3). What is a spread in Forex trading?
The spread is the difference between the bid and ask prices offered for a Forex pair. Like many financial markets, when you open a Forex trade, you will be offered two prices. If you want to open a long position, you trade at the ask price, which is slightly higher than the market price. If you want to open a short position, you trade at the bid price - which is slightly lower than the market price.
The size of the spread is affected by several factors. Some of them are the size of your trade and the demand and volatility of the currency.
With CAPEX you can trade Forex with spreads as low as 0.0001.
4). What is a pip in Forex?
Pips or pips are the units used to measure movement in a Forex pair. A Forex pip is usually equivalent to a single digit movement in the fourth decimal place of a Forex pair. So, if the EUR/USD pair moves from $1.11511 to $1.11521, it means that the pair has moved one pip. The decimal points that appear after the pip are called fractional pips.
The exception to this rule is when the quote currency is quoted in small denominations, a prime example being the Japanese Yen. Here, a movement in the second decimal place constitutes one pip. So, if the EUR/JPY pair moves from 106.452 yen to 106.462 yen, it has moved back by one pip, or unit.
The value of a pip in forex can change depending on the standard lot size offered by the forex broker. Since the forex market uses significant leverage for trades, small price movements – defined in pips – can have a significant impact on a trade.
5). What is leverage in forex trading?
Forex leverage is a means by which traders can borrow capital to gain greater exposure to the forex market. With a limited amount of capital (known as margin), traders can control large trade sizes. This can lead to larger profits and losses because they are based on the full value of the position.
Hence, trading on leverage makes understanding risk management very important.
Example: A trader may put up just $1,000 of their own capital and with a leverage of 1:30 to be able to open a $30,000 trade, for example, on the EUR/USD pair. Since the trader has only used a small amount of their own capital, they will make a large profit if the trade goes in the right direction. However, another downside to using leverage is that they can lose a large amount if the trade goes in the opposite direction.
6). What is margin in forex trading?
Margin is an essential part of leveraged trading. It is the term used to describe the initial deposit you put up to open and maintain a leveraged trade. When trading on margin, remember that your margin requirements will vary depending on your forex broker and the size of your trade.
Margin is usually expressed as a percentage of the full position. So, a trade on the USD/JPY pair, for example, may only require you to pay 3.34% of the total value of the position to be paid to open the trade. So instead of depositing $100,000, you only need to deposit $3,340.
7). What is a lot in forex trading?
Forex is traded in the form of contracts – batches of currencies used to consolidate forex trades. Because forex pairs tend to move in small amounts, contracts tend to be exceptionally large: a standard lot is equivalent to 100,000 units of the base currency. Therefore, since individual traders will not necessarily have £100,000 (or whatever currency they are trading) to put into each trade, forex trading is leveraged in this way.
The choice of lot size has a significant impact on the overall profit or loss of a trade. The larger the lot, the greater the profit (or loss) and vice versa.
8). What is a rollover in forex trading?
A rollover is the fee paid or earned for holding a spot trading position overnight. Each currency has an interbank overnight swap rate associated with it, and because forex trading is done in pairs, each trade involves not only two different currencies, but also different interest rates.
Swap refers to the fees charged or applied to a trader’s account for trades held “overnight,” i.e. after 5 p.m. Eastern Time (ET) – “after 12 a.m. ET.”
When a forex position is opened, the position will earn or pay the difference in the fee for the two currencies. These are referred to as swap rates, rollover rates, or currency swaps. The position will earn a credit if the fee on the base currency is higher than the fee on the counter currency. Likewise, the position will pay money if the fee on the base currency is lower than the fee on the counter currency.
For example, consider a long position on the New Zealand Dollar against the Japanese Yen, and if the overnight fee on the Japanese Yen is lower than the overnight fee on the New Zealand Dollar, you will earn the difference.
Changes in overnight fees can lead to significant fluctuations in overnight rates, so it is worth keeping up with the economic calendar to monitor when central bank announcements and decisions are made.
Benefits of Forex Trading
There are more reasons to gain exposure to the Forex market beyond currency diversification.
Once you do some homework, you will realize that Forex is one of the most rewarding asset classes for traders and investors. Although the Forex market is dominated by short-term speculators and has significant trading risks, there are investment/trading styles that are suitable for both:
More conservative active traders use longer-term holding periods and specific methods and tools