How Does Currency Trading Work?
Millions of people buy and sell currency every day of the year. The markets are open around the clock and represent the largest financial market in existence. In fact, while the U.S. stock market typically sees about $55 billion worth of trading each day, the foreign exchange (currency, or Forex) markets far outpace that number, clocking about $3,2 trillion worth of action in an average day.
How does currency trading, on sites like easyMarkets and elsewhere, work? Compared to many other types of trading, currency trading is really quite uncomplicated. Here are the key points prospective Forex traders should know before entering the market:
How Trades Work
Prices are quoted in pairs of currencies because when you trade, you are simultaneously buying one currency and selling another. The most basic idea behind a trade is to buy the currency you think will rise in price and sell the one you think will decline. For example, the pair known as JPY/USD represents the number of U.S. dollars that one Japanese yen can purchase. If a trader thinks the yen will rise in strength against the dollar, they would buy JPY/USD, in effect buying yen and selling dollars. If the trader was correct, and the value of the yen against the dollar rose, then the trader would come out ahead. If, instead, the yen weakened, the trader would suffer a loss.
Risk of Loss
The risk of loss in Forex currency trading can be very high, especially for traders who use any amount of leverage. Price changes, even small ones, can entirely wipe out an account and cause the trader to go negative. The broker might close the account when a trader gets near the maximum margin amount. These policies differ from broker to broker, so it is essential to know the terms of your brokerage provider before deciding to trade.
Leverage and Trading Hours
It is possible to trade Forex on leverage, but participants should understand that any type of leveraged trading can significantly magnify gains as well as losses.Because the currency trading markets in South Africa are so huge, and there are millions of buyers and sellers at any given time, many trading firms and brokerage houses do not charge any commission at all. If using leverage, a person can lose more than the amount of the trade, which can lead to a difficult situation.
Note that different brokers offer different kinds of contracts. Some allow traders to “go into the hole” and lose their entire leveraged amount. Others will not hold you, the trader, accountable for any more than the amount you have on deposit in your account. Trading hours tend to be around the clock, but depending what your brokerage allows, you might be confined to something other than 24-hour trading, or have fewer services available to you during certain hours.
Because the currency markets are so huge, and there are so many millions of buyers and sellers at any given time, many trading firms and brokerage houses do not charge any commission at all. They make their money on the spread between bid and ask prices that traders have to pay when they purchase a currency.