. Forex currency brokers are paid by the spread of the currency pair each time a transaction takes place, this is instead of charging a commission like stock or futures brokers do.
Currency pair movement is usually expressed in terms of pips. The smallest incremental change of any currency pair is called a pip. For example, if you see the current price of GBP/USD (British pound/U.S. dollar) quoted as 1.6832(bid)/1.6837(ask), then the spread of this currency pair is 5 pips, because the difference between the two is .0005. Thus, the smallest incremental price change for the GBP/USD would be one pip or .0001.
Foreign exchange trading can be quite volatile due to the multitude of big money players that trade this market. Volatility in the forex market can truly be a double edged sword; abuse it and watch your trading account shrink really fast, properly utilize it and it will reward you. Make sure you understand the many intricacies of price action strategies prior to diving into the Forex market with real money.
Cummins India: Forex volatility aided export earnings