The foreign exchange market, often referred to as Forex, is the place where different currencies are traded. This trading sets the mechanism for Forex pricing. In order to conduct transactions, traders must invest an amount of money in a specific currency pair.
But before trading in this most liquid market, it is always important to consider several factors such as the Forex pricing, or how the actual trades are performed.
Essential Characters of Forex Pricing
There is a long list of factors that determines Forex pricing. No single entity dictates the price in Forex market. Both the investors and the brokers create the price for a currency.
That is why before investing, it is highly significant to comprehend basic concepts such as leverage, quotes, spreads and commission as these will help you to deeply understand how forex trades are performed.
- Leverage is the ability of small capital to control large amounts of capital where higher leverage suggests a higher level of risk. Brokers offer different leverage ratio. Mostly, the 50:1 ratio is used but it could also be as high as 250:1 ratio. But it always depends on the type of account on how leverage will be gauged.
- Margin is the amount equivalent to short-term loan to the broker of the investor. An investor must deposit an amount to his margin account before conducting a trade. Normally, a margin call arises from a margin. This margin call is used to help traders manage potential loss.
- Quotes can be either a buy quote or a sell quote. Remember that currencies in Forex are traded in pairs. This pair has separate amounts to which you can buy or sell them. The buy quote is on the right side where you can purchase the base currency while the sell quote is on the left, also known as the bid price.
- Spread is the result of subtracting the sell quote to the buy quote. A breakeven may result in a trade if the movement of the trade is equal to the spread.
- Pip, commonly known as points, is the smallest price increment a currency can make. For example a 1 pip for the EUR/USD pair is equal to 0.00001.
- Commission and fees are not very common in Forex as all trades in any Forex account are done on a commission-free basis. But market makers still make money each time a person trades.
Trades are performed normally by just buying or selling the currency pairs and speculating on their specific movements. But remember to consider these essential elements in Forex pricing so you will not be lost in your trading journey.